In accordance with the mission entrusted to it, the Banco de Portugal, jointly with the Single Supervisory Mechanism (where applicable), will continue to strive to maintain the sound and prudent management of supervised institutions, namely by imposing adequate balance between their risk profile and capital and liquidity levels.
The Single Supervisory Mechanism (SSM) has established a set of priorities, which are the focus of supervisory action in significant institutions, so as to ensure that credit institutions effectively respond to the challenges and risk factors in the banking sector.
In the case of less significant institutions, in line with the strategy adopted by the SSM and taking into consideration the specific risk factors inherent in the activity carried on by the Portuguese banking sector, the Banco de Portugal has identified three supervisory priorities: business model and profitability, credit risk, and internal governance and control.
Essentially, the establishment of priorities aims to guide supervisory action towards assessing the main risks faced by banks, thus contributing to an increase in individual resilience and consequently to the stability of the system as a whole.
Profitability of credit operations
Assessment of the adequacy of credit profitability to credit risk and contribution to sustained internal capital generation
Supervisory activities will continue to strive to maintain capital and liquidity positions that, in addition to complying with the minimum requirements, are consistent with institutions’ activity growth, profile and risk appetite, and to require planning processes that are duly implemented in day-to-day management.
In this area in particular, the Banco de Portugal will continue to monitor whether new bank credit operations rely on prudent lending policies, so as to ensure the sustainability of banks’ business models through risk-adjusted return levels, whilst preventing excessive capital consumption in the future.
Focus on banks’ digital innovation processes (cybersecurity and Fintechs)
Digital innovation also deserves special attention from the Banco de Portugal and the SSM. In this case the intention is to assess whether banks are able to address potential cyber risks and to adapt to new customer needs at the level of digital financial services provided.
Reduction in NPLs
Challenge of NPL reduction plans
One of the most significant advances achieved by the Portuguese banking system has been to reduce non-performing loans in banks’ balance sheets.
These positive developments result from strict NPL reduction plans that the Banco de Portugal, either autonomously or – in the case of significant banks – jointly with the Single Supervisory Mechanism, has required each bank to observe in the context of the supervisory process.
This notwithstanding, NPL levels are still above the European average, which warrants maintaining their reduction plans a supervisory priority. The supervisory measures to be adopted include ensuring that banks implement robust credit risk identification and assessment processes, in compliance with the applicable requirements.
Ongoing reinforcement of internal governance following best practice
Given its importance to the stability of institutions, the robustness of internal governance processes will continue to be supervised, ensuring that the three main lines of defence of banks’ soundness – management and supervisory bodies, control functions and external auditors – effectively fulfil their legal responsibilities.
In this context, the Bank will continue to strongly scrutinise the requirements to act as member of corporate bodies, to assess the internal control systems of supervised institutions through inspections, and to hold new communication initiatives with institutions.