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Priorities — 2025
In accordance with the mission entrusted to it, the Banco de Portugal, jointly with the Single Supervisory Mechanism (SSM), will continue to promote the sound and prudent management of supervised institutions, namely by imposing the appropriate balance between risk profile and their levels of capital and liquidity.
The SSM reviews the set of priorities for the prudential supervision of significant credit institutions annually. The aim is to ensure that banks address challenges and risk drivers in the banking sector effectively.
In the same vein, the Banco de Portugal also sets supervisory priorities for less significant credit institutions on an annual basis, considering the priorities set by the SSM and the specific risk factors inherent to the activity of the Portuguese banking sector.
In this context, the Banco de Portugal identified two supervisory priorities for 2025, which aim to urge banks to:
Develop appropriate structures to strengthen operational resilience and mitigate risks associated with digital transformation and climate and environmental factors;
Fully address structural weaknesses, ensuring greater resilience to potential future shocks.
These priorities focus supervisory action on assessing the main risks which banks are or might be exposed to, contributing to increasing each institution’s resilience and consequently, the stability of the banking system as a whole.
Operational resilience (including Information and Communcation Tecnhology (ICT) Risk and Cybersecurity)
Transformation of information systems, management of information systems security and of outsourcing
In the current context, a number of factors could contribute to an increase –both in quantity and severity – in events that could disrupt normal banking operations. For example: (i) the massive use of digital channels by bank customers; (ii) increased fraud attempts associated with social engineering schemes; (iii) the persistence of cyber threats, partly related to increasing geopolitical risk; (iv) the fact that with technological innovation, banks' reliance on external service providers is ever greater (through outsourcing). The existing concentration of some ICT services outsourced may, in the event that systems become inoperable, compromise the security and business continuity of supervised credit institutions, or even exacerbate the risk of contagion and the potential impact of any incidents. If they materialise, these events could result in direct losses for banks and increased uncertainty about the sector.
Therefore, supervisory activity will follow developments in the Portuguese banking system in terms of operational resilience, ICT risk and cybersecurity, with a stronger focus on the transformation of information systems or the financial and technical availability of credit institutions to implement sufficiently robust and up-to-date security measures. The outsourcing of critical functions and the knowledge, experience and digital training of management bodies – and, in general, of bank staff – will also be monitored by the supervisor.
Business model
Monitoring the digitalisation strategy
Digitalisation is essential for banks to be able to meet customers’ needs, increase operational efficiency, diversify sources of revenue thus remaining relevant in an extremely competitive environment, also populated by non-bank financial entities (e.g. BigTech).
In this context, it is particularly relevant that banks define, implement and monitor digitalisation strategies.
A suitable and regular analysis of the impact of digital trends on the business model and environment in which institutions operate in the short, medium and long term is key to informed decision-making and as such, any digitalisation strategy should build on such an analysis. In addition, the development of key performance indicators allows banks to better monitor the implementation and execution of digitalisation strategies.
It is also important that supervised institutions have a clear allocation of responsibilities related to digitalisation in terms of management and supervisory bodies. For digitalisation strategies to be coordinated and conducted effectively, it is essential, for example, that digitalisation initiatives are in line with institutions’ overall strategy, that the (financial and human) resources needed to implement digital initiatives are rightly assessed, and that appropriate mechanisms are in place to report on the progress of such initiatives and potential implementation risks to the management body.
Climate-related and environmental risk
Climate risk identification and management policies and practices should comply with supervisory expectations
Credit institutions' ability to identify, assess and manage climate-related and environmental risks has become increasingly important for the banking sector, particularly in view of the uncertainty over the timeline for this source of risk to materialise. These risks have been progressively integrated into the supervisory processes, first and foremost by setting supervisory expectations and deadlines for them, as well as by conducting monitoring exercises, with a view to properly and progressively managing these risks.
Credit risk
Strengthening credit risk management frameworks
Developments in the environment where banks operate – marked by interest rates higher than observed for the past decade, geopolitical tensions and rising protectionism in international trade – could harm the creditworthiness of firms and households.
Therefore, supervisory activity will focus on: (i) monitoring exposures to counterparties and sectors that may be more vulnerable in this context, (ii) reducing larger and older legacy nonperforming exposures in some institutions’ portfolios, and (iii) enhancing models to monitor credit and estimate expected credit loss.
Liquidity and market risks
Strengthening liquidity and market risk management tools
Current volatility in international financial markets, with a potential impact on interest rates, could lead to a devaluation in financial assets, in particular debt securities held by credit institutions, with possible negative effects on capital and earnings or on investors’ perception of the economic value of these assets on the balance sheet. Supervisory activity will focus on monitoring the risks associated with some institution’s high exposure to these securities.
On the other hand, under the current interest rate scenario and due to deposits being easily withdrawn by bank customers, the robustness of liquidity contingency plans is crucial to ensure institutions are adequately prepared for adverse liquidity scenarios.
Governance and internal control
Effectiveness of the supervisory body in performing its functions and strengthening internal control functions, with a focus on internal audit
The evolution of the materiality of the main sources of risk and the constant update of the legislative and regulatory environment require continuous adjustment by supervised credit institutions, particularly their internal control functions and their management and supervisory bodies. Therefore, given their relevance for sound and prudent management, the proper discharge of the responsibilities of the institutions’ internal control functions and of their management and supervisory bodies will continue to deserve particular attention from the supervisor.
Internal control functions should have sufficient human resources and mechanisms to ensure their independence and status. The internal audit function should also plan the audit actions considering the key risks the institution faces, develop robust processes to identify and classify deficiencies, and set out appropriate action plans to address them. It is also important to ensure the proper involvement of management and supervisory bodies, so that deficiencies, especially those of higher severity, are addressed in a timely manner.
On the other hand, it is crucial that supervisory bodies act effectively and with heightened scrutiny. Supervisory bodies should be able to challenge decisions taken (and to be taken) by the management body and oversee the adequacy and effectiveness of the internal control system, in particular the adequacy of the risk management system with regard to, inter alia, the institution’s business model.
Business model
Adequate pricing policy
Credit pricing influences banks’ profitability and business model sustainability. It is important to ensure that supervised institutions have pricing policies and practices set by appropriate governance structures that consider the type of borrower, their creditworthiness and all relevant costs associated with credit operations.
In a context of lower credit demand and increased competition, with downward pressure on prices, weaknesses in banks’ pricing policies represent a potential source of risk to the business model (profitability). The supervisor will therefore seek to ensure that institutions adequately address current and prospective risks associated with both borrowers and developments in the macroeconomic environment when lending.