Press Release: Annual Report – Activities and Financial Statements 2013 of Banco de Portugal
At the occasion of the annual hearing of Governor Carlos da Silva Costa at the Parliamentary Standing Committee for Budget, Finance and Public Administration
In early May, Banco de Portugal released the Annual Report – Activities and Financial Statements 2013.
The first part of the report describes Banco de Portugal’s main activities in 2013 and takes stock of the achievements in the 2011-13 period, upon completion of this strategic planning cycle. The second part of the report presents the Bank’s financial statements and annual accounts.
I – Banco de Portugal’s activities in 2011-2013
Between 2011 and 2013 Banco de Portugal introduced major changes in its governance and internal control model and its internal organisation and action strategy, with the purpose of fulfilling the four established Broad Strategic Guidelines:
- Financial stability within the European context;
- Effective and fully-fledged contribution to the exercise of its tasks as monetary authority within the framework of the Eurosystem;
- Organisation and efficient management of resources;
- Communication and supply of services to the community.
Banco de Portugal carried out its activity in a particularly demanding environment, marked by the implementation of the Economic and Financial Assistance Programme (EFAP), financial market tensions, financial fragmentation in the euro area and the decision to establish a Banking Union.
During this three-year period, Banco de Portugal had several responsibilities in the implementation of the EFAP: as regards the safeguard of financial stability, the provision of economic and financial advice to the government, statistical reporting and processing of the Programme’s financial flows. New powers as resolution and macro-prudential authority were given to the Bank.
1. Financial stability
- To strengthen the effectiveness and efficiency of supervision, but also to adapt itself to exercise new powers as a macro-prudential and resolution authority and prepare for the challenges of the Banking Union, Banco de Portugal introduced significant changes in its internal structure and adopted a more intrusive risk-based supervision model, with a more cross-cutting and prospective focus. Banco de Portugal:
- Broke down its supervisory and legal enforcement functions into four separate departments, entrusted with the tasks linked to macro-prudential supervision, prudential supervision, banking conduct supervision and legal enforcement. A Specialised Committee for Financial Supervision and Stability was established, to coordinate, at the highest level, the various fields within supervision and financial stability;
- Developed new supervisory instruments (e.g. Funding and Capital Plans);
- Conducted quarterly stress tests to assess the banking system’s ability to face adverse scenarios;
- Conducted several inspections to major national banking groups, focusing on specific asset classes and procedures;
- Developed analytical tools for systemic risk assessment (e.g. constructing risk indicators regarding contagion across sectors and institutions);
- Intensified its legal enforcement action, leading to a strong recovery of pending cases, a significant reduction of the average duration of administrative proceedings and an increase in the number of proceedings initiated and settled annually.
- Between 2011 and 2013, Banco de Portugal fostered (i) the strengthening of banks’ solvency and (ii) the protection of the system’s liquidity, (iii) reinforced monitoring and supervision of the banking system and (iv) invested towards the improvement of the regulatory framework, namely amid the implementation of the EFAP and the Basel III agreement and the establishment of the Banking Union. To safeguard the Portuguese banking system’s liquidity, the Bank actively cooperated with the European Central Bank to establish and implement non-standard monetary policy measures.
- The Bank also played a prominent role in the intensification of the regulatory framework governing retail banking markets and widened its supervisory actions. It also fostered financial literacy and inclusion, while promoting, jointly with other financial supervisors, the National Plan for Financial Education.
2. Functions as monetary authority
Banco de Portugal reinforced the quality of its analyses and economic research, which are key for the Bank to play an active and influential role in the Eurosystem and in the definition and implementation of the EFAP. The Bank developed statistical microdata bases, which made it possible to respond to information requests within the scope of the EFAP and to support the preparation of research on the financial system and the Portuguese economy.
- As a regulator, supervisor and catalyst for payment systems, Banco de Portugal ensured the efficient operation of TARGET2-PT, launched the connection to TARGET2-Securities and promoted migration to SEPA (Single Euro Payments Area). The Bank also actively participated in the development of the new series of euro banknotes (Europa series), putting the first denomination (€5) into circulation in May 2013. The new banknotes are even more secure and resistant than those in the first series.
- In 2011-13 Banco de Portugal strengthened its international activity and intensified cooperation with other central banks, particularly those from Portuguese-speaking countries.
3. Organisation and efficient resource management
- Over the three-year period, Banco de Portugal reinforced its governance and organisational model, using international best practices as a benchmark. The Bank appointed an Ethics Adviser and adopted new codes of conduct for members of the Board of Directors and the Board of Auditors as well as for its staff. The statute of the internal audit activity was revised and the Board of Auditors Charter was approved. The Bank adopted a new risk management strategy, which lead to the creation of a new Risk Management Department and a Committee for Risk and Internal Control.
- To respond to the tasks entrusted to it and the challenges brought on by the national and international environment, the Bank invested in the renovation, internal mobility and skills of its human resources. The Bank’s staff has been rejuvenated, having become more skilled, while its composition by gender has become more balanced. Its compensation policy reflected the Board of Directors’ concern for reconciliation of containment measures – to join the effort made by the Portuguese society in the present economic context – with measures to promote merit and the quality of its employees’ work.
- As regards budget and building management, Banco de Portugal rationalised costs and improved budget procedures (see Annual Accounts). Finally, over this three-year period, restoration and repair works were underway on the Bank’s head office, during which a considerable section of King Dinis’ Wall was discovered (classified as a National Monument), and made available to the public as part of a museum.
4. Communication and supply of services to the community
- In 2011-13 Banco de Portugal adopted a more pro-active, community-oriented communication approach, accounting for its actions, underlying reasons and methods, which also lead to the reinforcement of its social responsibility policy. The Bank intensified contact with the media, strengthened its interaction with the financial community, provided new content and services for households (more specifically, bank customers) and firms, and created an integrated call centre. The Bank also reinforced the regular release of publications on its various fields of activity and increased and diversified the seminar and conferences it promotes, including some in cooperation with other entities.
II – Banco de Portugal Accounts for 2013
- At the end of 2013, the total balance sheet of Banco de Portugal amounted to €111,592 million (€119,406 million in 2012). The decrease from the total balance sheet amount recorded in 2012 was chiefly due to a significant decline in the market price of gold and to the marked fall in the amount of liquidity provided by Banco de Portugal, related to the monetary policy operations, to €47,864 million (€52,784 million in 2012), reflecting the smaller refinancing needs of the national banking system with the Eurosystem.
- Net profit for 2013 stood at €253 million (€449 million in 2012), following the transfer of €130 million (€268 million in 2012) to the general risk provision. The payment of dividends to the State amounted to €202 million (€359 million in 2012).
The Board of Directors of Banco de Portugal approved on 25 February 2014 the annual accounts of Banco de Portugal for the year ended on 31 December 2013. The annual accounts were subsequently submitted to the opinion of the external auditors and of the Board of Auditors. In accordance with the Decision 81/14/MEF, the annual accounts for 2013 were approved by the Minister of State and Finance on 30 April 2014. The annual accounts will be published in the Official Gazette together with the management report by 31 May 2014.
General risk provision
The Board of Directors of Banco de Portugal decided to transfer, on 31 December 2013, the amount of €130 million (€268 million in 2012) to the general risk provision, which increased to €3,322 million. The increase in this provision was lower than in previous years, as a result, among other factors, of the improvement in the balance sheet risks coverage.
The General risk provision is equivalent to a reserve, considering its permanent nature, being intended to cover potential balance sheet risks in a medium to long-term perspective. The amount allocated to this item is revised on an annual basis and, among other factors, takes into account the assessment of risks for the period under review and the results of the projection of the financial statements of Banco de Portugal over a three-year horizon, against a background of strengthened own funds and the maintenance of financial autonomy levels suited to the Bank’s mission.
Interest margin and gains/losses arising from financial operations
Net interest income totalled €727 million in 2013 (€803 million in 2012). This amount includes Interest income totalling €1,156 million (€1,513 million in 2012) and Interest expense totalling €429 million (€710 million in 2012). The fall in Interest income from 2012 was chiefly due to: (i) the reduction in annual average income rates; (ii) the decline in the average amount outstanding of claims related to monetary policy operations; and (iii) the reduction in the overall amount of the portfolio of securities held for monetary policy purposes, due to bonds that matured. In turn, the reduction in Interest expense was largely due to the significant decline in annual average interest rates and the fall in the average balances associated with the major liabilities items, most notably intra-Eurosystem liabilities (TARGET).
Realised gains/losses arising from financial operations recorded a negative value of €5 million in 2013 (and a positive value of €91 million in 2012). This negative value is mainly due to Realised losses arising from foreign exchange operations, partly offset by Realised gains arising from operations with financial instruments held in the trading portfolios.
Unrealised losses on financial assets and positions amounted to €114 million in 2013 (€2 million in 2012). These losses resulted chiefly from negative foreign currency revaluation differences (€55 million) and from the price devaluation of securities held in the trading portfolio denominated in euro (€60 million). In accordance with the Eurosystem harmonised accounting framework, end-of-period unrealised gains/losses are treated differently: realised gains are recognised in the balance sheet and realised losses are recorded under Profit/Loss.
In 2013 Banco de Portugal’s administrative expenses continued to reflect the strategic guidance provided by the Board of Directors regarding cost rationalisation and containment, intended to join the effort made by the Portuguese society in the present economic and financial context. Developments in administrative expenses also reflected the rise in the number of the Bank’s professional staff to address the increased responsibilities entrusted to the Bank in the field of banking supervision and financial stability.
On a comparable basis, Staff costs rose by €4 million (3.2%) from 2012, chiefly due to the imperative increase in the Bank’s professional staff. The rise in the amounts recorded in the accounts (€123 million in 2013 and €108 million in 2012) reflects the recognition in 2013 of the holiday subsidy that should have been paid and recorded in 2012. More specifically, the holiday subsidy relating to 2012 was not recorded in the accounts in that year in view of the decision to suspend its payment, based on the application of the State Budget Law for 2013. In 2013, considering that the said suspension was deemed unconstitutional (ruling of the Constitutional Court of Portugal No 187/2013), the holiday subsidies relating to 2012 and 2013 were recorded in the accounts (with the respective compulsory social charges).
Supplies and services from third parties totalled €38 million in 2013 (€41 million in 2012). This decrease reflected chiefly the €4 million reduction in expenses related to the Economic and Financial Assistance Programme to Portugal, which were negligible in 2013.
Other administrative expenses – which include mainly depreciation and amortisation of tangible fixed assets and intangible assets respectively – totalled €15 million in 2013 (€19 million in 2012). This decrease resulted chiefly from the completion in 2012 of the amortisation of high-value application systems.
30 May 2014