Public Consultation on Structural Reforms of the Financial System
 To what extent are the current and ongoing regulatory reforms sufficient to
ensure a stable and efficient banking system and avoid systemic crises?
We consider that ongoing regulatory reforms represent a step in the right direction and would
have positive effects regarding the financial stability, namely protecting depositors,
strengthening depositors confidence on the banking system, enhancing the capacity to absorb
losses from stakeholders and holders of other loss absorbing instruments (reducing the final
recourse to the tax payers), lowering the system risk, containing leverage, protecting
consumers and at the same time allowing the conditions for banks to continue to provide
credit to the economy (with more criterion and more directed).
Taking into consideration the ongoing changes, both at a regulatory level and at the
architecture of the supervisory bodies (Deposit guarantee shemes, Bail-in, CRD, Basel III,
MiFID, EMIR, short selling of CDS, MAD, ESMA’s regulation on CRAs, solvency II, remuneration,
corporate governance, ESAs, SIFIs, …), that will impact on market dynamics and market
structures over the coming years, it should be considered providing some time in order to
better assess if the proposed changes are sufficient to ensure a stable and efficient banking
system, namely whether they have been suited for correcting the failures and shortcomings
detected, and thereby avoiding the risk of overburdening the financial industry and economic
activity.
It is important to stress that exceptional circumstances like those that currently are affecting
the European financial markets and the reforms’ intent to counteract pro-cyclical adverse
movements from setting in should favor the possibility of exceptional regimes for those
countries currently undergoing specific adjustment programs. Demanding stringent banking
regulations by imposing stricter capital and liquidity conditions at a time economic conditions
remain under significant stress risks doing more harm than good, going right into the opposite
direction of the purpose of revising banking regulation.
 Which structural reforms would improve the safety and efficiency of the banking
system in the EU in the near term? In the long term?
Regarding the structural reforms (separation of structures, ring-fencing and prohibition of
certain activities) we consider that:
i)
ii)
iii)
Regarding the separation of structures the risks are not eliminated but shifted
across the financial group. The problem is not with the universal bank model
itself but relates to the robustness of the risk management and effective control
of the executive board and supervision;
Ring-fencing does not resolve the bank’s exposure to risky assets, namely ABS
held in the portfolio of retail banks activities and also retail banks need to have
access to wholesale funding markets because in some cases the deposits are
insufficient to finance the credit and in others there is a surplus of funds that has
to be lent;
Regarding the prohibition of proprietary trading activities, it’s a measure very
difficult to implement due to the difficulty of distinguished between proprietary
trading activities, market making activities, hedging and operations related with
customer operations;
iv)
Taking into consideration that a good deal of the challenges faced by the
European banking industry derive either from the weak macroeconomic
environment or the condition of public finances, and given that the European
Mainland banking business model is mainly made of traditional lending to
households and corporations, then the most logic answer for improving the safety
and efficiency of the banking system is to implement global macroeconomic
measures addressing those pitfalls. For the future, the countercyclical
measures/initiatives seem conceptually attractive though looking a bit complex to
implement and not far from the good use of dynamic provisioning. For the short
term tightening further the bank’s leeway to proceed their business does not
seem to rightly fit within the overall intention of strengthening the banking sector
and its financial institutions;
v)
Ad hoc changes in regulatory requirements need to be made taking into
consideration the macroeconomic environment but also the institutions (private
agents and authorities) capacity to comply with the new requirements, otherwise
risks only contributing to increase the general level of weariness related to
specific institution/system and does close to nothing to solve the problem in the
first place;
vi)
If one considers the novelty of some financial products as a factor that may have
contributed to the financial crises, than initiatives similar to food and drugs
products where prior to being released to the general public they need to
undergo specific testing could be tried as well within the financial industry.
 What are your views on the structural reform proposals to date (e.g. US Volcker
Rule, UK ICB proposal)? What would be the implications of these proposals on your
institution and the financial system as a whole
First and foremost a simple reminder that regulation needs to be designed according to the
banking system it envisages. In that regard the US financial system, and even the UK’s, having
a higher share of disintermediation of financial services differ from the usual high level
relationship banking that characterizes the European mainland banking model. Simply
replicating measures intended for the Anglo-Saxon model may have unwarranted collateral
effects.
We consider that ring-fencing of retail activities in fact may, in the end, contribute to create
problems for banks stability. Retail banks’ services benefit from combinnig their retail
activities to the capital markets activity, aiming at to obtain funding in wholesale funding
markets as well as for the application of their surplus of funds. Also retail banks need to
access wholesale markets for hedging and customer service and its difficult to differentiate
these activities from that resulting from pure speculation. This separation requires a
qualitative assessment by the executive board and supervisors. Deciding on simply banning
these complementary activities may impact on final customer by reducing the availability of
hedging instruments, access to funding, reduces flexuibility to securitize assets (important for
systems highly engaged with SMEs),… A compromise between the total leeway and the
complete banning of investment bank type operations seems best suited for the type of
business European banks do. Setting limits according to pre defined risk based metrics seems
the most sensible approach.
Regarding BCP Group (the largest private owned bank in Portugal with operations in European
countries, in Africa and China/Macao), on August 31, 2009, Banco Millennium bcp Investment
SA was merged into Banco Comercial Português S.A. (the parent company of BCP Group), in
order to develop directly the Investment Banking business, promoting an improvement in
conditions for the development of this activity and obtaining synergy gains, increasing its
articulation with the other business areas of the Group and deepening operating efficiency.
However, the BCP Group is a universal bank focused on the retail banking business and has
limited operations of proprietary trading. Trading income (which is a much broader definition
than proprietary trading) represented only c. 8% of net operating revenues in 2011.
We consider that the universal banks have specific characteristics in terms of risk which
should be reflected in regulation, supervision and internal risk management. Basel III
represents a step in right direction in order to mitigate some of the riskier strategies of
universal banks as the high leverage or the extreme reliance on short term wholesale funding.
A better way of keeping universal banks risks under control is more focused supervision ,
based on scenario analysis and stress tests, coordinated by EBA. This would enable universal
banks to benefit from diversification, which is beneficial for financial stability, while
eliminating/mitigating riskier strategies. Universal banks should incorporate in their strategy
to become a balanced universal growth bank with less risk growth strategies and benefiting
from diversification of its business across market segments as well as geographic
diversification.
 What are the main challenges of your financial institution as regards resolvability?
BCP considers that a bank failure should be borne by stakeholders and holders of other loss
absorbing instruments, according to the degree of subordination. Bail-in should represent a
last recourse action (gone concern) once other tools have failed and is critical that the
holders of the bailed in instruments do not end up in a worse position than they would have
if the bank had been liquidated. Bail-in should be a flexible tool and be applicable to all
liabilities but only as a recapitalization tool.
Regarding the Portuguese banking market and in the current context of crisis, the Portuguese
government has at its disposal mechanisms to support the financial system, comprehending
the banks issuing debt with state guarantee and the recapitalization of the Portuguese Banks
through the public recapitalization fund. This is of course completely different of banks been
bail-in.
Although the BCP presents currently a Core Tier I ratio of 9.2%, in order to comply with the
regulatory requirements set by the Bank of Portugal and by EBA and also with the
requirements of Basel III, in the current environment of Portugal been under and Economic
Adjustment Programme agreed with the IMF/EC/ECB, BCP submitted to Banco de Portugal a
Capital Plan on 20 January 2012, as per the EBA's recommendation of 8 December.
The Capital Plan delivered involves two components: a) Increasing the share capital, with
preference right, to be subscribed by private shareholders, so as to assure permanent own
funds. BCP received several assurances that allow it to count on the participation of
reference investors in a future share capital increase; and b) Using the temporary State
recapitalization facility regulated by Law 63-A/2008. BCP considers that is critical to preserve
the attractiveness of its project, creating the conditions to reimburse the State Capitalization
up until 2017 and to increase share value.
BCP is going to issue Hybrid financial instruments (“CoCos”), eligible as CT1 by EBA and Banco
de Portugal. CoCos are expected to be subscribed by the State as government support
measures under the recapitalization programme approved by the Portuguese Parliament in
Law 63-A/2008, and to be fully reimbursed until 2017 (this instruments will of course have a
cost for BCP). In parallel, BCP will issue new ordinay shares. Although primarily targeting
private shareholders, it cannot be discarded that a part or the whole could be underwritten
by the State. In the event that these shares are acquired by the State, they will be issued in
full compliance with the recapitalisation programme approved by the Portuguese Parliament
in Law 63-A/2008.Conflicts of interest are an important feature upon resolvability. Two
current European examples: the relationship stemming from the exposure to sovereign risk vs
the type and mode of state aid and all that relates to the evaluation of banks balance sheets
and forced deleveraging needs. The reasons for resolution and the measures of resolution
should be designed in a way to mitigate the potential development of situations such as these
that only contribute to reinforce investor’s unease and impact on the financing costs for the
whole economy.
 Are you implementing structural changes to your institution in the framework of
your recovery and resolution planning?
Despite being under a formal bail-out program, the Portuguese banks have been able to
significantly reinforce their capital levels in 2011 through market based operations and not
resorting to the available public recapitalization fund. They did so through cash calls,
optimization of RWAs and ALM operations, thereby making use of the instruments features to
recapitalize the financial institutions. The operations were carried on according to market
practices and regulatory requirements were achieved by year end. In that sense, one can say
that hybrids behaved like they were supposed to. So, the existing framework seemed to work
properly. Furthermore, within the context of the priorities and performance criteria set in
the adjustment program the banking system have been able to fulfill with most of the targets
agreed. Even though the Portuguese banking system should not be considered to be in a
situation similar to “resolution”, the way the banking system challenges have been dealt
with, successfully, argues in favor of the adequacy of solutions that are currently available.
BCP set a "Priority Agenda for 2012" in May 2012, as a tool for dynamic definition of priorities
for management and monitoring of the Bank's decision-making process - continuous
monitoring and updating. This agenda is based on 5 priorities: reinforce financial strength;
strict risk management; simplify the organization and ensure efficiency and cost reduction;
optimize business portfolio management; strengthen position and profitability of the business
in Portugal. This Priority Agenda translates into almost 50 priorities for action that are going
to be developed going forward.