Banks may change restrictions on lending to defence industry

Large Portuguese banks have restrictions on lending to the defence industry, especially arms, and some have acknowledged that they may change as part of the strategic shift towards rearmament at the European Union (EU) level.

At a time when the EU is debating the reinforcement of its defence strategy – the European Commission has proposed an €800 billion rearmament plan – Lusa asked the main banks about their internal rules for financing arms-related companies and whether they are acknowledged to be reviewing them in light of the changes at the European level.

Public bank Caixa Geral de Depósitos (CGD) told Lusa that its internal policy for this credit has specific rules and that financing for the defence industry (a broader sector than just the arms industry) has been negligible. For the future, the bank acknowledged that it would review its position if it defined it at a political level.

“If the legal and regulatory framework is adjusted and there is a national plan to finance the defence industry, Caixa will be in a position to assume a relevant role, in line with its mission and strategic guidelines,” an official CGD source told Lusa.

According to the bank led by Paulo Macedo, the rules for credit to this industry aim to “ensure compliance with national legislation and international conventions on this subject”, as well as rules to ensure that “socio-environmental risks, risks of compliance with the prevention of money laundering and the fight against terrorist financing and reputational risks are duly identified and mitigated”.

As for this funding, the official source says that in Portugal, this sector is mainly and directly funded by the state budget, since it is mostly public, so “funding for the defence sector by Caixa has been negligible”.

CGD says that it finances “companies that develop equipment in the aeronautical, aerospace, maritime and technological fields for civilian use” which can then “be converted into the security and defence component”, but that it does not have to be “aware of these developments – if they exist”.

Millennium BCP said its internal policy “establishes that the sector is excluded from financing arms production”.

According to Portugal’s largest private bank, this sector “is considered to have restricted and conditioned financing with regard to operations that do not support production”, in which case it requires a “very detailed” analysis before credit can be granted.

BCP said that it is established that financing can only be granted “for the acquisition by EU governments or companies directly owned by EU member states, and even in these situations, this always requires a rigorous assessment of the respective framework in the European Union’s common defence and security policy”.

It also stated that its internal policy “absolutely excludes, regardless of the type of financing, operations involving so-called “controversial” equipment, as established by international convention”.

When asked about loans to this sector, BCP said it did not provide any financing in 2024.

As for BPI, the bank said that its internal policies “do not inhibit financing to the defence sector, but impose certain conditions”.

The website states that the bank “recognises the right of countries to defend themselves and protect their citizens and, consequently, reserves the possibility of maintaining commercial relations with companies related to the defence sector whose activity is consistent with legitimate national security and defence strategies”.

Like other banks, BPI restricts financing when “there may be a clear risk of using defence material for repression and other serious violations of international humanitarian law, non-proliferation conventions and treaties and other related standards and guidelines”.

Santander Totta said that this financing verifies that “all customers and transactions comply with the defence sector policy, as well as with international conventions, non-proliferation treaties and all other legal and regulatory obligations”.

An official Santander Totta source also said that the Board of Directors approves these internal rules and reviews them periodically to “ensure that they remain fit for purpose”.

The issue of financing the arms industry has already been raised in public by the chairman of Crédito Agrícola, Licínio Pina, in mid-March during the Fórum Banca conference.

Licínio Pina said that the Crédito Agrícola group “has no appetite” for this type of credit but acknowledged that it may have to review its positioning due to the European strategic change.

“We can’t even lend money to a gunsmith, it’s in the bank’s risk policy, we have no appetite for this type of activity. […] Maybe we’ll have to review it,” he said in Lisbon.

Novo Banco did not respond to questions from Lusa.

Regarding banking regulations for financing this sector, the Bank of Portugal informed Lusa that the defence industry is not subject to a specific legal and regulatory framework and that it is the banks that “assess how financing companies in the defence sector exposes them to risks of different kinds and how to manage this exposure to risk”.

“In the light of the current prudential framework, it is the responsibility of credit institutions, within the scope of their internal governance and risk management systems, to ensure that effective processes exist to identify, manage and monitor all the risks to which they are exposed,” said the banking regulator and supervisor.