The Bank of Portugal activated the plan to prevent excess credit. Measures will only apply to new loans.
Portugal was one of the few European countries that had no credit limitations. But, given the growth of new loans, the Bank of Portugal announced measures to prevent excesses, which will be applied to housing and consumer credit. Deco says it is "a first step" for credit to be granted responsibly. But I wanted you to go further.
The Bank of Portugal yesterday issued recommendations to banks to apply three limitations that will only apply to new loans made as of July. To ensure that households are able to service their debt, they want to prevent the stress rate from exceeding 50% over the life of the loan. That is, the foreseeable cost of loan installments will not weigh more than half of the household's net income.
The supervisor considers that the Euribor will start to rise from current lows, albeit gradually. Thus, in order to calculate the effort rate that serves as the basis for the granting of credit, banks will have to calculate what the value of the benefit with the highest Euribor. In credits over ten years, they must add three percentage points to the current value of the fees.
Recently the banks have granted some credit with an effort rate of 30%. But without incorporating potential increases in Euribor. If the rate rises three percentage points is giving credit that have implicit rates of effort of about 50%. The objective is to avoid creating the "illusion of debt compliance capacity over the whole time horizon of the contract".
"The prolonged environment of low interest rates coupled with economic recovery creates incentives for greater competition between banks and potentially for an excessive reduction in the degree of tightening of credit standards." The supervisor also fears that there are incentives to lend to customers who are unable to repay them when interest starts to rise.
The longest terms in Europe
In the strategy to prevent over-indebtedness from threatening financial stability, another key issue is the maturity of loans. The housing loan granted in Portugal which has the highest maturity in Europe. On average they last 33 years and there are some contracts for more than 40 years. The Bank of Portugal wants to prevent credit from being made for periods of more than four decades. And that by 2022 the average deadline is 30 years. Another way of limiting very broad contracts is to adjust the yields considered for the effort rate if the loan term goes beyond the 70 years of the borrower. Complementing these measures is the relationship between the amount financed and the value of the houses. The loans can not exceed 90% of the valuation or the price of the property.
Although it has introduced rules to stop euphoria in credit, the Bank of Portugal foresees some exceptions. But when banks fail to meet the constraints, they will have to explain themselves to the supervisor. If the justifications are not satisfactory, they may be penalized, requiring more capital.
Natália Nunes, head of Deco's Surplus Support Office, said that these measures are "a first step." But I preferred that instead of recommendations the limitations should be binding. "The expectation is to see the attitude that the bank will have." On the other hand, the Portuguese Banking Association (APB) understands that "Banco de Portugal's recommendation is made with a more preventive character and not by the probability of imminent materialization of the risks that it intends to protect".
News: Diário de Notícias