Bank Resolution in Portugal Changes Hands With 7.5 Billion Euros Still on the Tab

The sale of Novobanco to France's BPCE closed the file on the most expensive episode in modern Portuguese banking. It did not close the account. The Fundo de Resolução, the vehicle that paid for the resolution of Banco Espírito Santo in 2014 and of Banif in 2015, still owes 7.5 billion euros, and the people responsible for managing that debt are changing.

José Alvarez has been appointed director of the Resolution Department at the Banco de Portugal, a promotion from deputy director confirmed by the central bank, which told ECO the appointment followed an internal competition. He is a long-serving official who spent years in prudential supervision and has already been working on the compensation owed to BES creditors. His deputy will be Joana Margarido, a lawyer who has been in the department for more than a decade.

The post became vacant because João Freitas, who was both secretary-general of the Fundo de Resolução and director of the department, moved in June to run Prudential Supervision, one of the central bank's most consequential jobs, after Luís Costa Ferreira left for EY.

A third seat is also empty. Luís Máximo dos Santos is reaching the end of his term as deputy governor, a position he has held since 2017, and his mandate as chair of the Fundo de Resolução's management committee expired in March. His successor is the government's appointment, and may be named in the coming weeks.

What the new team inherits

The arithmetic is unforgiving. The two resolutions and the capital injections into Novobanco under the contingent capital mechanism between 2017 and 2021 left the fund with a bill of 7.5 billion euros. In practice that is the loans used to finance the resolution measures: 6.4 billion from the State and 1.1 billion from the banks, repayable over the decades ahead.

On top sits the compensation owed to BES creditors under the no creditor worse off principle, the rule that nobody may come out of a resolution worse than they would have in a normal liquidation. The fund has reserved 630 million euros and the figure may rise. The procedure has already begun, and from December ordinary creditors will be able to start claiming; the amounts are expected to be around 32 percent of recognised claims.

Against those liabilities the fund holds assets valued at about 2.2 billion euros, which covers roughly 30 percent of what it owes. The sale of Novobanco brought in more than 900 million. The gap is closed year by year out of the contributions the banking sector pays in.

A constitutional question hanging over the funding model

That is where the second problem sits. In July the Constitutional Court, ruling on a request brought by one bank, found unconstitutional the rule setting the rate of the additional contributions paid by the sector. The judgment puts in doubt a financing model the largest institutions have criticised for years, and other banks have already indicated they may bring their own challenges. The Banco de Portugal and the Fundo de Resolução are assessing the implications.

For anyone living in Portugal the practical relevance is indirect but real: this is the mechanism that determines whether the cost of a future bank failure lands on the banking sector or on the taxpayer, and at present the sector's share of it is under legal challenge while the fund's assets cover less than a third of what it owes. The fund was created in 2012, in the middle of an international crisis, precisely so that taxpayers' money would not be the first line of defence.