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Portugal Banking and Finance
The importance of the financial system to the economy
dwarfed
its direct impact on employment and income. A
well-functioning
financial system served not only to increase the
mobilization of
saving but, more importantly, to direct capital resources
toward
their most productive uses. Since the mid-1980s, when
commercial
banking and insurance were reopened to private initiative,
the
Portuguese financial system had evolved toward greater
liberalization, diversification, and internationalization.
Although the private financial sector had grown
rapidly, the
eleven nationalized banks and eight public insurance
companies
still accounted for 80 percent and 60 percent of their
respective
markets in 1989. Notwithstanding their improved operating
conditions and higher solvency ratios, the profitability
of most
nationalized banks was depressed by their large holdings
of low
interest bearing public debt. Bad and doubtful loans
continued to
burden several state-owned banks. The nationalized banks
were
also plagued by undercapitalization, overstaffing, and an
excessive branching structure. Many of these banks had
large
pension liabilities, which, being unfunded, were not
reflected in
their balance sheets. The continuing structural problems
of the
state banks dated back to the late 1970s and early 1980s
when the
Portuguese government followed a "soft budget" policy that
emphasized social or political objectives over market
criteria.
Banks were required by law to extend preferential credit,
usually
at negative real interest rates, to the large nonfinancial
public
enterprises, as well as to the general government.
Relaxation of
the normal banking sanctions against troubled or failing
public
enterprises threatened the capital of the banks and their
own
financial viability. The Bank of Portugal's quantitative
credit
controls served mainly to facilitate commercial bank
financing of
the large deficits of the consolidated public sector. The
administrative control of credit penalized private small
and
medium-sized enterprises, in particular.
Portuguese financial markets experienced accelerated
change
after the country joined the EC in 1986. Deposit and
lending
rates were freed, new money market instruments were
introduced,
and in 1990, the Bank of Portugal removed credit ceilings
on
commercial banks. The Lisbon Stock Exchange was modernized
with
more stringent rules governing the disclosure of financial
information, as well as precautions against insider
trading.
Enabling legislation in 1984 allowed private banks and
insurance firms to be organized. By the late 1980s, six
new
foreign bank branches were established: Manufacturers
Hanover
Trust, Chase Manhattan, Barclays, Banque National de
Paris,
Citicorp, and Générale de Banque of Belgium. Four majority
Portuguese private banks were also set up: Banco de
Comércio e
Indústria (BCI), Banco Internacional de Crédito (BIC),
Banco
Português de Investimento (BPI), and Banco Comercial
Português
(BCP). By December 1990, BCP had become Portugal's leading
and
fastest growing private commercial bank with total assets
of
nearly US$6 billion. A number of private investment
(para-banking) institutions and venture capital funds had
also
become part of the financial picture since the mid-1980s.
During the first phase of "partial" privatization--in
1988
before the 1989 constitutional amendment--the government
selected
a medium-sized bank (Banco Totta e Açores) and two public
insurance companies (Aliança Seguradora and Companhia de
Seguros
Tranquilidade) as the first to be privatized. Share issues
for 49
percent of these companies were substantially
oversubscribed in
1989. After passage of the Reprivatization Law in April
1990, the
sale of the remaining 51 percent of both Tranquilidade and
Aliança shares took place later that year, and an
additional 31
percent of Banco Totta e Açores shares were also sold.
Other 100-
percent privatizations of financial firms envisaged for
1991
included the Banco Português do Atlântico, the country's
largest
commercial bank.
Significantly, the late 1980s saw the reemergence of
some of
the prerevolutionary family groups in Portugal's economic
landscape, particularly in the financial sector. As an
example,
the Espíritu Santo family became the majority shareholder
in BIC
and in the Espíritu Santo Sociedade de Investimento and
was
reported to be attempting to retake control of the
Tranquilidade
insurance company. The return of some of these
dispossessed
family groups to Portugal reflects a turnaround in
confidence in
Portugal's future, as well as the prospect for
reinvestment of
large sums of flight capital.
Notwithstanding the privatization trend, the Portuguese
government intended to maintain an important position in
the
financial system in addition to its control over central
banking
through the Bank of Portugal. The two major financial
groups
reserved for the state included, first, the Caixa Geral de
Depositos, the largest savings bank; the Banco Nacional
Ultramarino (a commercial bank); and Fidelidade (an
insurance
company). The second group dealt with international trade
and
export promotion and consisted of Banco de Fomento e
Exterior (an
investment bank); Banco Borges e Irmão (a commercial
bank); and
an external credit insurance company, Companhia de Seguros
de
Créditos (Cosec). Together, these two financial groups
accounted
for about 40 percent of Portugal's banking transactions in
1990.
Data as of January 1993
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