Statement at the Conclusion of the IMF and World Bank Financial Sector Assessment Program Mission to BrazilPress Release No 12/97
March 21, 2012
An International Monetary Fund (IMF) and World Bank (WB) mission, headed by Dimitri Demekas (IMF) and Augusto de la Torre (WB), visited Brazil during March 6-21, to conduct an assessment under the IMF and WB Financial Sector Assessment Program (FSAP). The mission met with Central Bank of Brazil (BCB) Governor Tombini, senior officials from the central bank and ministry of finance, the heads and senior officials from financial sector regulatory agencies, representatives of financial institutions and professional bodies, and market participants.
The FSAP mission found the Brazilian financial system to be stable, with low levels of systemic risk and sizable buffers. High capital buffers in combination with high levels of international reserves and a flexible exchange rate have helped the economy withstand the recent large external shocks. While coping with volatile capital inflows and fast credit growth remains a challenge, the Brazilian authorities have effectively used macroprudential measures to contain systemic risks.
Brazil´s strong financial markets infrastructure and strong regulation and supervision have been an important factor in maintaining financial stability, although there a few areas that could be strengthened further. Banking supervision is risk based and robust, which is reflected in a high degree of compliance with the Basel Core Principles for Effective Banking Supervision. Regulation and supervision of insurance and capital markets have been materially strengthened since the initial FSAP in 2002. In capital markets, transparency, and disclosure standards have been raised and risk-based supervision implemented. In insurance, solvency requirements are more risk-sensitive and public disclosure extensive. Going forward, supervision of brokers and groups should be enhanced. Areas that could be strengthened include enhancing the operational independence of SUSEP and PREVIC. A cross-cutting challenge for all supervisors is the need to keep pace with an evolving system, given constraints on budgets and human resources. Also, it would be important to enhance further legal protection to supervisory agencies.
The Brazilian authorities handing of the impact of the global financial crisis was swift, flexible, and successful; some reforms would further strengthen this framework to prepare it for future crises. The authorities should be congratulated for their important role in maintaining financial stability. Besides the strict regulation of the banking sector and strong consolidated supervision, a range of measures to restore market stability and preserve confidence were used. Nonetheless, the FSAP considers that certain aspects of the resolution and liquidity regime could be strengthened to ensure the full range of resolution tools are readily available in accordance with evolving international standards. Some of these measures are already under consideration.
Brazil is uniquely positioned to move financial sector development forward in a vigorous way, particularly to deepen long-term private finance. This is a challenging agenda. Capital market development is still impeded by high interest rates and the short-duration of most financial instruments but, aided by stronger public finances and a credible monetary policy in place for over a decade, the economy has started moving away from this equilibrium. This movement will continue, provided inflation continues to decline and domestic savings (both public and private) increase. In addition, certain targeted financial sector reforms could reinforce this process, particularly in strengthening the role of institutional investors. As interest rates fall further and spur mutual funds´ demand for longer-duration, well-articulated actions to enhance the supply of private securities are also needed to take advantage of the increased demand.