IMF Says Banking Regulators Should “Carefully” Monitor the Real Estate Market

23 February 2018

The International Monetary Fund believes that Portuguese banking authorities should be “vigilant” and “prepared” to take additional macroprudential measures, if necessary, in the real estate market.

Although the ratio of household debt to disposable income fell by 20% between 2011 and 2016 (and by 3% in September 2017), the decline has been slowing of late and remains above the European average.

The reasons for this slowdown can be found in the increase of in applications for new loans to home purchases and the rise in consumer credit, the International Monetary Fund (IMF) noted in its report on Portugal last Thursday.

Referring to the Bank of Portugal’s (BdP) recommendation to financial institutions regarding the concession of loans from July 2018, the IMF suggested that the Portuguese authorities remain vigilant.

The fund also asks them to be “prepared to take macro-prudential measures, if necessary, to prevent further imbalances and to increase the resilience of banks and creditors.” Among them, measures that increase coverage and the quality of the data on the real estate market, strengthening the analytical tools needed to ensure proper supervision. The IMF also recommended continued attention to the prevailing lending criteria.

Strengthen Business Models and Clean Up Bad Debt

Despite acknowledging an improvement in the Portuguese banks’ financial stability and results in 2017, the institution led by Christine Lagarde also warned of the need to strengthen their business models, improve cost efficiency and clear out bad debts.

For the IMF, “the resolute implementation of the NPL (Non-Performing Loans) strategy would ensure continuing financial stability and economic growth.”

“Supervisors should continue to ensure that banks’ plans are credible and be prepared to activate supervisory measures in case of diversion,” the report reads. “Given the weight of NPLs and current level of available capital margins, additional capital increases may be required for future settlements.”

The introduction in 2018 of some regulatory measures may also change the banks’ costs and financing structure. These include IFRS 9 – Financial Instruments (where banks will be required to estimate expected loan losses and record them in their balance sheet) and the new MREL banking resolution framework (which provides for the issuance of financial instruments that may come to absorb losses in case of resolution). The new payments policy will also increase the competition from fintech, start-ups specialising in financial services.

More Reforms to Reduce Corporate Debt

The non-financial corporate debt stock has fallen since 2012, decreasing from 127.9% to 102.4% of GDP in September last year.

But that decline, coupled with an increased recourse to equity, “is far from sufficient,” the IMF warned.

It is, therefore, necessary, according to the IMF, to implement reforms to encourage the owners of these companies to retain more income and to inject additional amounts of capital.

Original Story: Expresso – Maria João Bourbon

Photo: Gonçalo Rosa Da Silva

Translation: Richard Turner