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Banco de Portugal discloses macro-prudential policy objectives and instruments

Banco de Portugal discloses today the intermediate objectives of macro-prudential policy, as well as a set of instruments to guide and implement this policy.

Macro-prudential policy, for which Banco de Portugal is the national competent authority, has the objective of safeguarding financial stability, by strengthening the resilience of the financial sector and preventing systemic risk.

The definition of intermediate objectives, directly related to the mitigation of the various sources of systemic risk, makes macro-prudential policy more operational and transparent and provides an economic rationale for the selection of appropriate instruments to prevent risks and vulnerabilities that may pose a threat to the stability of the financial system. By defining this macro-prudential policy operational framework, Banco de Portugal ensures compliance with the recommendation of the European Systemic Risk Board on this issue (ESRB/2013/1).

The macro-prudential policy instruments disclosed today are available in Community or national legislation, may be applied to general or specific categories of risk to financial stability (cyclical or structural/global or sectoral risk) and cover all or part of the financial system subsectors.

The effectiveness of macro-prudential policy will be assessed by monitoring a set of indicators that signal risk factors and by measuring progress against the intermediate objectives. This assessment will enable Banco de Portugal to assess the adequacy of its intermediate objectives and instruments. Therefore, the set of instruments and intermediate objectives will be revised and adjusted where necessary to better achieve the ultimate objective of safeguarding financial stability. In addition, the list of selected instruments is not exhaustive. Therefore, it does not prevent the activation of other instruments deemed necessary.

The intermediate objectives and instruments selected to implement macro-prudential policy in Portugal are presented in the table below:

<p class="Titulotabela"><span>Intermediate objective</span></p> <p class="Titulotabela"><span>Macro-prudential policy instrument</span></p>
<p class="Textotabela"><b><span>Mitigate and prevent excessive credit growth and leverage</span></b></p> <p class="Textotabela"><span>Countercyclical capital buffer</span></p>
<p class="Textotabela"><span>Sectoral capital requirements </span></p>
<p class="Textotabela"><span>Limits on the value of a loan relative to the underlying colateral </span></p>
<p class="Textotabela"><span>Limits on the value of a loan or on debt servicing costs relative to the borrower’s income</span></p>
<p class="Textotabela"><b><span>Mitigate and prevent excessive maturity mismatch and market illiquidity </span></b></p> <p class="Textotabela"><span><span>Loan-to-deposit ratio </span><a href="#_ftn1" name="_ftnref1"><span>[1] </span></a></span></p>
<p class="Textotabela"><b><span>direct and indirect exposure concentrations</span></b></p> <p class="Textotabela"><span>Systemic risk buffer</span></p>
<p class="Textotabela"><span>Large exposure restrictions</span></p>
<p class="Textotabela"><b><span lang="EN-US">Limit incentives to excessive risk-taking by systemically important institutions</span></b></p> <p class="Textotabela"><span>Capital buffer for systemically important institutions</span></p>