private management most of banking business. More recently, as in the other European
markets, the prospect of EMU largely motivated a process of take-overs that has
intensified since 1994. Through this process the largest Portuguese bank groups aimed at
being able to compete in the enlarged European market.
The framework where the Portuguese banks operated changed significantly in
consequence of the liberalisation process summarised above, affecting necessarily their
behaviour, in particular their loan supply. On the other hand the changes observed in
credit aggregates also reflected the different demand conditions created under the impact
of European integration first and the participation in EMU afterwards.
The upward shift on households’ permanent income resulting from European
integration affected private consumption and consequently the loan demand by
households. Furthermore, the adjustment of the capital stock to a new output trend has
translated into an increase in investment of non-financial firms that has also been reflected
in their demand of bank financing. At the same time, the stability of the exchange rate
since mid-1993 and the decline of the inflation rate allowed a sustained and significant
reduction of both short and long run interest rates. The decrease in nominal interest rates,
perceived as being permanent, reduced the liquidity constraints of the economic agents
also contributing to the strong growth in overall credit demand.
Chart 1 shows aggregate quarterly figures on the evolution of bank loans granted to
the private non-financial sectors of the economy as well as the evolution of aggregate
deposits held with the banks by the private non-financial sectors18. After the deceleration
in the recession period between 1992 and 1994 (average annual growth rate in real terms
of 5.4 per cent), in 1995-1997 credit resumed the upward trend of the early nineties
(average annual growth rate in real terms of 14 per cent in this period compared to 16 per
cent in 1991) and strongly accelerated in 1998 and 1999 (annual growth rate in real terms
of 24 per cent). Until 1994 deposits behave very much like credit (even though with a
slightly smaller annual growth rate), but from 1995/1996 onwards they clearly exhibited a
much smaller growth rate than this aggregate (5.2 per cent in real terms during the period
1995-1997 and 6 per cent in 1998/1999). As a matter of fact, during the nineties, the
decline in interest rates reduced the incentives to save and deposits became less attractive
vis-à-vis alternative instruments (e.g. the acquisition of shares in the re-privatisation
process, or the investment in mutual funds that showed up in a developing financial
market).
18Those figures have been computed from data on the sample of banks for which consistent series
throughout the period 1990-1998 may be obtained. This is the sample of banks used in the econometric
estimations presented in this paper. It is described with more detail in the next subsection.
17