IMF Reports Assess the Stability of Financial System in Brazil

By Regulatory News

December 11, 2018

Basel III, Stress Testing

IMF published a report on the results of the Financial System Stability Assessment (FSSA) on Brazil. IMF also published the report on the detailed assessment of observance on the implementation of the Basel Core Principles for Effective Banking Supervision, along with several technical notes under the Financial Sector Assessment Program (FSAP). Brazil is deemed by IMF to have a systemically important financial sector, according to the Mandatory Financial Stability Assessments Under the FSAP. The technical notes published under the 2018 FSAP cover insurance sector regulation and supervision; stress testing and systemic risk analysis; supervision and oversight of FMIs; bank resolution; systemic liquidity management; and regulation, supervision, and systemic risk monitoring of the fund management segment.

The FSSA report highlights that, since the 2012 FSAP, the financial system has been stable, with the resiliency of the banking system being supported by high profitability. Banks are broadly resilient to severe macro-financial shocks. Current high profits and capital ratios support the resiliency of banks under a severe stress test scenario. Under the stress scenario, small capital shortfalls result; banks would nevertheless experience reduced income, including from market loss on government bonds, and high credit losses on exposures to the corporate sector. Moreover, some banks are exposed to concentration risk. Some actions are still needed to address bank-specific risk profiles to boost their resilience. Banks are generally well-positioned to manage short-term and medium-term liquidity pressures while interbank contagion seems limited. The FSSA report contains a table that summarizes the key recommendations from the FSAP in 2018.

The results of the assessment suggest that supervision and regulation have strengthened at both micro and systemic levels. This has included risk-based supervision, off-site monitoring, effective use of large data resources, sanctioning powers, and the phasing-in of Basel III requirements. The Banco Central do Brasil (BCB) has put forward guidance for the preparation of Recovery and Resolution Plans by domestic systemically important banks (D-SIBs), and has focused on frontier risks related to interdependence, cyberattacks and potential payments system outages. The securities commission’s (CVM) oversight of financial market infrastructures and issuers’ financial disclosure is in line with international standards. Structural reforms have included revisions to the pricing of directed subsidized credit and funding modalities of BNDES, enactment of the corporate governance law for state-owned enterprises, and adoption of a new corporate governance code by CVM.

Nevertheless, strengthening the underpinnings of regulatory agencies is needed. BCB’s independence and legal protection of staff should be ingrained in law. Likewise, the autonomy of the senior leadership of BCB and SUSEP (insurance regulator) should be protected by clear rules, including fixed terms and conditions of dismissal. Resources should be enhanced to manage challenges from new reforms, particularly at CVM and SUSEP. Overall, the assessment reveals that supervisory process is well-structured and thorough but there are areas where further improvements will be needed. The regulatory and supervisory approach should be upgraded in related party exposures and transactions, large exposures, country and transfer risk, and restructured loans. The existing resolution regime is inadequate and a new framework aligned to best international practice should be introduced promptly. The process for dealing with weak banks and emergency liquidity assistance should also be tightened.

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Keywords: Americas, Brazil, Banking, Securities, FMI, FSAP, FSSA, Basel Core Principles, Basel III, Stress Testing, Technical Notes, IMF

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