On the use of collateral by Portuguese monetary policy counterparties: facts and lessons for the future

This paper analyses the use of collateral for the Eurosystem’s credit operations by Portuguese counterparties for the period 1999-2023, with a particular focus in the period following the implementation of the Basel III regulatory framework. It identifies an increasing mobilisation of non-marketable assets and covered bonds by banks amid the introduction of Basel III as a new international banking regulatory framework and changes in the ESCF. The analysis also looks beyond the collateral pools of banks and quantifies the liquidity potential of unencumbered assets held by a subset of major Portuguese banks from a monetary policy perspective. Moreover, it presents for the first time the collateral pool of Portuguese banks from a regulatory-LCR perspective and concludes that the composition of HQLA vs. non-HQLA in the collateral pool of Portuguese banks changes significantly around periods of large changes in central bank credit exposure. Finally, this paper identifies signs of money market and bond issuance revival in the context of normalization of the ECB’s monetary policy and after the successful conclusion of Portugal’s adjustment programme, through which the country strengthened its banking system and regained market access.