The Court of Auditors, in its Audit Report - Prevention of Banking Resolution in Portugal, questioned the Ministry of Finance, which at the time was led by Mário Centeno, current Governor of Banco de Portugal, for his statements at the hearing of the Budget and Finance Committee Finance of the Assembly of the Republic, of May 13 this year.
To the TdC question “was the Banco Espírito Santo resolution“ the most disastrous bank resolution ever made in Europe ”because the assets included in the Novo Banco balance sheet were poorly valued and poorly accounted for?” the Ministry of Finance replied with a number: "So far, the capital injected into Novo Banco after the resolution amounts to more than 10.000 billion euros, a value much higher than that considered necessary at the time of the resolution in 2014".
The Court of Auditors, in assessing the Ministry's response, considered that there is a lack of documentary evidence in the statement made by Mário Centeno at COF.
“The sentence quoted in the question asked is part of the initial intervention by the Minister of State and Finance at the aforementioned hearing. In the case of statements made in the Parliament's Budget and Finance Committee, it was intended that the answer previously reported was justified with the respective documentary evidence (evidence) held by the Ministry of Finance ”.
"As this response was only sent, it appears that the Ministry has no other evidence", says the TdC.
The Ministry of Finance, explained to the TdC, that “the sentence in question was made in the intervention of the Minister of State and Finance in the hearing of the Budget and Finance Committee of the Assembly of the Republic, of 13 May” and that as such “ these are statements made in the context of parliamentary debate ”.
“Nevertheless, it can always be said that BES was the largest bank subject to a bank resolution, taking into account its weight in the system. In 2014, upon the resolution of BES and the creation of Novo Banco, a capital of EUR 4.900 million was injected by the Resolution Fund. At the time, it was mentioned by the political leaders that the sale would make it possible to recover that amount eventually with a return to the State ”.
The Ministry also recalls that “in December 2015, following a first sale attempt (interrupted in September 2015), the Resolution Authority decided to relay about 2.000 billion senior bonds from Novo Banco to BES in liquidation, increasing the capital of Novo Banco by 2.000 billion, which made it possible to ensure compliance with regulatory ratios ”.
The Ministry acknowledges that “this retransmission of obligations had a severe impact on the financing conditions of the Republic in 2016”.
“In the second sale process of Novo Banco, in 2017, the buyer (Lone Star) injected another 1.000 million euros of capital, acquiring 75% of the bank's capital”, reads the reply from the Ministry of Finance contained in the report of the TdC. In the sale process, a perimeter of depreciated assets was defined that remained at Novo Banco with a value of 7.838 million euros and which were covered by the Contingent Capital Mechanism, the Resolution Fund being responsible for the injection of capital to cover losses on these assets that call into question certain capital ratios up to the limit of 3.890 million.
To date, 2.976 million euros have been used, less than the losses and costs recorded in the assets of that perimeter, with the difference being absorbed by the capital generated in the current activity of Novo Banco.
“In these terms, it seems evident that the resolution carried out in 2014 did not proceed with an appropriate segregation of depreciated assets, as it kept the assets included in the contingent capital mechanism in the Novo Banco balance sheet and whose losses are high” , notes the Ministry of Finance on the BES resolution that created Novo Banco on August 3, 2014.
The Ministry, which was led by the current Governor of Banco de Portugal, also states that "the origin of the insufficient segregation of impaired assets indicates that the resolution was made without knowledge of all the accounting information on the effective value of the assets".
After concluding that “until now, the capital injected into Novo Banco after the resolution amounts to more than 10.000 million, a value much higher than that considered necessary at the time of the resolution in 2014”.
The Court of Auditors also asked the Ministry of Finance whether “the assets included in Novo Banco's balance sheet were audited or under another validation process?”
When applying the resolution measure, Banco de Portugal determined the carrying out of an assessment of the assets, liabilities, off-balance sheet items and assets under management transferred to Novo Banco, under the legal terms in force at the time, the Ministry of Finance.
This independent assessment was carried out by PwC (completed after resolution). "Its results and adjustments have been incorporated into the Novo Banco balance sheet".
The Ministry of Finance recalls that “Novo Banco is subject to statutory audit and its annual accounts are audited by the respective statutory auditor, which issues the Legal Certification of Accounts, attached to the Financial Statements for 2017, 2018 and 2019 ”.
In addition, within the scope of the execution of the agreements associated with the sale of Novo Banco, a mechanism for monitoring and verifying the execution of the contingent capital agreement was established, which provides for monitoring by the monitoring commission and the verification agent, which has been Oliver Wyman, who issue opinions and reports that support the decisions of the Resolution Fund (party to the contract) in this function of monitoring the performance of the contract.
Finance reminds the TdC that “the monitoring committee monitors and gives an opinion on a wide range of operations in the context of the execution of the referred contract”. And that “the verification agent evaluates and confirms, namely, the perimeter and valuation (loss adequacy) of the assets integrated and covered by the referred contract”.
Finally, “in compliance with the provisions of Law no. 15/2019, of 12 February, the special audit determined following the availability of public funds under the Framework Agreement, referring to 2019 (whose results are still await), and the procedure for making financial resources available in 2020 also started ”, referring to the Deloitte audit.
The Court of Auditors' comments on this response say that the Ministry of Finance has not provided “all the necessary and intended evidence to justify a positive answer to this question”.
"It appears that the Ministry of Finance does not have evidence on the validation of the maximum limit of 3.890 million euros of losses on these assets that the Contingent Capital Mechanism, contracted in 2017, obliges the Resolution Fund to cover", concludes by this the TdC, which for its part also defends that the Ministry “does not have evidence on the audit process of the Novo Banco accounts nor on the verification processes of the contingent capitalization agreement, which are monitored by the Resolution Fund, also seen not having sent that evidence ”.
“Only the communiqué from Banco de Portugal (published on its website on December 3, 2014) about the independent evaluation referred to in the response was sent”, says the TdC. This statement reports that the assessment was carried out by PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiales de Contas, Lda (PwC), between the months of August and November 2014, with reference to the date of application of the resolution measure to BES, and that it resulted in adjustment needs of 4.937 million euros, on a consolidated basis, and 4.920 million euros, on an individual basis, compared to the amount, measured by BES at the reference date, of the assets transferred to Novo Banco.
This communiqué states that the global adjustments determined by PwC were fully reflected in Novo Banco's opening balance sheets, on a consolidated basis and on an individual basis, approved on December 3, 2014 by the respective Board of Directors, as verified by PwC. And that, aiming at PwC's work to measure the assets, liabilities, off-balance sheet items and assets under management at the time of the respective transfer to Novo Banco, the adjustments found had been recorded upstream of that transfer and the amounts entered in the opening balance of the Novo Banco corresponded to the net value of those adjustments, so that, at the beginning of Novo Banco's activity, the respective balance sheet was “cleared” of these effects.
It is also stated that, when applying the resolution measure to BES, the determination of Novo Banco's capital needs (4.900 million euros) already had as reference the conservative valuation of the transferred assets, which explained the adjustments determined by PwC in the meantime. fully accommodated by Novo Banco.
The Court of Auditors also addressed the issue of FdR resources that are based on additional periodic contributions (to those delivered to the Single Resolution Fund) received from its participating institutions. As the loans granted by the State to finance the resolutions of BES and Banif can be paid by the FdR until 2046, "it was a public debt contracted by the State that, in practice, financed 72% of the use of the contingent capital mechanism".
Thus, concludes the TdC, “another risk is of additional pressure on the national public debt, which comes from having committed the FdR's resources until 2046 (term already justified with the need to safeguard the stability of the national financial system) to pay borrowings before 2018 when, since then, the State has lent another 2.130 million euros to the FdR ”.
To prevent this risk, warns the Court of Auditors, “it requires minimizing the margin of error in the planning of bank resolution, not only of the IMS [less significant institutions] whose competence is the ANR [National Resolution Authority], but also of the institutions whose competence is of the CUR [Single Resolution Council], but in which the intervention of the ANR has been decisive ”.