Today Banco de Portugal publishes the Macroprudential Recommendation on new credit agreements for consumers – progress report (in Portuguese only), which establishes limits to the criteria used by institutions to assess borrowers’ creditworthiness. This Recommendation is targeted at mitigating the build-up of systemic risk and increasing financial sector resilience, while promoting households’ access to sustainable financing. Not all new credit agreements concluded with consumers are covered by the Recommendation. Credit agreements for an amount equal to or lower than the equivalent to tenfold the guaranteed monthly minimum wage fall outside the scope of the Recommendation. Additionally, inter alia, credit intended to prevent or address arrears situations is excluded, thus giving greater flexibility to the design of these agreements. Credit agreements in the form of an overdraft facility and other credit with no defined repayment schedule, including credit cards and credit lines, are also excluded. 

Banco de Portugal has been monitoring the implementation of the Recommendation by the institutions covered, so as to prevent potential distortions of competition or actions that may jeopardise the Recommendation’s effectiveness. In May 2019 the first progress report on this macroprudential Recommendation was published, with March 2019 as cut-off date. This Report presents the results of the monitoring of the macroprudential Recommendation since then, focusing on the March-December 2019 period.

The Borrowers’ risk profile continued to improve and institutions reinforced compliance with the limits set in the Recommendation

In 2019 Banco de Portugal continued to interact closely with major institutions in the Portuguese financial system, continuing to assess the degree of implementation of the Recommendation through the monthly reporting by 13 institutions with a market share of 95% of new credit to consumers. Banco de Portugal has also been assessing the measures taken by all institutions in view of the Recommendation, based on the data reported through the Central Credit Register.

From July 2018 to March 2019 there was a considerable convergence towards the limits established in the Recommendation, while from March to December 2019 there were virtually no cases of non-compliance with the limits recommended in new credit granted.

This assessment was supported by the European Systemic Risk Board (ESRB) in its assessment report on European residential real estate markets published in September 2019. Portugal was assessed as medium risk, and was not the subject of an ESRB warning or recommendation, contrary to 11 European countries, precisely because the measures taken to address risk were considered to be appropriate and sufficient. 

The macroprudential measure adopted by Banco de Portugal was indeed pioneering, namely as regards the involvement of institutions’ governance in the assessment of the degree of implementation of the measure, and was a benchmark for other macroprudential authorities of European countries.

However, upon monitoring the Recommendation, Banco de Portugal has concluded that the maintenance of the upward trend of the average maturity and average amount of new personal credit might pose an increased risk for the financial system. Hence, by deliberation of the Board of Directors of 29 January 2020, Banco de Portugal decided to reduce the maximum maturity of new personal credit to 7 years. This excludes credit for education, healthcare and renewable energy – which will continue to have a maximum maturity of 10 years –, provided that these purposes are duly evidenced. The exceptions provided for in the Recommendation for granting credit to borrowers with a DSTI ratio (debt service-to-income ratio, i.e. the ratio of the total amount of monthly instalments of a borrower’s total debt to his/her net monthly income) between 50% and 60%, have been reduced by up to 10% of the total amount of new credit granted by each institution. In addition, the 5% exception to the DSTI ratio limits has been maintained with regard to the total amount of credit granted by every institution and covered by the Recommendation.

With regard to the limits to the LTV ratio (loan-to-value, i.e. the ratio of the amount of loans to the value of the property pledged as collateral), there was a change in the distribution of new credit by range. New agreements with an LTV ratio of more than 90% accounted for 22% of total new credit relating to residential immovable property in July 2018, 4% in March 2019, and became immaterial in December 2019 (2%). By contrast, there was an increase in the relative importance of new credit with an LTV ratio between 80% and 90%, which accounted for around 50% of new business in December 2019.

This convergence was also seen in the DSTI ratio, whose calculation considers interest rate rises and income reductions, in the latter case when the borrower is aged 70 and over at the expiry of the agreement. In December 2019 around 92% of new business regarding credit relating to residential immovable property and consumer credit was granted to borrowers with a DSTI ratio of 50% or less. The share of new business regarding consumer credit and credit relating to residential immovable property with a DSTI ratio between 50% and 60% underwent few changes from July 2018 to December 2019, standing at around 7%, i.e. much lower than the 20% limit provided for in the Recommendation in this period. New business regarding credit relating to residential immovable property and consumer credit with a DSTI ratio of over 60% accounted for 3% of new credit in December 2019, thus being within the 5% limit established in the Recommendation.

Limits to maturity were also complied with: for credit relating to residential immovable property from October 2018 onwards; for consumer credit since the entry into force of the Recommendation. As at December 2019 over 90% of credit relating to residential immovable property had a maturity of 20 to 40 years, with the weighted average maturity per credit amount declining by approximately one year between July 2018 and December 2019, i.e. from 33.4 years to 32.6 years. However, institutions show differences in the evolution of the average maturity of new credit, and thus have distinct needs in order to ensure convergence towards an average maturity of 30 years by 2022, as set out in the Recommendation. The average maturities of consumer credit increased from around six years in July 2018 to around eight years in March 2019, and remained at that level in December 2019. 

Finally, the regular payments requirement continued to show a high degree of compliance with the Recommendation. 

There was also a gradual improvement in the risk profile of borrowers with credit relating to residential immovable property since the entry into force of the Recommendation, considering the combination of the DSTI and LTV ratios. This improvement is evident from the analysis of the share of credit granted to higher-risk borrowers. In July 2018 it reached 35%, declining to 9% in March 2019 and to 4% in December 2019.

The analysis in the Report that is now published shows that the limits considered in the Recommendation are overall appropriate and effective in the compliance with the objectives set: to promote the resilience of financial institutions by applying suitable credit standards for households and foster households’ access to sustainable financing.

More recently, with the spread of COVID-19 economic and financial conditions have deteriorated considerably. Banco de Portugal will thus continue to pursue its objective of financial stability in this new context, promoting the flow of funds into the economy, through the instruments it considers appropriate.