liberalisation measures as the opening up of the banking sector to private initiative and the
beginning of the process of elimination of administrative controls on interest rates, on
bank credit as well as on capital movements. The credit limits were abolished by 1991.
Since then monetary policy has focused on the setting of cash reserves for the banking
system to control liquidity growth. With the revision of the Banco de Portugal statute, in
1995, price stability became explicitly the primary objective of the central bank, subject to
the overall economic policy of the government.
In order to approximate the Portuguese regime to those of most EU members and to
create an operational framework similar to the one that would be adopted by the European
Central Bank the Banco de Portugal also introduced new policy instruments and new
forms of intervention in the money market. A daily credit facility was created (1993),
allowing banks subject to minimum reserve requirements to raise funds overnight at pre-
announced rates, as well as an absorption facility (1994)16. In November 1994 the reserve
requirement regime was redefined. Its major change was the reduction in the minimum
reserve requirement ratio from 17 per cent (remunerated) to 2 per cent (non-remunerated).
The consequent liquidity sterilisation was achieved through the issuing of Deposit
Certificates by the Banco the Portugal.
Exchange rate stability became progressively the intermediate target to reach the final
goal of price stability. In 1992 the escudo joined the ERM and the remaining capital
controls were removed. With this decision monetary policy had to be used almost
exclusively to ensure that the exchange rate was kept within the ERM fluctuation bands.
The explicit restrictions on the composition of banks’ assets, namely the compulsive
investment in public debt, were removed and the legally imposed segmentation of banking
activities was gradually eliminated, culminating in the establishment of universal banking
in late 1992.
With the opening up to private initiative the banking sector expanded fast. Between
1984 and 1989 the number of banks operating in Portugal increased from 14 to 27 and
between 1989 and 1997 this number more than doubled to 5817. State-owned banks
continued to hold the bulk of banking business until late in the decade, but the presence of
new banks modified considerably the competitive context in which Portuguese banks
operated. The last step in the liberalisation of the Portuguese banking system was the re-
privatisation process of nationalised banks that started in 1989, gradually transferring to
16 The interest rate of the absorption facility sets a lower limit to very short-term money market rates. Its
upper limit was set by the overnight credit facility rate. Within that band money markets were stabilised
through repos, which made the repo rate the most important one for steering markets.
17 In the end of 2000 there were 62 institutions.
16