Circular Letter No. CC/2020/00000021: Flexibilization Measures and Additional Recommendations Related to the COVID-19 Pandemic

Circular Letter No. CC/2020/00000021 Sent to: Credit Institutions; Investment Companies; Financial Companies; Electronic Money Institutions and Payment Institutions. Mod. 40000375/T – 01/14 Subject: Flexibilization measures and additional recommendations related to the COVID-19 pandemic

The Banco de Portugal, taking into account the decisions already communicated by the European Central Bank (ECB) and the European Banking Authority (EBA), the consequences for the financial system of the current context of the COVID-19 pandemic, the declaration of a state of emergency, the exceptional and temporary legislative measures approved in this regard, and the need to gather critical information for the exercise of its functions, hereby transmits a set of recommendations and additional flexibilization measures in areas related to its supervisory and cash-in-circulation competences.

Additionally, clarifications are presented regarding the flexibilization measures on the compliance with capital and liquidity reserves communicated through Circular Letter No. CC/2020/00000017.

The Banco de Portugal will continue to permanently monitor the situation associated with the COVID-19 pandemic, and other measures and possible adjustments may be considered, namely resulting from the evolution of the current situation or aspects still under analysis by European authorities.

Without prejudice to the close cooperation with the ECB, it is noted that this Circular Letter only conveys the understanding of the Banco de Portugal within the scope of its competences, and it is not possible to exclude possible adjustments resulting from new decisions that that authority may adopt within the framework of its attributions in the context of the Eurosystem and the Single Supervisory Mechanism.

Following this Circular Letter, the Banco de Portugal will adopt the regulatory and administrative acts deemed necessary.

A - Use of own funds and liquidity reserves

In view of the current context and in line with the decision communicated by the ECB on March 12, 2020, for significant institutions, the Banco de Portugal transmitted, through Circular Letter No. CC/2020/00000017, that less significant credit institutions under its supervision may temporarily operate with a level lower than that of the own funds recommendation (“Pillar 2 Guidance”) and the combined own funds reserve, and with liquidity levels lower than the liquidity coverage requirement (“LCR”).

It is clarified that the expression “temporary” means that this guidance will be maintained until communicated otherwise by the Banco de Portugal, considering the economic and financial impacts resulting from the current pandemic and the decisions that may be taken on the matter at the European level.

Own funds recommendation (“Pillar 2 Guidance”)

If the institution anticipates that it will operate or begins to operate at a level lower than the own funds recommendation, the need for immediate notification to the Banco de Portugal remains, which must include detailed information on the main circumstances that determined the reduction of the own funds ratio, including direct and indirect factors related to the effects of the COVID-19 pandemic.

Mod. 40000375/T – 01/14 COVID-19. Based on this information, the Banco de Portugal will adopt, with adequate flexibility, the appropriate supervisory measures regarding the specific situation of the institution.

Combined own funds reserve requirement

Currently, the combined own funds reserve requirement applicable to less significant credit institutions is composed of the conservation reserve requirement (2.5% of the total amount of risk positions), the institution-specific countercyclical reserve, and the reserve for other systemically important institutions (O-SII), as applicable.

It is considered appropriate, given its relevance, that the requirement for immediate notification to the Banco de Portugal be maintained for cases where the institution operates with an own funds ratio that generates a situation of non-compliance with the combined own funds reserve, as well as the submission of an own funds conservation plan, within 5 business days after the non-compliance, under the terms and with the content provided for in the General Regime of Credit Institutions and Financial Companies (RGICSF) 1 .

However, to the extent necessary and considering the exceptional context of the current pandemic, it is considered appropriate to use a period of 10 business days2 , and prior case-by-case authorization by the Banco de Portugal is dispensed with.

The Banco de Portugal will evaluate the plan presented and the calendar proposed by the institution for the implementation of measures intended to restore the combined own funds reserve. It will be permitted that the measures to be adopted with a view to the full restoration of the combined own funds reserve, provided they are credible, be executed over a longer period, depending on the duration of the current pandemic and the decisions that may be taken on the matter at the European level.

The plan must provide that the institution operates, with an adequate margin of safety at all times, at a level higher than the minimum own funds requirements, including the additional minimum own funds requirements (Pillar 2), and the institution must during the calendar defined for the restoration of reserves immediately notify the Banco de Portugal if relevant deviations from the plan occur.

Liquidity Coverage Requirement (“LCR”).

Applicable legislation allows the use of liquidity reserves in adverse scenarios, such as the current pandemic context, even if this implies operating with an LCR below the minimum level of 100%.

In any case, whenever the institution anticipates that it will operate or begins to operate with an LCR lower than 100%, it must immediately notify the Banco de Portugal3 . This notification must include detailed information on the main factors that determined the reduction of the LCR.

Article 414 of Regulation (EU) No 575/2013 establishes that the institution must present “without unjustified delay” a plan to restore timely compliance with said requirement.

1 As provided for in paragraph 1 of Article 138-AD of the RGICSF. 2 Provided for in paragraph 2 of Article 138-AD of the RGICSF. 3 As provided for in Article 414 of Regulation (EU) No 575/2013 (CRR).

Mod. 40000375/T – 01/14 In this sense, the Banco de Portugal, considering the exceptional context of the current pandemic, considers it appropriate that the institution submits a plan that identifies how it will operate in a situation of LCR lower than 100%, considering various scenarios of future evolution, within a maximum period of 5 business days after the notification. This plan may provide for the restoration of the LCR level above 100% within a longer period, depending on the duration of the current pandemic and the decisions that may be taken on the matter at the European level.

While operating below the minimum LCR level, the institution is subject to sending a daily report of the liquidity situation to the Banco de Portugal, unless another periodicity is authorized.

B - Dividend distribution policies

In recent years, and in line with the recommendations of the ECB addressed to significant credit institutions, the Banco de Portugal has promoted among less significant credit institutions the adoption of prudent dividend distribution policies and allowing the compliance with all prudential requirements prospectively.

Due to the pandemic situation, the Banco de Portugal considers it essential to ensure that credit institutions conserve capital to maintain the capacity to support the economy and absorb potential losses in an environment of uncertainty.

In Recommendation ECB/2020/19 of March 27 on dividend distribution during the COVID-19 pandemic4 , the ECB recommended to significant credit institutions not to distribute dividends and to abstain from share buybacks intended to remunerate shareholders. On March 31, 2020, a similar understanding was transmitted to credit institutions in a public statement by the EBA5 .

In this framework, the Banco de Portugal also recommends to less significant credit institutions, until at least October 1, 2020, not to distribute dividends regarding the 2019 fiscal year and not to distribute interim dividends regarding the 2020 fiscal year (nor assume irrevocable commitments to pay them). In particular, the Banco de Portugal recommends that:

a) Less significant credit institutions that have already proposed to distribute dividends related to the 2019 fiscal year may decide to maintain their proposal, but condition its effective payment to a reevaluation of the situation after the reduction of uncertainties caused by the COVID-19 pandemic (and, in any case, not carry out this dividend distribution before October 1, 2020).

b) As an alternative to maintaining the dividend distribution proposal, less significant credit institutions may decide to change their dividend distribution policy, opting not to distribute any dividend regarding the 2019 fiscal year while simultaneously proposing a possible distribution of reserves subject to a reevaluation of the situation after the reduction of uncertainties caused by the COVID-19 pandemic (and, in any case, not carry out the distribution of reserves before October 1, 2020).

c) If the option referred to in item a) is adopted, the amount of proposed dividends must continue to be deducted from retained earnings regarding the 2019 fiscal year, and also from the calculation of Common Equity Tier 1 own funds.

4 See Press Release of March 27, 2020 “ECB asks banks not to pay dividends until at least October 2020”. 5 See Press Release of March 31, 2020 “Statement on dividends distribution, share buybacks and variable remuneration”.

Mod. 40000375/T – 01/14 d) If the option referred to in item b) is chosen, the amount of dividends initially planned can be reintegrated into the 2019 profits and be fully included in the retained earnings of this fiscal year. If the situation evolves favorably, eventual payments to remunerate shareholders must be made from the institution's reserves.

During the same period, less significant credit institutions must also abstain from carrying out share buybacks intended to remunerate shareholders.

The Banco de Portugal considers that this recommendation must be complied with on an individual basis, if applicable, and on a consolidated basis, and replaces previous communications of the Banco de Portugal following the adoption of the ECB Recommendation of January 17, 2020 (ECB/2020/1)6 . Credit institutions that are not in a position to comply with this recommendation in that they consider themselves legally obliged to distribute dividends must immediately communicate these grounds to the Banco de Portugal.

C – Credit risk, non-performing assets and impairment recognition

The Banco de Portugal has actively participated in the ongoing discussions on credit risk, non-performing assets, and impairment recognition and awaits the conclusion of work aimed at issuing additional guidelines under definition at the European level, namely regarding the prudential and accounting reflection of temporary moratorium measures.

In this domain, the Banco de Portugal highlights the importance of the recommendations and the approach advocated by the EBA7 and the ECB8 regarding the prudential framework applicable to the classification of loans in default, the identification of restructured exposures, and consequent accounting treatment, in the context of the COVID-19 pandemic.

Additionally, and as recommended by the EBA and in line with the ECB's action for significant credit institutions, the Banco de Portugal recommends to less significant credit institutions to evaluate the possibility of implementing the transitional provisions regarding the impacts of the adoption of IFRS 9, provided for in Article 473(a) of the CRR (if they have not yet made this option). The Banco de Portugal will be available to analyze authorization requests received in this context.

D - Deadlines for verification of implementation of supervisory measures

Upon duly justified request, the Banco de Portugal is available to evaluate situations where it is justified to review the deadlines for qualitative supervisory measures already communicated to less significant credit institutions.

6 Revoked by Recommendation ECB/2020/19. 7 See https://www.bportugal.pt/comunicado/covid-19-autoridade-bancaria-europeia-emite-declaracao-sobre-aplicacao-do-quadro. 8 See Press Release of March 20 “ECB Banking Supervision provides further flexibility to banks in reaction to coronavirus” and respective FAQs on “Relief measures regarding asset quality deterioration and non-performing loans”.

Mod. 40000375/T – 01/14 E - Suspension of deadlines whose expiration results in tacit approval by the Banco de Portugal

Decree-Law No. 10-A/2020, of March 13, which establishes exceptional and temporary measures regarding the COVID-19 pandemic, provides for an exceptional regime for the running of deadlines. In particular, Article 17 of Decree-Law No. 10-A/2020 provides that “deadlines whose expiration results in tacit approval by the administration of authorizations and licenses requested by individuals are suspended”.

The Banco de Portugal understands, in this regard, that among the processes whose deadlines are suspended under the provisions of Article 17 of Decree-Law No. 10-A/2020, of March 13, are the following:

a) Authorization processes for the exercise of functions as a member of an administrative or supervisory body established in Article 30-B of the RGICSF; b) Non-objection processes for the accumulation of offices established in Article 33 of the RGICSF; c) Authorization processes for statutory changes established in Article 34 of the RGICSF; d) Non-objection processes for the acquisition or increase of qualified participations, taking into account the provisions of paragraph 9 of Article 103 of the RGICSF; e) Registration processes under the terms established in paragraph 4 of Article 71 of the RGICSF.

F - Suspension of administrative deadlines established by normative act that run in favor of individuals

Law No. 1-A/2020, of March 19, established a set of additional exceptional and temporary measures in response to the COVID-19 pandemic.

Item c) of paragraph 6 of Article 7 of Law 1-A/2020, of March 19, is applicable to all administrative deadlines that run in favor of individuals, which will be suspended until the end of the exceptional situation is declared, under the terms provided for in Article 7, paragraph 2, of the same Law. The individual, however, has the possibility to perform the act (namely, through a remote communication means), not taking advantage of the suspension.

The Banco de Portugal understands, in this regard, that among the deadlines that are suspended under the provisions of item c) of paragraph 6 of Article 7 of Law 1-A/2020, of March 19, are the following:

a) The 30-day deadline to request registrations with the Banco de Portugal provided for in paragraph 1 of Article 71 of the RGICSF; b) The deadlines provided for in Instruction No. 23/2018, namely established in Article 6, paragraph 1, and in Article 7, paragraph 3; c) The deadline for the prior hearing of interested parties fixed under the terms of Article 122, paragraph 1 of the Administrative Procedure Code or of special applicable provision.

G - Extension of the deadline for compliance with obligations and recommendations established in the context of authorization processes for the exercise of functions regarding the realization of institutional integration training or strengthening of candidates' qualifications

It is considered appropriate that the deadlines established in previous decisions of the Banco de Portugal regarding the above-identified processes and that are still in progress be extended by a period of six months from the publication of this circular letter.

Mod. 40000375/T – 01/14 H - Possible non-renewal of mandates of corporate bodies within the deadlines established in the Commercial Companies Code

Article 18 of Decree-Law No. 10-A/2020, of March 13, provides that general assemblies of commercial companies, associations, or cooperatives that must take place by legal or statutory imposition may be held until June 30, 2020. The non-renewal of mandates and presentation of the corresponding authorization requests for the exercise of functions to the Banco de Portugal, justified by the impossibility of holding a general assembly, will be adequately considered within the relevant processes.

I – Non-objection processes for the acquisition or increase of qualified participation in a supervised institution – communications

Without prejudice to the possibility of submitting documentation by mail, and considering the provisions of paragraph 1 of Article 14, and paragraph 1 of Article 61, both of the Administrative Procedure Code, all communications to be made within the scope of these processes, whether the initial request or subsequent communications in response to requests for elements requested by the Banco de Portugal, should preferably be ensured through the following email address: dsp.registos.expediente@bportugal.pt.

J - Temporary closure of supervised institution agencies

The temporary closure of agencies framed within the contingency plans of institutions or resulting from the application of public health measures is being monitored by the Banco de Portugal, namely through the information reporting created in this context. Based on this information, the Banco de Portugal monitors, among other aspects, the availability of essential banking services to citizens at the national level.

It is the understanding of the Banco de Portugal that the temporary closure of agencies in the situations indicated above is not subject to the registration duty provided for in the combined provisions of items l) and o) of Article 66 of the RGICSF, and no formality is necessary, apart from the aforementioned reporting. Upon the end of the exceptional period resulting from the validity of the state of emergency, agency closure situations that remain must be subject to an autonomous request for registration annotation, under the current legal terms.

K – Accountability – Notice No. 1/2019

The publication and sending to the Banco de Portugal of accountability elements referring to December 31, 2019, depend on their respective approval or public disclosure, and do not have a defined deadline in Notice No. 1/2019. Thus, whenever the deadlines for the disclosure of financial statements defined in specific legislation are flexibilized, it is considered appropriate that the same can be reflected in the deadline for sending to the Banco de Portugal9 .

Without prejudice to other accountability obligations to which entities are subject, the Banco de Portugal considers it appropriate that the publication and sending to the Banco de Portugal of the information

9 As per press release of March 27, 2020 by ESMA “ESMA statement on actions to mitigate the impact of COVID-19 on the EU financial markets”, regarding entities covered by the Transparency Directive.

Mod. 40000375/T – 01/14 referencing the first quarter of 202010 may occur up to 120 days after the end of the quarter, instead of the 60 days provided for in Notice No. 1/2019.

L - Market disclosure prudential requirements (Pillar 3)

The Banco de Portugal recognizes the importance of institutions disclosing relevant prudential information, by enabling the reduction of uncertainty about risks and vulnerabilities and helping to ensure the confidence of various market participants, particularly in the context of the COVID-19 pandemic.

At the same time, the Banco de Portugal also recognizes that the current context may originate operational challenges in preparing prudential information for disclosure.

Thus, less significant institutions must publish prudential information on the same date or immediately after the publication of financial statements11 . As mentioned in the previous point, if the deadline for the publication of financial statements is flexibilized, the Banco de Portugal considers it appropriate that the same must be reflected in the deadline for the disclosure of Pillar 3 prudential information12 .

It should be noted that, although disclosure requirements do not constitute a report to the Banco de Portugal, institutions must provide proof to the Banco de Portugal of their compliance13 and, since July 10, 2019, submit a declaration issued by the “Compliance Function” informing on how compliance with these requirements was given, together with a file with evidence of this compliance. Regarding that declaration and associated file, the Banco de Portugal considers it appropriate that, regarding the next report of June 30, 2020, this can be sent until September 15, 2020.

Finally, the Banco de Portugal recalls that institutions must evaluate the need to carry out additional disclosures that are necessary to provide a complete understanding of their risk profile to market participants14, in the context of the COVID-19 pandemic and the measures implemented aimed at mitigating its economic impact.

M – Behavioral supervision reports

At the level of behavioral supervision reports, the Banco de Portugal, based on an assessment of their criticality for the exercise of these functions, and regarding the deadline for sending the information provided for in Instruction No. 8/2010 (“Communication of reference units for complaint report”) regarding March 31, 2020, considers it appropriate that the information in question can be submitted until the next day, July 14, 2020, the deadline provided for the fulfillment of the next report, simultaneously with the information regarding June 30, 2020.

10 Provided for in paragraph 3 of Article 4 of Notice No. 1/2019. 11 As provided for in Article 433 of Regulation (EU) No 575/2013. 12 As per press release of March 31, 2020 by EBA “Statement on supervisory reporting and Pillar 3 disclosures in light of COVID-19” 13 As provided for in paragraph 1 of Article 17 of Banco de Portugal Instruction No. 1/2017. 14 As provided for in Article 431 of Regulation (EU) No 575/2013.

Mod. 40000375/T – 01/14 N – Cash recirculation

Deadline for sending counterfeit, false, or suspected banknotes and coins

It is considered appropriate that the deadline for the delivery of retained banknotes and coins, as well as the information report, referred to in Instruction No. 38/2012 of the Banco de Portugal, regarding the compliance with the duty to retain counterfeit, false, or suspected banknotes and coins, can be 20 business days.

Validity of training for professionals on the knowledge of the euro banknote and coin

It is considered appropriate that the training for professionals on the knowledge of the euro banknote and coin, ensured by the Banco de Portugal under the terms of Instruction No. 35/2012, regarding the qualification of professionals in the context of the recirculation of euro banknotes or coins, whose validity period expires in the period between March 10 and June 10, shall be valid until June 30, 2020.

Suspension of inspection actions within the monitoring of cash recirculation activity

In order to avoid physical contact, but also to reduce operational effort

Mod. 40000375/T – 01/14