Prudential supervision

Banco de Portugal is responsible for authorising the setting up of credit institutions, financial companies and payment institutions, monitoring the activity carried on by supervised institutions, checking compliance with the prudential rules regulating their activity, issuing specific recommendations and decisions to remedy any irregularities detected, imposing sanctions in the event of infringement, and taking extraordinary reorganisation measures.

The purpose of supervision is to ensure the financial stability of institutions and the safety of the funds entrusted to them. However, supervision has mainly a preventive nature (hence, the designation prudential supervision), and it does not replace a competent management and an effective internal control of credit institutions and financial companies, nor the important role played by institutions’ internal and external auditors.

The law provides for rules governing the taking up of business, which are intended to prevent certain institutions from operating in the financial markets, where such institutions are disreputable or do not show adequate financial soundness to perform operations or that do not have the ability to manage the respective risks in an effective manner. The requirements for the taking up of business include the suitability and qualifications of the members of the management and auditing boards, the control of qualifying holdings, the “four-eye” principle (according to which current management of a credit institutions should be the responsibility of at least two members of the respective board), minimum initial capital, as well as the viability of both the business plan and the adequacy of human, technical and financial resources.

Once the authorisation has been granted, Banco de Portugal monitors the activities of the institutions in a systematic and continuous manner, by resorting to a range of prudential rules and supervisory procedures (for instance, on-site inspections and analysis of the information regularly reported by the institutions). Among the former, stress should be laid on the definition of minimum initial capital, the minimum own funds requirements for the coverage of credit, market and operational risks, the limits on risk concentration and the provisioning rules.

Preventing the use of the financial system for money laundering and terrorist financing is also one of the supervisory functions of Banco de Portugal.

Whenever irregularities are detected in the way that institutions operate, Banco de Portugal issues specific determinations and recommendations and imposes sanctions on infringements.

Banco de Portugal may impose reorganisation measures to institutions, in the event of any serious disturbances of their regular operating conditions, in order to prevent the dissemination of such situations to the rest of the system (prevention of contagion risk). These extraordinary measures are diversified (from restrictions to the conduct of certain activities to direct intervention in the management, such as the appointment of interim members), and depend on the scope and seriousness of the problems encountered.

In extreme situations, Banco de Portugal has powers to revoke the authorisation granted for the exercise of activity and to request the judicial winding-up of an institution. In the case of banks, the Fundo de Garantia de Depósitos (Deposit Guarantee Fund), intervenes automatically in the process, in order to ensure the repayment of deposits up to amounts established in the law. The members of the Fund are institutions that take deposits, except branches of credit institutions authorised in other EU Member States (which are covered by the guarantee system in the home country) and Caixas de Crédito Agrícola Mútuo (Mutual Agricultural Credit Banks) and the respective Caixa Central (Central Mutual Agricultural Credit Bank) belonging to the Sistema Integrado de Crédito Agrícola Mútuo (Integrated Mutual Agricultural Credit Scheme (Portuguese acronym: SICAM)), which are covered by the Fundo de Garantia do Crédito Agrícola Mútuo (Mutual Agricultural Credit Guarantee Fund), established by Decree-Law No 345/98 of 9 November.

The growing integration of financial markets and the developments of international activity of the institutions require increased institutional cooperation with other authorities involved in the supervision and regulation of the financial sector, at both the national and international levels. Therefore, Banco de Portugal promotes and participates in a number of initiatives and fora in terms of bilateral and multilateral cooperation.

In 2006, the Portuguese financial system was reviewed by the IMF within the scope of the Financial Sector Assessment Program – FSAP. This was an integrated evaluation of the different components of the financial sector, including an analysis of the financial performance and emerging risks, and a judgement on the strength of legal and regulatory infrastructures and on the quality and efficiency of regulation and supervision by the competent authorities.