Initial address by the Chair of the Resolution Fund's Management Committee and Vice-Governor of Banco de Portugal before the Parliamentary Committee of Inquiry into the management of BES and GES
25 November 2014
Good afternoon Mr. Chairman, Members of Parliament,
I have been summoned before this Committee largely as a result of my capacity as Chair of the Resolution Fund's Management Committee and I will therefore focus my initial address on this Fund and its role in the resolution measure applied to Banco Espírito Santo (BES). Specifically, it will be divided into four parts. First, I will outline the institutional framework of the resolution function in Portugal. Then, I will talk about the financing of the resolution measure applied to BES. Third, I will address more generally the role of the Resolution Fund in the context of that measure. Finally, I will touch on the governance model of the Resolution Fund.
1. Institutional framework of the Resolution Function
The national framework currently in force in Portugal governing the resolution of credit institutions and investment companies was created in 2012, replacing the previous reorganisation system with a new approach for Banco de Portugal’s intervention in credit institutions facing financial difficulties.
This new approach was based on the preliminary versions of the framework established at European level in May 2014. The guiding principle of this national and European framework is that the losses of the institution under resolution shall first be borne by its shareholders and creditors, in that order. Where recourse to funds exogenous to the failing institution proves necessary, this financing must be provided by a resolution fund, which in turn shall be financed from contributions paid by the banking system. The rationale behind the creation of this financing mechanism is that the system must be able to overcome difficult situations on its own, avoiding the transfer of losses to taxpayers and therefore favouring a separation between sovereign risk and banking risk.
The framework established in 2012 endowed Banco de Portugal with the powers to apply resolution measures when a credit institution fails to comply or is at serious risk of not complying with its authorisation requirements. These resolution measures are designed for the following purposes: to ensure the continuity of essential financial services; to prevent systemic risk; to safeguard public funds and taxpayers’ interests; or to safeguard depositors’ confidence. The national resolution authority function was therefore entrusted to Banco de Portugal, and was enshrined in its Organic Law.
The Resolution Fund was created, also in 2012, for the purpose of providing financial assistance to the resolution measures to be adopted by Banco de Portugal.
For the fulfilment of its mission, the Resolution Fund has its own funds, mostly disbursed by the banking sector. Specifically, the Resolution Fund's financial resources are chiefly provided by initial and annual contributions directly paid by member institutions, as well as the proceeds from the contribution over the banking sector. Since the 2013 fiscal year, under the legal framework, these proceeds belong to the Resolution Fund, and cannot be used elsewhere. Those financing sources may be supplemented by special contributions from the member institutions, real or personal guarantees by member institutions, enabling the Fund to borrow funds, and, exceptionally, loans or guarantees granted by the State.
In sum, the resolution institutional framework currently in force in Portugal is based on two separate entities, each with its own responsibilities: Banco de Portugal, in its capacity as resolution authority, is exclusively responsible for deciding and applying resolution measures; and the Resolution Fund, in its capacity as financing mechanism, is chiefly responsible for providing the financial support decided by Banco de Portugal.
In applying resolution measures, Banco de Portugal, as resolution authority, is particularly responsible for:
- Verifying the assumptions and conditions for the resolution;
- Selecting the measure to be applied;
- Selecting the perimeter of assets, liabilities, off-balance-sheet items and assets under management to be sold to an acquirer or to be transferred to a bridge bank;
- Setting up a bridge bank, where Banco de Portugal decides to apply that measure, approving the respective statutes and defining the applicable regulations;
- Appointing the members of the management and supervisory boards of the entity which is the object of the measure and, where applicable, of the bridge bank;
- Stipulating the financial support to be provided by the Resolution Fund;
- Conducting the process for the disposal of the bridge bank's equity or assets;
- Where applicable, revoking the authorisation of the entity that is the object of the resolution measure, and, as a result, winding it up.
In turn, the Resolution Fund is entrusted with a limited set of responsibilities, reflecting its very specific mission. Outside the context of actual resolution measures, the Fund is chiefly responsible for managing its own resources, in accordance with a plan agreed with Banco de Portugal. Within the context of actual resolution measures, the Resolution Fund shall be especially responsible for carrying out all the procedures required for the provision of funds as stipulated by Banco de Portugal. This may include mobilising previously accumulated resources, obtaining loans, or submitting proposals to the Government for special contributions or guarantees from member institutions. The Fund cannot refuse to provide financial assistance as stipulated by Banco de Portugal, and shall provide such resources as soon as this is decided by Banco de Portugal.
2. The financing of the resolution measure applied to Banco Espírito Santo, SA
The deliberation of the Board of Directors of Banco de Portugal of 3 August 2014 establishing the application of a resolution measure to BES set out that the Resolution Fund should provide an amount of €4.9 billion for the purpose of paying up Novo Banco's equity.
Considering that the Resolution Fund only started its activity in 2012 and that, on 3 August 2014, its own resources totalled €377 million, the Fund had to resort to complementary financing means in order to provide financial support to the application of the resolution measure to BES.
Therefore, considering the extremely urgent, inevitable and exceptional nature of the resolution measure and the need for the Resolution Fund to have the necessary resources to implement it, the Resolution Fund's Management Committee, in its meeting of 3 August 2014, decided to submit to the Ministry of Finance a financing proposal with a view to (i) obtaining a loan from the State to the amount of €4.4 billion and (ii) collecting a special contribution from member institutions to the amount of €135 million.
However, a group of institutions that are members of the Resolution Fund indicated their availability to provide a loan to the Fund in the short run, making it possible to change the structure of the financing initially suggested.
Subsequently, the Resolution Fund's Management Committee decided that the financing request previously submitted to the Ministry of Finance should be revised and that, alternatively, a request should be made for a loan from the State amounting to €3.9 billion.
Summing up, the financial support provided by the Resolution Fund for the implementation of the resolution measure applied to BES by Banco de Portugal was the result of:
- (i) A loan granted by the State amounting to €3.9 billion, with a maturity of three months, renewable up to two years, for which the Fund shall pay quarterly interest;
- (ii) A loan granted by a group of credit institutions that are members of the Resolution Fund, amounting to €700 million, with a maturity of three months, renewable up to two years, intended to partially endow the Fund with the required funds for paying up Novo Banco's equity, and to ensure the payment of interest due under the terms of the loan granted by the State; and
- (iii) The mobilisation of resources available to the Fund, namely receipts from contributions paid by the financial sector, including the contribution over the banking sector.
Given that the loan granted to the Fund by some member institutions was only signed on 28 August, on 4 August the State provided the Fund with an additional amount of €635 million, in excess of the €3.9 billion loan. This advance payment was repaid on 29 August, generating interest payment to the State of approximately €1.3 million.
Moreover, after their first maturity, the loans granted to the Resolution Fund were both renewed for an additional period of three months. Upon the renewal of the State’s loan, on 4 November, the Fund paid interest to the State to the amount of €28.8 million, which means that, overall, the Resolution Fund has already paid the State approximately €30 million total in interest.
Against this background, the Resolution Fund is currently the debtor of two loans, totalling €4.6 billion, and owns in full Novo Banco's equity, currently valued at €4.9 billion.
According to the legal framework in force, after the sale of Novo Banco's equity to a stable privately-owned shareholder structure, the proceeds from that sale will be primarily allocated to repaying the Resolution Fund for all the amounts provided for the establishment and development of Novo Banco's business, including a remuneration corresponding to the financing costs borne by the Resolution Fund, plus a share to cover the administrative and operational costs of such support.
The amount received by the Resolution Fund from the sale of Novo Banco's equity will necessarily be used to repay the loans obtained. It has been stipulated by contract that the Fund may only repay other liabilities after the State loan has been fully repaid and remunerated.
In the event that the proceeds from the sale of Novo Banco exceed the sum of the amounts provided by the Resolution Fund, the respective surplus will revert to BES (‘bad bank’), or to its insolvent estate, if in the meantime BES's authorisation has been revoked.
In the event that the proceeds from the sale of Novo Banco's equity are insufficient to repay the loans, the Resolution Fund will use its own receipts to finance the possible shortage. As previously mentioned, these receipts are obtained from annual regular contributions to the Resolution Fund (including the contribution over the banking sector) and any special contributions. The definition of the financing structure of a possible shortage (in terms of type of contribution, its distribution in time, and any recourse to temporary loans) will critically depend on the amount of such hypothetical shortage. In any case, financing will be structured in such a manner as to not jeopardise the solvency of any bank and, naturally, to preserve financial stability.
3. The role of the Resolution Fund within the context of the resolution measure applied to Banco Espírito Santo, S.A.
In accordance with the framework described above, the main task of the Resolution Fund within the context of the resolution measure applied to BES was to carry out all the procedures required for the provision of funds, as stipulated by Banco de Portugal, to the amount of €4.9 billion.
To this effect, the Resolution Fund submitted proposals on the financing structure to the Ministry of Finance, as mentioned above.
The Resolution Fund was also responsible for submitting proposals on the members of the management and supervisory boards of Novo Banco to Banco de Portugal, both when the bridge bank was set up and after the Board of Directors chaired by Vítor Bento resigned.
As sole shareholder of Novo Banco, the Resolution Fund is also responsible for carrying out the tasks entrusted to it by this status, with the adjustments imposed by the specificities of the resolution regime, which, as seen above, entrusts specific powers exclusively to Banco de Portugal.
As sole shareholder of Novo Banco, the Resolution Fund was called to issue its opinion and decide, up to now, on a number of corporate or administrative issues listed in the documentation provided.
4. The governance model of the Resolution Fund and the role of the banking sector
The Resolution Fund has administrative and financial autonomy and is managed by a Management Committee comprised of three members: one member of the Board of Directors of Banco de Portugal, appointed by the latter, who chairs the Committee, one member appointed by the Minister of Finance and one member appointed by agreement between both institutions. The technical and administrative services essential to the smooth operation of the Resolution Fund are provided by Banco de Portugal.
The Fund is audited by the Board of Auditors of Banco de Portugal. Each year the Fund submits for approval its annual report to the member of the government responsible for finance, after which the report is published on the website of the Resolution Fund. In 2013 the Management Committee of the Resolution Fund decided to secure external auditing services to audit the Fund’s accounts, even though no legal or regulatory rules require the Fund to do so.
Under this institutional framework, credit institutions and investment companies that are member of the Resolution Fund basically take on the role of its ‘funders’. They are legally required to pay contributions to the Fund. These contributions are similar to an insurance premium to cover the risk of a member institution failing to comply, or being at serious risk of not complying, with its authorisation requirements and, as a result, possibly leading to the contagion of other financial institutions. Within this context, the contributions to the Resolution Fund correspond to a mutualisation of this risk. Should a specific event occur against which the member institutions wish to protect themselves, the intervention of the Resolution Fund protects the member institutions as a whole, preventing the situation in one of the institutions from spreading to the remaining institutions and contaminating them.
It is worth highlighting that member institutions have no role in managing or administering the Resolution Fund. Nevertheless, institutions may accompany the Fund’s activities by analysing its annual report, which is made available to the public, and participate in cooperation activities and institutional dialogue with the Fund for which it is always available.
More recently, an advisory body providing support to the Fund’s Management Committee was created with the entry into force of Decree-Law No 157/2014 of 24 October. This body will be comprised of representatives from member institutions. The organisation and operation of this advisory council will be regulated by an executive order of the member of the government responsible for finance.
Mr. Chairman, Members of Parliament,
In conclusion, I would like to stress the following:
The resolution of BES – an undoubtedly large bank of systemic importance in Portugal – has put to the test the country’s recent resolution regime in a violent and unexpected manner.
The impact of the application of the resolution measure to BES on the accounts of the Resolution Fund and its consequence for the different institutional sectors will depend on the proceeds from the sale of Novo Banco.
Anyway, whatever this impact, we must never lose sight of the essential issue. And this essential issue is that, notwithstanding BES's clear systemic relevance, the measure adopted – the only measure Banco de Portugal could apply effectively, aside from winding it up, under the conditions and within the time available – has made it possible to safeguard financial stability in Portugal, protecting deposits, without disruption, and ensuring the smooth provision of financial services.
Thank you for your attention.