Carlos Costa took Brussels’ criticisms personally and answers them

Carlos Costa was criticized by the European Commission. Brussels said that the Bank of Portugal was not demanding enough during Troika’s adjustment programme. Three days later, the governor answers: “They do not know what they are talking about”, adding that “it is an offence to the Bank of Portugal”.

“The ones who say it [the adjustment] was a failure surely do not know what they are talking about”, states Carlos Costa during the Fórum Banca 2016, a conference organized by the Portuguese newspaper Jornal Económico and by PWC. “It is an offence to the ones who made the adjustment programme and it is an offence to the Bank of Portugal”, he said, adding “there is no point in demonizing” the regulator.

Carlos Costa rejects the charges made to the actions taken on by the regulator. “The Bank of Portugal was vital in financing over a third of the banking system”, he says, highlighting there was a problem in the sector, but that banking has since improved. It has deleveraged. It became smaller, but that has costs.

“We have an economy that can be characterized by the fact its three main agents are heavily indebted: individuals, corporations and public administrations. Among this indebtedness, there are some good news: the loan-to-deposit ratio had a 30% improvement”. He pointed out: “Banking is financing the economy using clients’ resources”, adding: “We had an oversized banking, with the ability to give credit of 170 and that now gives 100”.

Carlos Costa mentions there was a “very significant system leverage reduction. It no longer depends on the financing of the capital market. It is the positive aspect of the adjustment process, to which the economy and the banking system became dependent on”, yet, of course, doing so had its costs. “The reduction in the volume of businesses had its impact”, more so considering the current context in which non-performing loans are large and continue to influence banking.