carlos da silva costa : portugal – progress on financial stability address by mr carlos da silva costa, governor of the bank of portugal, to omfif ( golden series lecture ), london, 30 october 2013. * * * ladies and gentlemen, it is a great pleasure for me to be here with you today. i would like to take this opportunity to talk about progress made on financial stability in portugal over the last three years. safeguarding financial stability is one of the three pillars of the economic and financial adjustment programme of portugal – in place since june 2011 – together with fiscal consolidation and structural reform. the safeguarding of financial system stability is one of banco de portugal ’ s core missions. to achieve this goal, we have put in place a comprehensive strategy aimed at reinforcing bank solvency, protecting banking system liquidity, enhancing the effectiveness of the supervision of the financial system, and improving the regulatory framework. this strategy has been implemented over the last three years and has delivered on several fronts. today, the portuguese banking system is more capitalized, more transparent and in a more favourable liquidity position. today, we benefit from improved supervision and a stronger regulatory framework. this was achieved in the context of a very demanding domestic and external environment, characterized by the structural rebalancing of the portuguese economy and the persistence of financial fragmentation and economic weakness in the euro area. thus, let me outline the steps taken so far to strengthen the resilience of the portuguese financial system. strengthening solvency and liquidity the core tier 1 ratio of the banking system increased from 8. 1 % at the end of 2010 to 11. 9 % at the end of the second quarter of 2013. from 2010 on, banco de portugal has adopted several measures towards preserving adequate capital ratios. in particular, we have imposed more stringent capital requirements : a core tier 1 ratio of 9 % by the end of 2011 and of 10 % by the end of 2012. this is well above the 8 % benchmark in the eu legislation. in addition, we have recommended the sale of assets and set limits to the distribution of dividends. the more stringent capital ratios aimed at strengthening the resilience of the banking system in the context of a very strong adjustment of the portuguese economy. this resilience is especially important at times of economic adversity, where the recognition of impairments is a dynamic exercise with a powerful impact on banks ’ net income and capital positions. the recapitalisation operations undertaken

financial crisis, several european countries, including spain, have successfully launched major reforms and reached higher and sustainable growth while preserving their social model. [ slide 9 ] however, efforts should be pursued to spur economic growth in the medium term. structural unemployment remains high and potential growth remains significantly below its 1990s or 2000s average. structural reforms are needed to unleash the full economic potential of european countries. the case of france, today, is particularly interesting in that regard. france faces important structural challenges but as already said, the economic environment for reform has never been more favourable since the financial crisis. so it is our imperative to “ fix the roof ”, now. and the good news is that reforms are on a firm upward path. i stress it as a fully independent central banker : the new government has indeed displayed a strong commitment to reforms and already implemented major structural reforms to boost employment, productivity and resilience. [ slide 10 ] the recent labour market reforms have widened the negotiation space given to social partners for decision - making and reduced the uncertainties of labour disputes. this should give more flexibility to firms and contribute to supporting employment. the ongoing apprenticeship reform aims at making this status more attractive for both workers and firms, in order to tackle youth unemployment. in a context where the number of job vacancies remains too high, the ongoing reform of lifelong vocational training, which is currently too costly and inefficient, should help to better match the skills of workers to the needs of firms. add very significant reforms of primary and secondary education and university, and you can expect a steady improvement in french labour ’ s skills in the coming years. the unemployment benefits reform will also be an essential building block in improving the functioning of the labour market. more control over the job - search effort should increase labour force participation and also contribute to tackling structural unemployment, while improving the efficiency of the welfare state. 2 / 4 bis central bankers'speeches [ slide 11 ] finally, consistent tax reforms have aimed at rebalancing the tax burden from production factors towards broad - based taxes. labour costs were lowered, with in particular a tax credit on payroll, implemented in 2013 and reinforced by social contribution cuts this year. regarding capital, important measures have also been taken to alleviate taxation on productive capital and savings : the scrapping of the household wealth tax on everything except property assets, the introduction of a 30 % flat tax on household capital gains, dividends or interests and a decrease in corporate tax from 33