How can the Bank of Portugal ensure the financial stability of Portuguese companies? – executive summary

Financial stability is crucial for the smooth functioning of companies' activities, especially to reduce uncertainty about financing conditions and the development of their sales.

It can also be affected by the condition of companies, because if their health is fragile, the risks to financial stability are higher. For example, excess debt and lower profitability can lead to an increase in bank defaults, and if this leads to large losses, the health of banks may also be jeopardized, damaging the economy's financing.

Ultimately, this situation may lead to an economic crisis, but the outcome depends largely on the banks.

According to the Bank of Portugal, the financial health of companies has improved significantly since the sovereign debt crisis, which was demonstrated in the rapid recovery of the economy after the pandemic crisis, and in its ability to absorb increases in production, energy and other raw materials. materials, and more recently, with rising interest rates.

In recent years, the attitude of the Bank of Portugal, the European Central Bank and the banks themselves has led them to limit problem credit and to be more demanding when extending credit.

Banks were also forced to increase capital buffers in difficult times, which helped improve their financial ability to finance companies even in periods of crises or increased uncertainty.