Brief history of the Banco de Portugal
The Banco de Portugal was established by a royal charter of November 19th, 1846, to act as a commercial bank and issuing bank. It came about as the result of a merger of the Banco de Lisboa and the Companhia de Confiança Nacional, an investment company specialised in the financing of the public debt.
By 1887, the Banco de Portugal shared the right to issue banknotes with other institutions. With the publication of the Decree-Law of July 9th, 1891, the Banco de Portugal became the sole issuer of bank notes for the mainland, the Azores and Madeira.
From the beginning, it was a public limited company, and until its nationalisation, in 1974, was for the most part privately owned.
The first decade of the Banco de Portugal's existence was marked by considerable hardship, after which it grew steadily as the major Portuguese commercial bank, until the First World War. This growth may be explained by the fact that most of the persistent public debt could be monetised with the help of public loans, to the detriment of the money supply. Until 1891, when the gold standard was in force, one of the main concerns of the Banco de Portugal was ensuring the convertibility of the paper currency it issued into metallic currency.
Although it was not part of its official functions, the Banco de Portugal also acted as a "lender of last resort" in the banking system, preventing several crises and easing many more.
Following the 1891 financial and monetary crisis and the establishment of non-convertibility of Banco de Portugal banknotes, this active monetary policy halted and the discount rate was fixed at a level which would last until 1914. Conversely, its function as the "bank of the banks" was retained and developed, together with a certain degree of informal supervision over the sector.
In June 1931, a major change in the functions and statutes of the Banco de Portugal took place. New rules were set into place in order to limit the increase of its liabilities, linking these to the amount of foreign currency reserves. These rules, together with other stringent measures, intended to restrain its role in financing the Government, enabled effective monetary control. The administrative dependence of the Government increased and the Bank took on a commitment to pursue a policy of fixed interest and exchange rates.
Later, trade and capital movements were completely freed. The existence of a budgetary surplus allowed this, and ensured the feasibility of a mostly passive monetary policy until the mid-1970’s. In the course of this period, the functions of the Banco de Portugal changed substantially , and its scope was extended to the spheres of international payments, management of reserves and national monetary policy.
During the Second World War and post-war period, new restrictions on international transactions were introduced, leading to the development of a very complex exchange control system, encompassing capital, goods and current invisibles operations. The regulatory attributions in this area, as well as the system supervision, became a responsibility of the Banco de Portugal, which started to act as a Government agent in its relationship with international monetary organisations.
By the end of the 50’s, a legal framework designed to regulate the activity of the commercial banks and other credit institutions was created.
From 1957 to 1960, laws obliging the banks to hold minimum cash reserves and entrusting the Banco de Portugal with greater responsibilities were approved, providing for increased intervention in credit control and in the setting of interest rates.
From nationalisation to 1997
Following its nationalisation in September 1974, the functions and statutes of the Banco de Portugal were redefined by means of the Organic Law published on November 15th, 1975. In addition to its role as central bank, the Banco de Portugal was, for the first time, charged with the supervision of the banking system.
Responding to social changes, monetary policy became more active and the Banco de Portugal took on important responsibilities in the area of monetary and credit control, and, mainly after joining the European Community in 1986, in the organisation and regulation of the money market.
With greater control of the budgetary policy and growing integration in the European markets, the functions of the Banco de Portugal grew more like those performed by other European central banks.
In October 1990, a new Organic Law was published, the main innovations of which concerned the constraints imposed on the financing of public deficits, and other provisions ensuring greater independence for the Banco de Portugal’s board of directors.
In the meantime, the economic policy framework underwent profound changes throughout 1992, reflecting the option of the authorities for policies seeking nominal stability, and in April the Escudo joined the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS).
In December, complete freedom of capital movements was decided upon, making the Escudo fully convertible.
Within the scope of the adjustments resulting from preparation for the Economic and Monetary Union (EMU), the Organic Law of the Banco de Portugal underwent further major changes in 1995.
Price stability emerged as the main mission assigned to the Bank. Its autonomy in the management of monetary policy was enhanced, and it was entrusted with new responsabilities in the realm of payment systems.
In January 1998, the Organic Law of the Banco de Portugal underwent again further major changes, which envisaged the reinforcement of its autonomy, in accordance with the requirements relating to the participation of Portugal in Stage Three of EMU, and the preparation of its integration in the European System of Central Banks (ESCB) from the January 1 1999 onwards.
In March 1998, the European Commission proposed the inclusion in the euro area, from January 1 1999 onwards, of eleven Member States, Portugal included. That same month, the Banco de Portugal, requested by the Government, gave the opinion that the recommendation handed down by the European Commission abides by the spirit and the letter of the European Union (EU) Treaty.
On May 2 1998, Heads of State and Government of the EU decided that EMU would start on January 1 1999 with eleven Member states, Portugal included. At that same date, the ministers
of the Member States adopting the euro as their single currency, the governors of the central banks of these Member States, the European Commission and the European Monetary Institute (EMI) have agreed on the method for determining the irrevocable conversion rates for the euro at the starting date of Stage Three and decided that the ERM bilateral central rates of the currencies of the Member States at that time would be used in determining the irrevocable conversion rates for the euro.
On June 1 1998, the Banco de Portugal became part of the ESCB.
On January 1 1999, following the adoption the day before by the EU Council of the irrevocable conversion rates between the euro and the currencies of the eleven participating Member States, Stage Three of EMU started, marked by a single monetary policy and a single currency - the euro. The currencies of the eleven participating Member States, the escudo included, became national denominations of the euro.
On that date a new version of the Organic Law of the Banco de Portugal entered in force, including modifications required from its integration in the ESCB which only needed to become effective as of the start of Stage Three of EMU.