IMF published its staff report report under the 2018 Article IV consultation with Brazil. Directors concurred that the financial system is broadly resilient. Nonetheless, they agreed with the FSAP recommendation that further action is needed to strengthen the micro-prudential, macro-prudential, and safety net frameworks. Directors underscored the importance of improving the efficiency of the financial system, especially by reducing the high intermediation costs.
The staff report reveals that the recent FSAP found the banks to be well-capitalized, profitable, and liquid, largely due to high interest margins and fees. Capital ratios are above regulatory minima. The FSAP systemic risk analysis suggests that bank solvency and liquidity are broadly resilient to further severe macro-financial shocks. Four banks (public and private) would fail the solvency stress test, but with a small capital shortfall. Some banks are also exposed to concentration, exchange rate, and market risks. Pillar 2 capital requirements could help mitigate identified risks in banks, supporting the need to build additional capital buffers for banks that failed the stress test. Structural indicators for the banking sector reveal that Brazil fares considerably worse than other countries because of the high level of state intervention in credit markets. Reforms should thus aim to foster a stronger and more efficient private credit market. Bank reforms are also relatively easy to legislate since various measures can be undertaken by the government without congressional approval.
The recent FSAP has called for further action to strengthen the prudential, safety net, and macro-prudential frameworks. To strengthen the underpinnings of the BCB as the bank supervisor, its independence, along with the legal protection of staff, should be ingrained in law. The regulatory and supervisory approach should be upgraded to better deal with related-party exposures and transactions, large exposures, country and transfer risk, and restructured loans. The existing resolution regime is inadequate and a new framework in line with the FSAP recommendations should be introduced promptly. Furthermore, the process for dealing with weak banks and emergency liquidity assistance should be tightened and the deposit guarantee fund should be brought into the public sector. The increasing complexity of the financial system and gaps in systemic risk oversight call for closer coordination among supervisory agencies—the creation of high-level multi-agency committees with mandates for macro-prudential policy and crisis management should be a priority.
Raising the efficiency of financial intermediation would boost productivity. Proposed laws on corporate bankruptcy, electronic collateral registration, and positive credit registry will help reduce banks’ costs. A new regulation on fintech will ease market entry and foster bank competition. Legislations granting central bank independence and legal protection to its staff, strengthening bank resolution framework, and creating a committee responsible for macro-prudential policy and crisis management are under way. The central bank is working on new regulation on supervision of related party and large exposures, in line with the FSAP recommendations. The authorities disagreed with staff’s recommendation regarding supervision of country and transfer risks, arguing that the current monitoring tools already in place ensure timely identification of those risks and swift supervisory actions. The central bank also noted that the current supervisory processes ensure close monitoring of restructured loans and the extent of inappropriate forbearance. Moreover, the central bank is already taking steps to improve the Pillar 2 capital requirements framework to address bank-specific risk profiles, which will boost their resilience.
Related Link: Staff Report
Keywords: Americas, Brazil, Banking, Article IV, FSAP, Pillar 2, BCB, IMF