Bank of Portugal demands special audit to Banco de Fomento

The Bank of Portugal required Banco de Fomento to carry out a special audit to assess the institution’s credit risk under the leadership of Beatriz Freitas.

The audit will be carried out by an independent entity and for that purpose, a public tender will be launched to select it. The announcement was published Monday in the Official Gazette and gives Banco de Fomento 30 days to choose the company that will carry out the audit over the next six months.

Although the announcement does not specify this, ECO knows that at stake are the allocation processes for Covid-19 lines and their eligibility. Also at issue is the high amount of public guarantees underlying the allocation of these lines.

The amount is not known, but according to the latest Public Finance Council report, the guarantees granted by the State under the Covid lines already amounted to €1,057.4 million by July 2021. “Although it was also not possible to have more up-to-date data from the Directorate General of Treasury and Finance on the State’s responsibilities regarding guarantees, it was possible to ascertain the granting until July 2021 of at least €200.7 million of personal guarantees aimed at ensuring the counter-guarantees provided by the FCGM under those support lines, adding to the €856.7 million issued in 2020,” the report published on September 17 can be read.

But to this amount must be added the €1 billion provided for in the Economic Recovery Support Line: Resume to support the credits’ restructuring, which are no longer in the moratorium of companies in the sectors most affected by the pandemic. The line also serves to refinance credits in moratorium or provide additional liquidity to companies.

Or even the guarantees that will be provided under the Capitalisation and Resilience Fund (FCR), created in July, with a capital that could reach €1,300 million. This fund, which aims to provide temporary public support to strengthen the solvency of companies, may invest via equity instruments, quasi-equity instruments, debt instruments, and may also provide guarantees, under certain conditions.

According to information that Banco de Fomento provided to the Court of Auditors, referring to 30 September last year, for the eight lines that had been launched by then an average claims rate of 16.5% was predicted. And the Finance Minister, in March this year, anticipated that the default level will be higher and this will force an upward review of the impact on public accounts both this year and next.

This special audit is required by the Bank of Portugal under the General Regime of Credit Institutions and Financial Companies, which states that the regulator “may require special audits to be carried out by an independent entity, appointed by it, at the expense of the institution being audited,” in this case Banco de Fomento. The stipulated cost is €350,000.

ECO knows that the request for this audit was made in April, but only now has the announcement been published, which “has as its object the acquisition of internal control and credit risk auditing services.”

The choice of the auditor will be determined by price and the professional experience and size of the team. Each of the factors will have a 50% weighting in the decision.