The profound transformation of the portuguese financial system since the last financial crisis

António Guerreiro, President of the Strategic Council of Banco Finantia, comments on the profound transformation of the Portuguese financial system since the last financial crisis in an article published in Cadernos de Economia, of the Ordem dos Economistas.

The portuguese financial system has undergone a profound transformation since the last financial crisis. Institutions' profitability and solvency, which had fallen dramatically, have already recovered to pre-crisis levels.

In the last ten years, live credit, the number of branches and the number of workers in the sector have decreased by an average of 30% and technological developments have been dramatic.

The sector currently faces new challenges, some unprecedented, such as negative interest rates, excessive regulatory burdens and competition from new traders, outsiders of the traditional financial system.

The Banking Union is far from being finalized and the Single Market still has serious gaps. As a consequence, there is no appropriate level playing field and institutions based in countries with lower ratings (such as Portugal), are more conditioned.

Retail banking should continue to be subject to strong technological impulses with an impact on the institutions' cost structure and on the quality and speed of the banking services offered.

Investment banking will continue to suffer from a low volume of transactions, due to the decrease in the size of the national business fabric and the appetite for capital market activities. On the investors' side, there is a significant aversion to risk and low interest rates (in debt investments).

The new rules introduced by the MIFID (Markets and Financial Instruments Directive), the instability of the fiscal framework and the lack of tax incentives have not contributed to the increase in domestic savings.

Development banking was practically abandoned in Portugal with the privatization of BFE. Subsequent efforts to recreate it have proved to be insufficient and, in reality, the presence of the State in financing the economy and its own projects has been dispersed among various institutions and agencies, including CGD.

It would be advisable to join state institutions / initiatives in this field in order to give more focus to the space of State intervention in the economy, similarly to what happens in many other countries such as Spain (ICO) and Brazil (BNDES).

The current Government has already shown signs towards the rationalization of its institutional intervention in financing the economy and foreign trade.

The high concentration of efforts in channeling specific European funds should not overshadow the need to address other realities such as the need for medium and long-term financing and the capitalization of companies. Wait!

Regarding financial regulation, it has been shown to be growing and unstoppable, a trend that should continue in the near future. The agents of the sector have reacted against the excesses that lead to increased costs and without tangible benefits for economic growth.

Risk aversion has become widespread as a result of the new rules. The lack of proportionality in its application has inhibited the growth and competition capacity of smaller institutions.

European banking growth and profitability are currently low when compared to the United States. It will be necessary to reflect on the effect of regulation on the competitiveness of European banking before proceeding with the regulatory avalanche to which the sector has been subjected in recent years. Little or no reference is made to its impact on economic growth despite the understandable quest for lasting financial stability.

Regulators have suggested banking concentration as a solution to overcome the low profitability of European banking, but so far, few operations have been carried out in this regard. Industry operators are uncertain about their advantages, especially if they are cross-border.

The exponential growth of financial operators outside the banking system, often with little or no regulation, has brought new challenges to the global financial system.

What is the impact of a possible liquidity crisis on the system, since those operators are very far from banking regulation (Basel Accords) and do not generally have access to liquidity windows, as is the case with banks? Hedge funds, for example, now control volumes of financial assets above the largest global banks, therefore with enormous economic power and the ability to intervene in the allocation of resources. And they are little or not regulated at all!

It is worth highlighting the growing importance of private equity in the financing of many companies in growth or restructuring, with special relevance for all segments of the new economy, renewable energies and infrastructure. Although national sources of capital in this area have not yet acquired the desirable expression, due to a lack of incentives and an appetite for the risks involved, their importance and growth should increase in the coming years.

The capital market in Portugal has diminished in importance, also affected by excessive legislation and by the decreasing number of companies present.

This market needs more training and less regulation. It is difficult for SMEs to take an interest in the capital market given the administrative burden it entails.

In this case, alternative institutional mechanisms are needed that can meet your needs.

In a convenient simplification for a synthetic approach, it can be said that the financial system today is divided along two major axes: i) payment and related system (volume and technology) and financial investments and investment (risk and service) on the one hand ; and ii) highly regulated activities vs activities poorly regulated by another.

Underlying the entire system, technology and artificial intelligence evolve, sometimes independently, sometimes in collaboration with the banking system.

The very privacy of the financial clientele can often be at stake.

Externalities to the financial system also have powerful influences: demography, trade wars, globally relevant political and institutional instabilities are not without bringing new risk factors and uncertainties for investors and companies.

Faced with this scenario, we need informed and consistent political and economic decision-makers to be able to give the necessary confidence to markets and economic agents. It is important to foster medium and long-term investment that creates the wealth necessary to sustain the social and even civilizational system to which we have become accustomed: education, health, pensions, etc. quality and quantity suitable for all. *

NOTE

(*) The opinions expressed in this article are the responsibility of the author and in no way are Banco Finantia, S.A. responsible.