carlos da silva costa : the portuguese banking system – challenges and possible responses opening note by mr carlos da silva costa, governor of the bank of portugal, at the 4th money conference, lisbon, 22 november 2019. * * * as prepared for delivery. good morning, it is with great pleasure that i take part in the 4th edition of the money conference. in this opening note i aim to comment on some of the challenges that the portuguese banking system faces and highlight some of the possible responses. let me begin with a summary of some relevant indicators. in recent years, the portuguese banking system has been characterised by a series of positive developments. portuguese banks are today more capitalised and are more stable in terms of resource intermediation. they have abundant liquidity and have improved their productivity indices. observed in quantitative terms in1 : an increase in the total capital ratio from 10. 3 % to 16. 1 % ( between the end of 2010 and june 2019 ) ; an increase in the liquidity coverage ratio ( lcr ) from 151. 5 % to 212. 3 % ( between the third quarter of 20162 and june 2019 ) ; a reduction in the loan - to - deposit ratio ( ltd ) from 150. 6 % to 88. 2 % ( between the end of 2010 and june 2019 ) ; an increase in the total average assets per branch from 81. 5 to 94. 9 million euro ( between the end of 2010 and the end of 2018 ). in the first half of 2019, there was an increase in profitability of the portuguese banking system. the return on equity ( roe ) in june 2019 was 8. 4 %, compared with 6 % of the average of significant institutions supervised by the single supervisory mechanism3. for this increase there were, on the one hand, factors of a structural nature, namely the increase in the sector ’ s efficiency and, on the other, the lower weight of losses associated with the assets generated over the period of great credit expansion, observed in the reduction of costs with provisions and impairments. however, there are enormous challenges for the sector against a background of moderate future economic growth, low interest rates and high indebtedness of public and private agents. thus, in the first place, banks must continue to reduce their non - performing assets in line with the guidelines and reduction plans submitted to the supervisory authorities. it must be considered that the ratio of non - performing loans ( npls ) net of impairments in the portuguese banking system remains

member states and setting - up effective solidarity mechanisms to preserve the cohesion of the euro area and the eu are necessary conditions to overcome the current crisis. however, it goes without saying that neither stability nor solidarity will endure if not accompanied by sustainable and balanced development within the european union. i will devote the final part of this talk to this third crucial dimension, which i call “ prosperity ”. we have seen that – not only in europe but elsewhere in the world economy – growth since the early 1990s was to a large extent financed by increasing private and public debt. the resulting over - leveraged public and private sector balance sheets have eventually brought us to the crisis we have been facing in the past five years. a new growth paradigm is needed, one that produces sustainable rather than illusive growth and allows us to preserve the essential features of the european social model. in other words, we need a growth and development strategy that will bring us closer to the “ highly competitive social market economy ” aimed at full employment and social progress, better environment and scientific and technological advance advocated by the eu treaty. this growth and development strategy could be built around three dimensions : institutional and structural reform ; completion of the single market ; and strengthening of europe ’ s external dimension. ( i ) institutional and structural reform institutional and structural reforms aimed at removing barriers to competition, promoting innovation and entrepreneurship and fighting vested interests are needed to support long bis central bankers ’ speeches term growth, improve debt sustainability, promote competitiveness and rebalance the economy. the fact that the crisis seems to have acted as a catalyst for reforms is good news. the pace of structural reforms has accelerated markedly in recent years and this renewed commitment to economic reform has been particularly strong in countries under eu - imf adjustment programs and / or experiencing tensions in sovereign debt markets. we are all aware that the road to reform is often bumpy and windy. in order to maximise benefits and minimise the risk of social upheaval, reform efforts should be pursued in a coordinated manner. the different initiatives at the national, european and international level have to be part of a well defined and consistent strategy where the right sequencing needs to be found. ( ii ) completing the single market on the single market, let me quote president barroso, who claimed that “ the single market has always been the driving force behind our economic development and prosperity and, now more than ever, it remains our best asset in facing the crisis. ” i could not agree more. it is almost