IBFed in Brazil - 02/03/12

2 Mar 2012

Last week IBFed Managing Director, Sally Scutt and Adam Cull visited Brazil to make contact with the Brazilian Federation of Banks and meet with officials and others. This note records the discussions.

The Brazilian Federation of Banks – ‘Febraban’ – is clearly an experienced and active trade association working across a whole range of issues of concern to the industry. It is currently in a state of transition, with the recent appointment of a full time executive president, Murilo Portugal, marking a departure from a structure which relied heavily on day-to-day management of the association by the chairman of the Board (a bank chairman appointed for a period of two years). Mr Portugal, a former deputy managing director of the IMF, expressed interest in the work of IBFed and understood the importance of the industry coordinating globally to address international regulatory initiatives. We are hopeful that Febraban will consider Associate membership of IBFed in the near-future.

Given the strong economic position, it was no surprise to learn of the huge level of interest amongst foreign investors in the Brazilian market. However, we heard how regulatory restrictions for foreign financial institutions were compounded by political suspicion of foreign investment in key infrastructure and the complexity of tax and regulation.

We met with member banks that have followed their corporate clients to support them as they enter the Brazilian market. As in many locations, however, the regulatory consequences of the financial crisis were evident.  Not least in the conservative manner in which the Banco Central do Brasil assessed applications from foreign banks to open local operations. As in other countries, we heard how Brazilian supervisors had insisted upon foreign banks operating as stand-alone subsidiaries with their own capital and liquidity.

On the financial regulation front, the Central Bank emphasised to us Brazil’s commitment to the G20 regulatory reform agenda and welcomed the development of the Financial Stability Board’s outreach via the new Regional Consultative Group for the Americas. In terms of the specifics of the G20 Action Plan, the Central Bank will soon publish a consultation paper detailing its plans for the implementation of Basel III (Basel II is due for full implementation by 2013). Current thinking was that all the aspects of Basel III would be introduced together, although the forthcoming consultation may separate the issues. Capital levels are already high across the industry and it was the Central Bank’s expectation that the industry would use its strong revenues to meet the more stringent requirements of Basel III via retained earnings. There was, however, concern at the impact the transition could have on the ability of the two big state-owned banks to finance the economy during this period.

The Central Bank was also moving forward to implement the FSB’s recommendations on crisis management. A consultation paper was in preparation to update existing rules regarding resolution. There was encouraging support for the concept of group resolution and recognition of the need for supervisors to work together to preserve the value of a failing global group. It was agreed that until such time as progress was made on this front, it was unlikely that national supervisors would contemplate moderating their demands for subsidiarisation. Interestingly, the Brazilian resolution regime already encompasses a number of early intervention and prevention tools under consideration by the European Commission – not least the power to appoint a special manager.

As in other countries, the Brazilian government has taken steps to develop a macroprudential regime. This includes a new committee at the central bank to monitor threats to financial stability and to provide early warnings. Whilst this has no direct powers, the committee comprises representatives of each of the regulators (banking, markets, insurance and pensions) who do have the power to act on conclusions. We heard how the banking supervisor had used powers to prevent the distribution of dividends to tackle concerns about the capital positions of five banks. Another step to enhance financial stability had been a decision to grant non-bank participants in the payments system the right to access intraday liquidity from the central bank.    

Consumer regulation is at a less developed stage than some other G20 countries. We heard that there was little consumer lobby, partly due to the historic low level of credit (a result of a traditionally high interest rate environment), although it was anticipated this would change as credit increased as a proportion of GDP. Febraban explained to us the work the industry had done to provide financial education and to develop self-regulation of the relationship with the consumer.

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