State committed to injecting no more funds into BES successor bank

Page created: Friday, 17 October 2014 15:24 GMT

BES   Novo Banco  Public Funds

The Portuguese state has promised the European Union authorities not to inject further funds into Novo Banco, the ‘good’ bank spun off form Banco Espírito Banco when the latter was wound up in August, and which has received €4.9 billion from the banking sector resolution fund.

The pledge was made in a letter that the Ministry of Finance sent to the European Commission on the subject of the BES rescue, and which the commission published this week. In it is stated that “Portugal will not supply any additional support in capital or in liquidity” to either the good or the bad bank that resulted from the operation.

The letter, which is signed by the finance minister, Maria Luís Albuquerque, also states that the good bank “will not supply any additional capital and/or liquidity to the ‘bad bank'”, except for the liquidity necessary to wind down its activities and operational costs.

The commission this week made public the documents in which it approved the winding up of what at the time was Portugal’s third-largest bank and gave the green light to the operation, as well as Albuquerque’s letter.

According to the letter, the decision was taken to wind up BES “in the absence of buyers” for the bank. This, it went on, was the “solution that remained to safeguard the stability of the financial system in Portugal”.

On 3 August, the Bank of Portugal took over control of BES and announced that it was being split into a good bank, now called Novo Banco, and a bad bank to take the ‘toxic’ assets and liabilities, including a stake in BES Angola.

The former was capitalised by the sector resolution fund, which was loaned €3.9 billion by the Portuguese state, making use of remaining under Portugal’s euro-zone bailout that had been earmarked for the financial sector.

According to the commission, the resolution fund is a state entity, despite being financed by the banks, since “its financing has a public nature and the Resolution Fund is completely under public control”. It considers the funds injected into Novo Banco to be state aid, but that this is justified given the turbulence that BES’s failure would create in the economy.

The commission estimates that the costs of a disorderly failure of BES would be up to €46 billion, with up to €28 billion resulting from the immediate liquidation or bankruptcy, and a further €18 billion that would have to be paid out to depositors by the country’s Deposit Guarantee Fund. The solution found was thus “the least onerous option for Portugal”.