If at first glance there is no bank that causes any concern when it comes to its security, the European Central Bank (ECB) has already warned about the risks of banks’ exposure to the real estate sector. Christine Lagarde recognizes that banks have more solid accounts, but remembers that several challenges continue, such as the increase in non-performing loans.
The non-performing credit ratio in total credit fell to 2.9% in September, against 3.1% in June, according to data from the Bank of Portugal (BdP) on the Portuguese banking system for the third quarter. According to the banking regulator and supervisor, in a quarterly analysis of the banking sector, the decrease in the ratio in banks operating in Portugal was due to the drop in non-performing loans (credits that are difficult to collect) by around 6.6%.
A study by Prime Yield, Keep an Eye on the NPL&REO Markets – Portugal, Spain, Greece and Brazil, reveals that non-performing credit is falling in the national market, concluding that both families and companies have registered important reductions in the amount in default. . At stake are 5,600 million loans in default in the third quarter of 2023, 22% less than the 7,200 million registered in the same period of the previous year.
In fact, according to the same document, in all European countries, a stock of non-performing loans (NPL – Non-Performing Loans) of 362,700 million euros was recorded in the third quarter of 2023, minus 1.3 % compared to the same period last year. And Portugal was one of the European Union countries that contributed most to this fall, having only been surpassed by Greece (with an NPL stock of 8.3 billion euros) and Croatia (with an NPL stock in the order of one billion euros) .
Despite this greater stability, the issue around security continues to be relevant, especially knowing whether the money will be safe if the bank goes bankrupt.
And will it be safe? In the case of deposits, there are no big doubts. Up to 100 thousand euros, all term deposits and current accounts are safeguarded by the Deposit Guarantee Fund. Problems arise if you have more than 100 thousand euros in a single account in your name. It is recommended that you spread your savings across several banking institutions. But there are solutions here too: alternatively, add a holder to the account who has not exceeded 100 thousand euros in savings at that bank. In this way, any of the holders can guarantee the right to a refund of the money.
Diversify investment
No matter how much confidence you have in your bank, it is essential that you understand exactly what type of products you are investing in (see boxes on the side): this is the only way to be aware of the risk you are taking on each application. It is inevitable that the most profitable investments involve taking some risk, but that is a decision that is up to you alone. If you prefer prudence, opt for low-risk applications. The return may be equally low, but the capital invested will remain safer. The risk is directly related to the amount you are willing to lose, eventually, to achieve a certain profitability.
However, do not forget that one of the investor’s main enemies may be his own nature. Fear and excessive ambition, as well as investors’ lack of discipline, are obstacles. In addition to the emotional component, the vast majority of investors are not prepared or mentally prepared to take losses, so they usually create mental defenses to maintain their investments.
Do not forget that, in many cases, the bank is only an intermediary for the application, and is not responsible for managing the product or issuing it. This is what happens, for example, with retirement savings plans, investment funds and some bonds. But even in these cases, a possible bank failure does not put the money you invested at risk. In a situation like this, you will only have to change financial intermediary.
Products versus risk
PPR
Despite often contracting a retirement savings plan (PPR) over the counter, the bank only functions as an intermediary for the sale and, if it is not the depositary of the fund, even if it closes, nothing will happen to the PPR, unless the company responsible also file bankruptcy. If you have already subscribed to the product with an insurance company, you will only be at risk if the company goes bankrupt. But if the PPR is associated with an autonomous fund,
the money will also be safe and you will have to wait until the management entity recommends a new intermediary
Credits
What happens with most applications, which remain safe in the event of bank closure, also happens with debts.
For example, if you have taken out a loan for construction, home, car or personal purchases, you will always have to honor your financial commitments. And if the bank to which you paid the installments closes, there will always be an entity
to purchase the assets of that bank, automatically transferring payment of installments to that entity. This way there will be no interruption in the collection of installments and no intervention will be necessary to change the creditor.
Accounts and deposits
You can have up to 100 thousand euros deposited in each bank, in current accounts or in term deposits, and these amounts are always safeguarded. In the event of eventual closure of the institution and in a scenario in which the bank is unable to reimburse all depositors, the Deposit Guarantee Fund ensures this reimbursement. This fund is managed by Banco de Portugal and only this entity has the power to activate it.
Actions
Buying bank shares is the gamble that puts your money at greater risk. If the financial institution (or any other company) disappears, its shares lose their value and it will be impossible to recover the money invested.
Funds
The closure of a bank has no impact on investments made by customers in investment funds, regardless of the format: monetary, share or bond funds, mixed, flexible and real estate, among others. As the funds’ assets are autonomous from the bank, the bank only assumes the role of intermediary. In the event of a crisis, the guarantee provided by the Investor Compensation System (SII) can be activated, up to 25 thousand euros per holder and per institution.
Obligations
The degree of risk depends on the type of obligations in which you invested the money. For example, if you invested in the bank’s senior bonds, these have priority in recovering the invested capital (compared to other bonds). If the obligations are subordinated to the bank, they do not benefit from this priority. Because they are exposed to greater risk, these bonds usually have higher returns. If you invested in bonds from entities outside the bank, its closure has no impact.
Scams. Take care not to fall
Pyramid schemes. Warning signs
• Above-normal and guaranteed returns: as a general rule, it is almost impossible to find a reliable investment that meets these characteristics. A legitimate company has no interest in indefinitely paying fees that would be ruinous to it.
• Recruitment of new members: although promoters assure that recruitment is not necessary, once the participant accepts the scheme, they realize that they can earn much more by bringing in new members or they may be pressured into doing so
• Disparity between information: as a rule, scheme websites have little information. It is in face-to-face meetings that promises of easy income appear. The company’s representatives justify themselves with the argument that they want to avoid the tax authorities
• Psychological manipulation: promoters of fraudulent schemes try to make you feel that refusing the proposal would be saying no to the opportunity of a lifetime.
The display of luxury goods is part of this logic of action
• Avoid the banking system: the movement of money within the banking system can be traced and financial institutions have a duty to report abnormal or suspicious transactions. Most scams therefore try to resort to alternatives. Postal remittance systems, such as Western Union, or electronic payment systems, such as PayPal, are among the preferred ones.
