The measure, which came into effect in October 2024, obliges BCP, Santander, BPI, Novobanco and also the Bankinter branch in Portugal — the five banks that use the internal rating method (IRB) to assess risk — to reserve capital equivalent to 4% of the amount of risk-weighted positions in the portfolio of individuals secured by properties intended for housing located in Portugal, according to a report by Eco.

“The Bank of Portugal must review the design and calibration of the reserve during 2025,” stated the initial announcement when the measure was announced in 2023. This review has now taken place, but without changes. “Given the absence of material changes in context, based on an assessment of the measure's effectiveness, the Bank of Portugal has decided to maintain the reserve, without alterations,” reads the statement published by the supervisor.

The sectoral systemic risk reserve functions as a financial airbag. It is a capital cushion that banks must build with Common Equity Tier 1 capital to protect themselves from any shocks in the residential real estate market. The objective, according to the Bank of Portugal, is “to increase the resilience of institutions in the face of a potential future materialization of systemic risk in the residential real estate market in Portugal.”

This means that if house prices fall sharply or if there is a crisis in the mortgage market, banks have a capital reserve to absorb losses without collapsing or drastically cutting credit to the economy.

“The application of this instrument is preventive in nature,” the regulator emphasizes. “In a scenario where the source of the risk materializes, this reserve can be released to contribute to maintaining credit to the economy,” the regulator clarifies, underlining that, “in this scenario, the Bank of Portugal will announce the period during which an increase in this reserve is not expected.”

The reserve does not cover all banks. Only those that use sophisticated internal models—the IRB method—to calculate the risk of their loans. For example, Caixa Econômica Federal, which uses the standard risk calculation method, is excluded. “Institutions that use the IRB method have a significant weight in the mortgage market, and the risk weightings they apply are lower than those of banks that adopt the standard method,” explains the Bank of Portugal. In other words, by using more favourable risk assessment models, these banks consume less regulatory capital—and the 4% reserve is intended to compensate for this advantage.

When the measure was announced, the supervisor assured that “the institutions covered by the measure have sufficient management reserves to accommodate the introduction of the sectoral systemic risk reserve,” estimating that the buffer could be constituted “without harming compliance with other prudential requirements and guidelines or the lending activity of these institutions.”

The decision to keep the reserve unchanged reflects the absence of material changes in the Portuguese residential real estate market and the effectiveness of the preventive measure. The 4% reserve should be reviewed again at least every two years.