As the macroprudential authority, the Banco de Portugal has introduced a 4% sectoral systemic risk buffer. It will be applicable to institutions using the internal ratings-based (IRB) approach, on the risk exposure amount of all retail exposures to natural persons secured by residential real estate located in Portugal. 

This measure will apply from 1 October 2024 and will be reviewed at least every two years. 

The Banco de Portugal made this decision having notified the European Central Bank, which did not object to the Banco de Portugal’s proposal. The Banco de Portugal also consulted the National Council of Financial Supervisors, the European Systemic Risk Board, and the European Commission. A prior hearing of interested parties was also conducted, in accordance with the provisions set forth in Articles 121 and subsequent of the Code of Administrative Procedure. 

The application of this macroprudential tool is preventive and aims to increase the resilience of institutions to the materialisation of potential systemic risk in the residential real estate market in Portugal. Should systemic risk materialise, the Banco de Portugal will consider a reduction in the percentage of the sectoral systemic risk buffer to contribute to maintaining the granting of credit to the economy. In this regard, the Banco de Portugal will indicate the timeframe during which an increase in this buffer is not expected. 

The institutions using the IRB approach account for a substantial share of the Portuguese mortgage credit market, and the risk weights they apply are low compared to those used in the standardised approach. 

The institutions covered by the measure have sufficient management buffers in place to accommodate the introduction of the sectoral systemic risk buffer. It is therefore estimated that the buffer could be set without jeopardising compliance with other prudential requirements and guidance or the lending activity of these institutions.

This measure supplements the macroprudential recommendation adopted by the Banco de Portugal regarding new credit granted to consumers, as recently revised in terms of the calculation of the debt service-to-income (DSTI) ratio. Specifically, the Banco de Portugal has decided to reduce the interest rate shock used in the calculation of the DSTI ratio (by 150 bp for new loans to households with a maturity of over ten years, with proportional reductions applied to other maturities). This change aimed to prevent an overly restrictive approach in assessing borrowers’ creditworthiness amid the ECB’s reference interest rate hikes from the beginning of the monetary policy normalisation process until the end of September.

On the sectoral systemic risk buffer

The systemic risk buffer is one of the macroprudential policy tools available to the Banco de Portugal.

This instrument is provided for in European law, through Article 133 of Directive 2013/36/EU (CRD), transposed into national law by Articles 138-U, 138-V, 138-W, 138-X, 138-Y, and 138-Z of the Legal Framework of Credit Institutions and Financial Companies.

Under the applicable legal framework, the systemic risk buffer may be applied to prevent and mitigate systemic risks not covered by other macroprudential tools of the Capital Requirement Regulation (CRR) and the CRD.

This buffer consists of Common Equity Tier 1 (CET1) capital and can be applied to risk exposure amount of all exposures or on a sectoral basis, i.e. to a subset of exposures. The decision referred to the European Banking Authority’s guidelines for setting the exposures covered by the sectoral systemic risk buffer. 

The aim of the sectoral systemic risk buffer as a macroprudential tool, is to increase the financial system’s resilience to sector-specific systemic risk.