IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with Brazil. The IMF Directors agreed that the financial system is broadly resilient but firms and households face an unduly high cost of borrowing. They welcomed progress on strengthening the financial sector and agreed that further steps should be taken to enhance oversight of banks in line with the 2018 Financial Sector Assessment Program (FSAP) recommendations, particularly the implementation of a new financial resolution regime. Directors also agreed on the importance of improving the efficiency of financial intermediation and welcomed the recent approval of the credit registry law.
The staff report highlights that banks are well-capitalized, profitable, and liquid. Banks’ average ratio of regulatory capital to risk-weighted assets rose to 18% at the end of 2018 from 17.2% two years earlier, while nonperforming loans (NPLs) fell from 3.9% to 3.1%. The 2018 FSAP systemic risk analysis suggests that banks are broadly resilient to further severe macro-financial shocks, although they are exposed to concentration, exchange rate, and market risks. In the corporate sector, profitability has improved in recent quarters, but leverage remains high. A macro-financial shock could significantly increase debt at risk among corporates, undermining access to additional credit and hindering investment. The authorities have made notable progress in implementing financial sector reforms recommended in the 2018 FSAP. In financial sector oversight, risk-based supervision has been strengthened and contingency plans for crisis management have been put in place.
The assessment highlights that further action is needed to strengthen the banking sector. The authorities should build on recent efforts to enhance the prudential, crisis management, safety net, and macro-prudential frameworks, as detailed in the 2018 FSAP. Several legislative efforts are underway to pursue these objectives. The regulatory and supervisory approach should be upgraded in related party exposures and transactions, country and transfer risk, and restructured loans. A new resolution regime should be introduced promptly to broaden the authorities’ toolkit for dealing with systemically important institutions, among other objectives. The process for dealing with weak banks and emergency liquidity assistance should be tightened to ensure that such assistance is not provided to insolvent banks. The deposit guarantee fund should be brought into the public sector to help prevent conflicts of interest and retain the mandate for financial stability in the public sector, among others. The increasing complexity of the financial system and gaps in systemic risk oversight call for closer coordination among supervisory agencies and the creation of a high-level interagency committee with mandates for financial stability and crisis management.
Reforms to improve bank intermediation efficiency should continue. IMF staff analysis suggests that banking sector reforms would generate large productivity gains and enjoy strong public support. The authorities are pursuing negotiations with the Organisation for Economic Co-operation and Development (OECD) to be compliant with the codes of liberalization by 2020, irrespective of whether Brazil will ultimately become a member of the OECD. Compliance with the codes of liberalization would result in the removal of certain restrictions to international transactions and restrictions to the establishment of branches of foreign banks and insurance companies. The report notes rapid growth in lending from cooperative banks and rising competition from fintech firms in recent years. The selected issues report examines profitability and determinants of foreign exchange intervention in Brazil. The report also analyzes the liquidity management framework and the supporting institutional setup, along with their implications for public debt dynamics and fiscal rules.
Keywords: Americas, Brazil, Banking, Insurance, Article IV, FSAP, NPLs, Systemic Risk, Macro-Prudential Framework, Liquidity Management, Financial Stability, IMF
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