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Banking: Portugal’s bail-in bombshell

Portugal’s central bank had very few options when it decided to bail-in senior bondholders of Novo Banco at the end of last year. The move has dismayed investors and may breach the ECB’s newly introduced bail-in powers. Have years of effort in developing a bank resolution regime already gone up in smoke? And what does it all mean for a deeply shaken market for bank funding?



European investors were well-prepared for the implementation of the EU’s Bank Recovery and Resolution Directive (BRRD) bail-in regulation on January 1 this year. However, the Bank of Portugal’s decision to bail-in a small number of senior bondholders in Novo Banco, just three days before year-end means that the new legislation is now overshadowed by confusion and controversy.

Many senior bond investors had their year-end break interrupted by a press release from the Bank of Portugal on December 29. It stated that, based on the deteriorating situation at Novo Banco, (the ‘good’ bank created after the collapse of Banco Espiríto Santo in 2014): “Banco de Portugal decided to confer again on BES the responsibility for certain issues of non-subordinated bonds issued by the latter and intended for institutional investors.” The affected bonds had been transferred from BES to Novo Banco when the latter was set up in August 2014. Under the original BES resolution Banco de Portugal, as the resolution authority, was given the power to retransfer assets and liabilities between BES and Novo Banco at any time.

It identified five tranches of fixed-rate senior bonds maturing between July 2016 and June 2024 with a face value of €1.985

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