The central bank requires the bank to establish a safe lending system during the real estate market crisis.

Portugal's biggest banks will be forced to create additional capital to protect against a possible decline in house prices, according to a new measure announced by Portugal's central bank on Wednesday.

The measure would create a reserve of additional capital that would amount to 4% of the portfolio of loans to individuals secured by residential real estate, allowing banks affected by the measure to set aside around 400 million euros.

The measure comes at a time when banks are making record profits thanks to rising interest rates and are able to build up new reserves, and when many European countries are facing falling prices in the residential real estate market.

Banks will have to have this reserve in place by October 1 next year. The measure will be reviewed by the banking regulator at least every two years. Not all banks fall under the macroprudential supervision guidelines.

BCP, BPI, Santander Totta and Novobanco will have to comply with the new rule because they use their own estimated risk parameters to calculate regulatory capital for credit risk (the so-called "internal rating approach"), unlike Caixa, a state-owned bank that is not subject to the measure. Another Portuguese bank that may be forced to create this additional capital is Bankinter. The Bank of Portugal is awaiting the Spanish bank's decision on whether to apply the measure to its Portuguese branch.

The measure affects dividends. The measure was adopted after notification to the European Central Bank, "which had no objection to the proposal," and consultation with the National Council of Financial Supervision, the European Systemic Risk Committee and the European Commission, according to the Central Bank of Portugal. The banks were also given prior approval and were found not to like the measure, reports ECO.

The need to keep more money for themselves to make extra reserves will affect the dividends they intend to pay next year. The combined profit for the first nine months of the year is 2.3 billion euros and BCP, Santander Totta and BPI have already announced the payment of results to shareholders, while Novobanco is prohibited from doing so due to an external capital reserve agreement.

In light of these measures, Portugal's central bank governor said last week that banks should seize the opportune moment to prepare for changes in the environment. "It is very important that the banking sector plans its buffers [reserves], builds the necessary reserves, because the conjuncture can change, it will change, we don't know when it will happen. But we must be prepared," warned Mário Centeno at a meeting organized by the American Club in Lisbon.

Although Portugal's real estate market continues to show resilience, the Bank of Portugal is concerned about the strengthening of banks' "shock absorbers" ahead of a potential deterioration in economic conditions or a significant unexpected correction in house prices. This reserve will need to serve to absorb potential losses.

The measure does not discourage lending, says Portugal's central bank. In Portugal, loans to families secured by real estate account for 26% of banks' assets and most mortgage contracts have variable interest rates - about 90% of contracts are linked to variable rates. This additional capital complements the macroprudential guidelines for mortgage lending announced in 2018, which set out rules for the duration of loan contracts (capped at up to 40 years), the financial effort rate (just revised) and the loan-to-value ratio (loan-to-value).

The Portuguese regulator believes that this new measure will not prevent banks from complying with other requirements and guidelines, nor will it make it more difficult to extend credit.

Other European countries, including Germany, Belgium, Slovenia, Lithuania and Malta, have also already required their banks to set up these additional capital reserves depending on their real estate market exposures. German financial regulator BaFin warned this week of possible bank losses due to pressure on real estate prices.

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