Portugal: Deposit Guarantee Fund

On November 3, 2008, the Portuguese government passed a legal decree increasing the country’s deposit insurance coverage from EUR 25,000 to EUR 100,000, directly citing guidance issued the previous month by the EU (Portugal 2008b). On October 7, 2008, the Economic and Financial Affairs Committee of the EU had urged member states to raise their deposit insurance coverage to at least EUR 50,000 (European Council 2008). On March 11, 2009, EU officials issued a directive requiring member states to increase their deposit insurance coverage to EUR 100,000 by the end of 2010 (Directive 2009/14/EC).

Portugal’s Fundo de Garantia de Depósitos (FGD) said that the government raised the insurance coverage both to shore up confidence in the banking system in response to challenges in international markets and because of EU directives (Portugal FGD 2008).

At the peak of the GFC, Portugal introduced several measures to strengthen the financial system. The deposit insurance-coverage increase was one of four pillars of the Portuguese government’s Initiative to Strengthen Financial Stability (IREF),^F“Iniciativa para o reforço da estabilidade financeira.” announced on October 12, 2008. The other three were: (1) improved financial-institution disclosure and transparency requirements, (2) allocation of EUR 20 billion for state guarantees of financial-institution debt (Portugal 2008a, Article 10), and (3) a recapitalization program (Portugal 2008c; Torres 2009).

The Portuguese ministries of finance and public administration issued a legal decree temporarily increasing the deposit insurance coverage from EUR 25,000 to EUR 100,000 on November 3, 2008. This decree was set to expire on December 31, 2011 (Portugal 2008b).

On December 26, 2011, the ministry of finance made the temporary limit of EUR 100,000 permanent by another decree law (Portugal 2011).

Decree laws are implemented by ministers and, unlike regular laws, do not require parliamentary votes (European Justice n.d.). However, they can be vetoed by the president (European Justice n.d.).

The increase in deposit insurance coverage was implemented by the nation’s deposit insurance fund, the FGD, which was created by a decree law on December 31, 1992 (Portugal 1992) and began operations in 1994 (Portugal FGD n.d.e). The fund is a unique legal entity “with administrative and financial autonomy and its own assets,” but “the technical and administrative services necessary for the proper functioning of the Fund are provided by the Banco de Portugal” (Portugal FGD n.d.a).

The FGD was audited by the audit board of the Bank of Portugal (Portugal FGD 2008).

It was overseen by a three-person committee and a secretary general (Portugal 1992, Article 158).

• The chair of the committee was appointed by the board of directors of the Banco de Portugal.
• One committee member was appointed by the finance minister (Portugal FGD n.d.f).
• The other committee member was appointed by the Associação Portuguesa de Bancos (private-sector Portuguese Banking Association) (Portugal FGD n.d.f).

The secretary general was a staff member of the Banco de Portugal. The secretary’s job was to assist the three-person management committee in “preparing their decisions and coordinating the respective implementation process” (Portugal FGD n.d.a).

On October 12, 2008, the government announced that EUR 20 billion would be available for state guarantees of financial-institution debt as part of the broader Initiative for Strengthening Financial Stability. The finance minister emphasized that his support for the bank-debt guarantee did not imply he thought deposits were in danger (Cofina Media 2008). He also said that the government did not want Portuguese banks to be put at a competitive disadvantage with those of other European countries (Jornal de Noticias 2008). 

On November 3, 2008, the government increased the deposit insurance limit from EUR 25,000 to EUR 100,000 (Portugal 2008b).

Based on the EUR 100,000 limit, the FGD covered EUR 111.6 billion in deposits at the end of 2011, representing 71% of total deposits in eligible accounts, according to the FGD’s 2011 annual report (Portugal FGD 2011). The FGD did not make that figure available in earlier years.

The FGD had EUR 1.36 billion in total resources as of December 31, 2008. Those resources included EUR 434 million in irrevocable payment commitments that participating credit institutions had made to the FGD and that were secured by public-debt securities (Portugal FGD 2008). The FGD collected contributions to the fund annually at the end of April from the covered institutions (Portugal FGD 2008). New member institutions paid EUR 50,000 in initial one-time fees; there were three new members in 2008 (Portugal FGD 2008).

The FGD’s deposit-coverage ratio—its total resources divided by insured deposits below the EUR 100,000 limit—was 1.42% on June 30, 2010, according to its 2010 annual report (Portugal FGD 2010). The FGD did not initially make that figure available.

If the amount of funds required for a payout exceeded the amount available to the FGD, it could raise additional funds by: (a) requiring special contributions from member credit institutions, (b) borrowing from the Banco de Portugal, or (c) borrowing from the state (Portugal FGD n.d.d).

BPP, a commercial bank with EUR 2.9 billion in assets (Alumnia 2010), suffered liquidity difficulties in September 2008 owing to the GFC, and the Portuguese government guaranteed bank loans of EUR 450 million to the bank in December 2008 (General Court of the European Union 2014). In 2009, BPP submitted several recovery plans to the Bank of Portugal. However, the central bank rejected them all. Meanwhile, EU rules permitting state guarantees expired in the summer of 2009 (General Court of the European Union 2014). As a result, on April 16, 2010, the central bank of Portugal, seeing no way to restructure or recapitalize BPP, revoked its banking license (General Court of the European Union 2014). Lawsuits by the creditors of the guaranteed loan of EUR 450 million continued for more than a decade (Portugal FGD n.d.g).

On April 22, 2010, the FGD paid out an initial EUR 22.7 million: i.e., the first EUR 10,000 per depositor, as required by law (Portugal FGD 2010).

On May 12, 2010, 12 commercial banks (joined by two others on May 17) asked Portuguese courts to stop further payouts, which they did (Portugal FGD 2010). However, the freeze was ended by two court decisions, one on July 26, 2010, and another on September 20, 2010 (Portugal FGD 2010). On October 1, 2010, the FGD paid out an additional EUR 46.4 million (Portugal FGD 2010). Additional payments were made during the remainder of 2010, as the FGD received information on where to send the money to, and by the end of the year, EUR 89.2 million had been paid out (Portugal FGD 2010). An additional EUR 8.2 million was paid out in 2011, making for a total of EUR 97.4 million (Portugal FGD 2011).

For Portuguese commercial banks and savings banks, participation in the FGD was mandatory, thought it was not for agricultural banks, which could choose instead to participate in their own deposit insurance fund (Fundo de Garantia do Crédito Agrícola Mútuo) (Portugal FGD 2009).

Foreign banks with branches in Portugal were required to participate, unless the deposits were covered by their home country’s deposit fund (Portugal 1992, Article 156.1.b).  Similarly, foreign branches of Portuguese banks had to participate unless the host country required participation in a local deposit fund (Portugal 1992, Article 156.2.b).

In 2020, the agricultural banks’ deposit insurance fund, Fundo de Garantia do Crédito Agrícola Mútuo, merged with the FGD (Portugal FGD n.d.e).  

The FGD covered all deposits except those associated with criminal activity (including money laundering and terrorist activity) and those held by: (a) credit institutions, (b) investment firms, (c) financial institutions, (d) insurance and reinsurance undertakings, (e) collective investment undertakings, (f) pension funds (apart from the deposit accounts of pension funds whose associates are small or medium-size enterprises), or (g) national or foreign administrative public-sector entities (Portugal 1992, Article 164).

Contributions to the fund were collected annually at the end of April from the covered institutions, in addition to the one-time fee each new bank was charged to join the fund (Portugal FGD 2008). In 2008, three new institutions each paid EUR 50,000 in initial one-time fees (Portugal FGD 2008). The FGD charged banks a 0.03% base rate on covered deposits, with adjustment factors applied; the actual rate ranged between 0.02% and 0.032% of covered deposits annually (Portugal FGD 2008), with a minimum fee of EUR 17,500 (Portugal FGD 2008). Banks had the option of paying these annual fees in cash or “irrevocable commitments”; 90% of fees in 2008 were paid in cash (Portugal FGD 2008).

In addition to increasing the coverage limit, the 2008 decree law required that the FGD pay out funds more quickly than it had previously (Portugal 2008b). Now, the first EUR 10,000 had to be paid out within seven days and the remainder within one month (Portugal 2008b). According to the decree law, this count begins on the date on which the deposits become unavailable (Portugal 2008b). The FGD stated that this “unavailability” can be determined by the central bank (a) certifying within five working days of a complaint that a bank cannot repay deposits or (b) revoking activity authorization (Portugal FGD n.d.h). An EU directive in March 2009 required EU member states to similarly speed up deposit insurance payments (Directive 2009/14/EC).

On Friday, April 16, 2010, the Bank of Portugal revoked BPP’s activity authorization, rendering the bank’s deposits unavailable (Portugal FGD 2010). The following Thursday, April 22, BPP provided a list of depositors to the FGD, and as a result EUR 22.7 million was paid immediately to depositors (Portugal FGD 2010). Because of lawsuits filed against some of these depositors, some funds were withheld (Portugal FGD 2010). However, following two court orders, the FGD later began paying out additional depositors. By the end of 2010, it had paid out EUR 90.7 million (Portugal FGD 2010).  

There do not appear to be additional restrictions associated with the increase in deposit-guarantee coverage.

The November 3, 2008, deposit insurance-coverage increase to EUR 100,000 was initially set to expire on December 31, 2011 (Portugal 2008b). However, on December 26, 2011, the finance ministry made the temporary limit of EUR 100,000 permanent through a new decree law (Portugal 2011). In March 2009, EU officials had increased the required limit for member states to EUR 100,000 (Directive 2009/14/EC).

EUR 100,000 remained the coverage limit as of March 2022 (Portugal FGD n.d.b).