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Press release of the Banco de Portugal on the December 2021 issue of the Financial Stability Report

The evolution of the pandemic continues to have an impact on the assessment of risks to financial stability. Despite the mitigation of these risks over the short-run, health uncertainty persists and vulnerabilities have accumulated, which may result in the materialisation of medium-term risks. The effects of the pandemic have still not been overcome or fully materialised yet, and their full extension is still uncertain.

The main vulnerabilities and risks to financial stability contained in further detail in this issue of the Report are:

  • Reassessment of risk premia as a result of increased uncertainty on the part of investors about inflation developments and the response of monetary authorities. 
  • Changes in financing conditions on international markets, with an impact on residential real estate market prices and the cost of financing the sovereign and other institutional sectors. 
  • The impact of disruptions in non-financial corporations’ activity on default and credit risk materialisation, particularly in the sectors most affected by the pandemic. 
  • Increase in the debt to disposable income ratio of households, owing in particular to the growth in housing loans, with a bearing on financial resilience of the sector to changes in unemployment and related falls in income.

For the Portuguese banking sector:

  • Deterioration in asset quality and credit risk materialisation: importance of a proper credit impairment recording.
  • Market risk materialisation stemming from an increase in long-term interest rates, with a negative impact on the value of financial assets in the portfolio, most notably government debt.
  • Low profitability levels, amid low interest rates, limited expansion of the domestic credit market and increased competition in more profitable segments.
  • Challenges arising from the digitalisation process in banking activity, including cybersecurity, and the transition to a sustainable economy.

Preserving financial stability in Portugal will crucially depend on the financial situation of domestic agents and the responsiveness of national authorities. Thus, it is of paramount importance to resume the pre-pandemic adjustment paths. 

The Banco de Portugal may take macroprudential measures aimed at mitigating the potential build-up of systemic risk in some sectors.

Financial Stability Report - December 2021