Banco de Portugal : establishes transitional arrangements for own funds

Banco de Portugal has approved Notice No 6/2013, which establishes transitional arrangements for own funds, under Regulation (EU) No 575/2013, and lays down measures to preserve those funds.

Own funds minimum ratios

Regulation (EU) No 575/2013 enables Banco de Portugal to phase in the implementation of own funds minimum requirements relating to the common equity tier 1 capital ratio and the tier 1 capital ratio, while setting intermediate thresholds to be implemented from 1 January 2014 to 31 December 2014.

Therefore, Banco de Portugal establishes in Notice No 6/2013 the minimum level of 4.5% for the common equity tier 1 capital ratio, applicable as of 1 January 2014.

Banco de Portugal also determines that credit institutions and investment firms should preserve a common equity tier 1 capital ratio of 7% or more until the actual transposition of Directive 2013/36/EU into the Portuguese legal framework. If at some point the common equity tier 1 capital ratio is below that threshold in any of those entities, Banco de Portugal shall apply the provisions laid down in Directive 2013/36/EU regarding the preservation of a capital conservation buffer.

Measures for the preservation of capital adequacy levels

In order to ensure an appropriate transition until the full implementation of the provisions laid down in Regulation (EU) No 575/2013 and Directive 2013/36/EU, Banco de Portugal establishes measures for the preservation of capital adequacy levels, preventing credit institutions from carrying out transactions that, immediately or in the short term, may have an actual or foreseeable effect of reducing the value of one or more of their own funds components. These transactions include, inter alia, dividend payments and the repurchase of instruments eligible for the calculation of own funds.

Banco de Portugal may authorise, on a case-by-case basis, some of the above transactions, if the credit institution in question submits a fully reasoned capitalisation plan, evidencing forward-looking and permanent compliance with the minimum capital adequacy levels applicable at each point in time.

These preservation measures shall cease to apply to credit institutions which become able to comply, on a sustainable and forward-looking basis, with the provisions of Regulation (EU) No 575/2013 and Directive 2013/36/EU, without using transitional provisions.

Framework

The recent international financial crisis has revealed vulnerabilities in the regulation of the global financial system. In order to mitigate such vulnerabilities, the Basel Committee on Banking Supervision has presented a range of measures (regulatory framework known as "Basel III") intended, inter alia, to enhance the quantity and quality of banks' own funds. In the European Union, these measures have been adopted via a legislative package comprising Regulation (EU) No 575/2013 and Directive 2013/36/EU, both of the European Parliament and of the Council of 26 June.

Regulation (EU) No 575/2013 (or CRR - Capital Requirements Regulation):Defines prudential requirements applicable to credit institutions and investment firms, specifically as regards the establishment of rules to calculate and determine minimum own funds. Its provisions shall apply directly to all Member States as of 1 January 2014, without requiring its transposition into the respective national legal frameworks. This Regulation also comprises transitional provisions enabling a number of requirements to be phased in. Banco de Portugal shall have powers to maintain or bring forward the date of implementation of some of these requirements. Any decision made in this regard must be published.

Directive 2013/36/EU (or CRD IV - Capital Requirements Directive):Establishes that credit institutions and relevant investment firms shall hold, in addition to other own fund requirements, a capital conservation buffer to ensure that they accumulate, during periods of economic growth, a sufficient capital base to absorb losses in stressed periods.

Recently, within the scope of the Economic and Financial Assistance Programme to Portugal, it has been agreed with the European Commission, the European Central Bank and the International Monetary Fund that rules should be established in order to ensure that the Portuguese banking groups will preserve a common equity tier 1 capital ratio of 7% or more after 1 January 2014.