## cr18341 ## Source details **Canonical URL:** [cr18341](https://www.imf.org/-/media/files/publications/cr/2018/cr18341.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18341.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18341.pdf.json) --- ### EXECUTIVE SUMMARY — Key findings on recent reforms and remaining gaps - Improvements since last FSAP: - creation, within the Banco Central do Brasil (BCB), of a new Resolution Department; - establishment of requirements for recovery and resolution planning. - BCB early intervention powers described as "robust and flexible." - Remaining limitations: - resolution powers are incomplete; - no formal inter-agency arrangements for crisis management. - BCB prepared a comprehensive draft law (the "Draft Law") to introduce a new resolution regime aligned with international best practices; the FSAP provides recommendations on its design and on areas not addressed in the Draft Law. ### Assessment of the Draft Law - Overall assessment: - The Draft Law represents a major improvement but requires enhancements in clarity and effectiveness. - Improvements introduced: - options to restore viability of a failed institution; - broadened toolkit for systemically important institutions, including powers for limited bail-in and bridge banks; - strengthening of the legal protection regime and removal of impediments to temporary public support. - Areas needing clarification: - application of the resolution toolkit to medium and small-sized banks; - details of the bail-in powers (valuation, scope, excluded liabilities); - bridge bank transactions and governance; - conditions for transfers to asset management companies (AMCs). ### Recovery, resolution planning, and resolvability - Current requirements and progress: - RRPs mandatory for domestic systemically important banks (“D-SIBs”); recovery plans developed since December 2016 with preliminary plans due December 2017 and final approval/implementation by July 2018; D-SIBs update plans annually thereafter. - Resolution planning and resolvability assessments being initiated; first round of resolution plans due in mid-2018; Resolution Department responsible for developing plans and assessments. - Findings: - Recovery plans include critical functions, monitoring program with indicators and triggers, stress scenarios (idiosyncratic and systemic), recovery scenarios, and governance mechanisms. - Scope for RRPs should be extended to include most banks with proportionality (simpler RRPs for small/medium banks). - Potential correlation among recovery measures across banks (e.g., asset sales) could hamper system-wide implementation. - Recommendations: - Expand RRP regulations to include all banks (notably recovery planning) using proportionality. - Urge banks to tailor recovery plans to match their structure. - Analyze recovery plans jointly to identify and mitigate correlated measures. ### Institutional independence and inter-agency coordination - Institutional facts: - BCB is responsible for licensing, supervision and resolution of banks, and leads resolution of banking groups, but lacks an explicit financial stability mandate in law. - CMN has broader responsibility for soundness of Brazil’s financial system; CMN composition includes the Minister of Finance (Chairperson), the Minister of Planning of Economic Affairs and the BCB Governor. - BCB Board members have no fixed term; President appoints and may dismiss Governor and Deputy Governors at any time without legal requirement to publicly disclose reasons. - BCB is an "autarquia federal vinculada" under the remit of the MoF; CMN approves BCB bylaws and budgetary/organizational matters. - Coordination gaps: - Inter-institutional arrangements (Complementary Law 105/2001, cooperation with CVM and SUSEP, COREMEC) are supervisory in nature and do not formally cover resolution or crisis preparation. - No formal arrangements between the BCB and the deposit insurer (FGC) due to FGC’s private law status. - Recommendations: - Provide for a financial stability mandate of the BCB as a resolution authority. - Strengthen BCB operational autonomy: fixed terms for Board members, statutory constraints on removal, public disclosure on early dismissal reasons, and clarification of CMN/MoF powers vis-à-vis BCB administrative functioning. - Strengthen and formalize inter-institutional arrangements among financial safety net participants, including MOUs that cover resolution and contingency planning. - Formalize arrangements among sectoral resolution authorities (BCB, CVM, SUSEP) clarifying lead roles in conglomerate resolution. ### Early warning, supervision and crisis preparedness - Supervisory architecture: - Supervisory cycle with onsite/offsite activities; banks ranked on quantitative and qualitative indicators. - Watch-list includes banks with rating “3-” or higher and banks facing continuity risk. - Early warning structure: Supervisory Department and Financial System Monitoring Department supported by Integrated Monitoring System (SIM). - Financial System Monitoring Department receives daily transaction-level information across derivatives, securities, FX, equity, fixed income, clearing houses and trade repositories. - Supervisory actions: - Measures available: imposition of controls; reduction of risk exposures; increases of minimum capital levels; restrictive operational limits; increase of liquidity; restrictions on managers’ compensation and payments to shareholders; restrictions on operations/acquisitions/opening branches; sale of assets. - Watch-list classifications: banks “under attention” (medium-term viability concerns) and banks “under observation” (higher risk; formal correction letters and supervisory action plans). - Information on watch-list status is not passed to the FGC. - Findings and recommendations: - Early warning framework effective but could better link indicators to specific supervisory actions to reduce forbearance. - Recommend linking early warning indicators to specific supervisory actions. - Notify Resolution Department whenever a correction order affects capital, liquidity, or viability and formalize its role in decision-making leading to resolution. - Inform FGC of any bank placed on the watch list, subject to confidentiality safeguards. ### Emergency Liquidity Assistance (ELA) - Legal and operational features: - ELA framed within BCB general authority under Law 4,595 of 1964; CMN can regulate limits and conditions. - FRL prohibits use of public funds to rescue financial institutions except for BCB discount operations and loans with maturities of less than 360 days. - Eligible counterparties: banking institutions; collateral policy set by Law 11,882 of 2008; haircuts applied per schedule; no explicit solvency test for recipient institution. - Decision authority: Deputy Governor for monetary policy for maturities ≤ 15 days; Board of Governors for other cases. - BCB accountable ex post to National Congress each quarter with reporting requirements. - Recent practice and issues: - BCB has not granted ELA in recent years; ordinary liquidity operations used instead. - FGC has effectively provided quasi-ELA and open bank assistance (e.g., BTG Pactual case). - Reasons for shift to FGC include concerns about legal protection in public sector, reputational issues, and avoiding triggering enhanced supervision. - Assessment: - Maintain flexibility but specify safeguards: solvency test tied to remedial plan, enhanced supervision, restructuring measures. - In systemic circumstances when solvency/viability is in doubt, ELA should be provided only upon MoF indemnity with time-bound restructuring (3–6 months). - Formalize decision-making roles of BCB departments and deputy governors; prepare templates, standard contracts and collateral assessment procedures. - Return ELA function to BCB as high priority; discontinue FGC emergency liquidity provision once BCB ELA framework fully operational. - ELA recommendations: - Revise ELA framework to provide a solvency test tied to enhanced supervision, remedial plans, and possible restructuring measures. — BCB — High - Finalize arrangements for prompt operationalization of ELA. — BCB — High - Allow ELA in systemic circumstances upon an MoF indemnity. — BCB — High - Establish decision-making procedures clarifying departmental roles and documentation; enhance preparedness and test ELA procedures. ### Resolution framework: current proceedings, Draft Law changes, and key tools - Current proceedings: - Temporary special administration (RAET), extra-judicial liquidation, and intervention exist; triggers are broad and qualitative and not clearly tied to non-viability assessments. - Over last five years extra-judicial liquidation was the only main proceeding applied; RAET and intervention largely unused. - Proceedings are often lengthy, with low asset recovery and protracted litigation. - Draft Law reforms: - Introduces two proceedings: stabilization and compulsory liquidation, replacing RAET, intervention and extra-judicial liquidation. - Stabilization appoints an administrator with full management powers to execute BCB-determined resolution strategy; compulsory liquidation appoints a liquidator with powers to manage and liquidate. - Shareholders’ rights suspended in both regimes. - Draft Law expands scope to resolve entities licensed by BCB, including financial market infrastructures, and allows extending regime to group entities, controlling shareholders and providers of essential services. - Key tools in Draft Law: - Bail-in: conversion of certain debt into equity based on book value; exclusions include insured deposits, financial instruments held under custody, claims of legal entities under domestic public law, and secured claims; BCB can exclude other liabilities on grounds such as risk to financial stability. - Bridge banks: assets/liabilities may be transferred to bridge banks owned by the FGC with management appointed by BCB; bridge banks are shell entities under private control of the FGC until activated. - NCWOL safeguard introduced only for bail-in (compensation from Resolution Fund if creditors would be worse off than in liquidation). - Draft Law prohibits suspension of decision to adopt a resolution or granting provisional measures by courts; judicial review circumscribed with remedies likely limited to damages. - Design issues and recommendations: - Clarify decision framework between stabilization and compulsory liquidation; adopt a resolution strategy guiding choice of regime. - Introduce forward-looking triggers based on non-viability (e.g., "likely default") to allow earlier entry into resolution. - Broaden bail-in techniques beyond debt-to-equity conversion to include write-downs, principal reduction, and other typical bail-in actions. - Allow valuation mechanisms that can override book value where appropriate (independent valuation, override authority). - Specify suspension and exercise of voting rights post-bail-in; define who exercises those rights. - Add clear statutory rules on bridge banks’ governance and on establishing AMCs, including setup, governance and strategy. - Revisit acquirer’s right to terminate assumed obligations within 12 months. - Extend NCWOL beyond bail-in to other tools that economically mirror bail-in (e.g., asset/liability transfers). - Introduce tiered depositor preference: first tier for insured depositors and the FGC (subrogated claims); second tier for uninsured depositors above other unsecured creditors. ### Resolution funding, FGC role, and deposit insurance - FGC profile and limits: - FGC is a non-profit private association of financial institutions; membership compulsory upon licensing. - As of end-2016, FGC had 183 member institutions. - Ordinary Guarantee coverage: R$ 250,000 per depositor per institution/conglomerate (covers specified deposit types). - Special Guarantee (DPGE) covers up to R$ 20 million; DPGE1 and DPGE2 programs exist. - FGC excludes deposits held abroad and deposits of nonresidents; bylaws being modified to extend coverage to nonresident depositors. - Funding and operations: - FGC funded through ex-ante premiums charged monthly; premiums are not risk-based and identical across institutions. - FGC cannot set its own premiums; dependent on CMN and BCB. - FGC had R$ 33.8 billion in immediately available funds (1.78 percent of the balance of eligible deposits) as of end-2016; target is 2 percent of insured deposits. - Open bank assistance limits: least-cost test; per institution/conglomerate limit 25 percent of FGC net assets; aggregate limit 50 percent of FGC net assets; board can authorize exceedance if BCB recognizes risk to financial stability. - FGC lacks emergency liquidity access to authorities; may solicit extraordinary member contributions or borrow. - Operational weaknesses: - Slow depositor payout due to delays in receiving depositor data from liquidator and absence of Single Customer View (SCV); payout examples show weeks/months delays. - FGC lacks timely supervisory information and cannot adequately prepare for providing open bank assistance or payouts. - Governance conflict: private industry ownership raises concerns over incentives and access to data. - Recommendations on FGC and funding: - Consolidate resolution funding into a Resolution Fund and limit deposit insurance fund remit to payouts or funding transfers of insured deposits. - Strengthen information sharing between BCB and FGC with confidentiality safeguards. — BCB/FGC — High - Require banks to produce deposit data in Single Customer View (SCV) format. — FGC — Medium - Move FGC into the public sector as a fully owned public institution performing a public interest function; if short-term reform is challenging, implement mechanisms to prevent misuse of FGC lending (e.g., BCB “no objection” and analysis of medium-term viability). — FGC/BCB — Medium/High as applicable - Remove restriction on covering deposits of foreign residents. — FGC — High - Emergency liquidity provision by the FGC should be discontinued once the BCB ELA framework is fully operational. ### Crisis management, legal protection, and public support - Crisis management gaps: - Inter-agency coordination among financial safety net participants is ad hoc; COREMEC does not include resolution/crisis planning in its mandate. - Establish formal, high-level crisis coordination with an effective Secretariat and regular multi-agency simulations. - Public support and budgetary constraints: - FRL restricts use of public funds to rescue financial institutions but carves out specific short-term BCB operations; Draft Law introduces an exception for public support in resolution processes under conditions in the law. - Draft Law enables Treasury lending to the Resolution Fund where industry resources and bail-in are insufficient; Treasury repaid by future industry contributions. - Authorities should review budgetary rules to allow prompt temporary recourse to public funds subject to safeguards and recovery mechanisms. - Legal protection: - Current liability regime: BCB staff liable for willful or negligent acts; public entity liability under Constitution allows damages upon proof of causality nexus. - Draft Law raises bar for personal liability of BCB officials to fraud or willful misconduct and extends protection to managers of FGC, administrators and liquidators, and bridge bank management. - Recommendation: adopt the legal protection regime in the Draft Law and extend legal protection to acts/omissions taken in support of foreign resolution measures. ### High-level consolidated recommendations (selection by theme and priority) - Institutional arrangements: - Provide a financial stability mandate of the BCB as resolution authority and strengthen BCB operational autonomy (fixed Board terms; statutory removal constraints; clarify CMN/MoF powers). — MOF/BCB — High - Strengthen inter-institutional arrangements among safety net participants to require cooperation and information exchange. — BCB — Medium - Formalize arrangements among resolution authorities for different financial sector segments on adoption of new regime. — BCB — Medium - Crisis prevention and preparedness: - Link early warning indications to specific supervisory actions. — BCB — High - Inform FGC of any bank placed on watch list once confidentiality procedures are in place. — BCB/FGC — High - Expand RRP regulations to include all banks (notably recovery planning) with proportionality. — BCB — High - Undertake formal inter-agency crisis simulations and exercises. — BCB — Medium - ELA and liquidity: - Revise ELA framework to provide a solvency test tied to enhanced supervision, remedial plans, and restructuring measures. — BCB — High - Finalize arrangements for prompt operationalization of ELA. — BCB — High - Allow ELA in systemic circumstances upon an MoF indemnity. — BCB — High - Resolution framework and tools: - Ensure new resolution framework and stabilization tools can apply to medium and small-sized banks where appropriate. — BCB — High - Provide forward-looking criteria based on non-viability to allow timely entry into resolution. — BCB — High - Broaden bail-in options; clarify bridge bank transactions and AMC powers; facilitate asset/liability transfers. — BCB — High - Introduce tiered depositor preference (first tier: insured depositors and the FGC). — BCB — High - Clarify creditor safeguards, NCWOL scope, and strengthen independent valuation rules. — BCB — High - Funding and deposit insurance: - Strengthen information sharing between BCB and FGC with safeguards. — BCB/FGC — High - Consolidate FGC’s resolution funding into the Resolution Fund; clarify remit between deposit insurance and resolution funding; allow Resolution Fund solvency support in systemic cases; rule out open bank assistance by deposit insurance fund once ELA operational. — FGC — High - Require banks to produce depositor data in SCV format and improve FGC payout capacity with target to payout within 7 days over time. — FGC — High/Medium - Move FGC into the public sector as a fully owned public institution; if short-term challenging, adopt mechanisms to prevent misuse of FGC lending. — FGC/BCB — Medium - Crisis management and legal protection: - Remove impediments to public support in resolution when necessary for financial stability and subject to safeguards and recovery from industry. — MOF — High - Review budgetary rules/procedures to allow prompt temporary recourse to public funds and amend legal framework accordingly. — MOF — High - Establish a high-level inter-agency crisis coordination committee with an effective Secretariat. — MOF/BCB — High - Adopt the legal protection regime provided under the Draft Law and extend protection to acts/omissions supporting foreign resolution measures. — MOF — High *Source: EXECUTIVE SUMMARY and selected chapter excerpts (Technical Note prepared by David Hoelscher and Alessandro Gullo) — cr18341* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Key findings on recent reforms and remaining gaps - Important improvements have been made to the bank resolution, safety net and crisis management framework since the last FSAP, including: - creation, within the Banco Central do Brasil (BCB), of a new Resolution Department; - establishment of requirements for recovery and resolution planning. - The early intervention powers of the BCB are described as "robust and flexible." - Remaining limitations and broadly acknowledged shortcomings: - resolution powers are incomplete; - no formal inter-agency arrangements for crisis management are in place. - The BCB has prepared a comprehensive draft law (the "Draft Law") to introduce a new resolution regime aligned with international best practices; the FSAP provides recommendations on its design and on areas not addressed in the Draft Law. ### Assessment of the Draft Law - The Draft Law represents a major improvement but requires enhancements in clarity and effectiveness. - Improvements introduced by the Draft Law include: - options to restore viability of a failed institution; - broadened toolkit for systemically important institutions, including powers for limited bail-in and bridge banks; - strengthening of the legal protection regime and removal of impediments to temporary public support. - Areas needing clarification: - application of the resolution toolkit to medium and small-sized banks; - details of the bail-in powers; - bridge bank transactions; - conditions for transfers to asset management companies. ### Recovery, resolution planning, and resolvability - The Draft Law requires systemically important domestic banks to prepare recovery plans. - The BCB is beginning resolution planning and resolvability assessments. - Recommendation: extend some form of RRP requirements (notably recovery planning) to non-systemic institutions, subject to proportionality criteria, so that resolution authorities benefit from planning frameworks for any bank in distress. ### Institutional independence and coordination - The effectiveness of the new resolution framework could be strengthened by enhancing the operational autonomy of the BCB: - BCB is the resolution authority for banks and leads resolution of banking groups, but enjoys limited autonomy and is hierarchically under the remit of the Ministry of Finance (MoF); - governor and deputy governors do not have a fixed mandate and the BCB does not set its own budget; - the Governor has ministerial rank and reports directly to the President. - Inter-agency coordination among financial safety net participants is ad hoc and could be improved by establishing a formal, inter-agency crisis management framework. - The framework should be tested with regular multi-agency crisis exercises. ### Emergency Liquidity Assistance (ELA) - The process for dealing with weak banks and providing ELA should be tightened despite robust early intervention powers. - Suggested measures: - adopt a regulation identifying progressively tighter measures tied to early warning indications to address emerging risks; - formalize the role of the Resolution Department in decision-making leading to resolution; - implement measures to limit the risk faced by the BCB, including a solvency test of the recipient institution and escalating measures such as enhanced supervision. - Historical context: ELA has not been used in over 20 years, partly due to banks' concerns about triggering enhanced supervisory actions and easier access to open bank assistance from the deposit guarantee agency (FGC). - Proposal for systemic circumstances: an indemnity of the MoF could operate where solvency is in doubt and sufficient assurances of repayment are not available. ### Funding framework, deposit insurance, and FGC role - The Draft Law adds a new Resolution Fund to complement the deposit insurance fund (FGC), potentially permitting limited use of public resources. - Need for clarity on interaction between the deposit insurance fund and the Resolution Fund to reflect different purposes (deposit protection vs resolution funding). - Recommendations regarding FGC: - strengthen the FGC, including by bringing it into the public sector and ruling out open bank assistance from the deposit insurance fund; - enhance payout arrangements, access to supervisory data (with confidentiality safeguards), and establish back-up funding facilities; - emergency liquidity provision by the FGC should be discontinued once the BCB ELA framework is fully operational; - if solvency support is required in systemic circumstances, provide it from the Resolution Fund and rule out open bank assistance by the deposit insurance fund. - Interim measures: put in place mechanisms to minimize risk of the FGC lending to unviable and insolvent banks. - Strengthen information sharing between the BCB and FGC with related safeguards. ### Crisis management and legal protection - Formal inter-agency coordination arrangements for financial safety net participants should be established; current arrangements are ad hoc and typically do not address resolution and contingency planning. - The BCB has taken a central coordinating role but the role could be formalized with a broad inter-agency framework and regular multi-agency simulations. - The reform of the legal protection regime in the Draft Law is critical: - current standard: BCB staff liability subject to an ordinary negligence standard; - Draft Law proposes raising the bar for liability to a fraud or willful misconduct test; - this change is crucial to strengthen effectiveness of safety net operations, including ELA, depositor protection, and resolution actions. ### Table of Recommendations (high-level summary of key recommendations, implementing agency, and priority) - Institutional Arrangements - Provide for a financial stability mandate of the BCB as a resolution authority and strengthen the operational autonomy of the BCB as a resolution authority. — MOF — High - Strengthen inter-institutional arrangements among financial safety net participants to require cooperation and exchange of information. — BCB — Medium - Formalize arrangements among resolution authorities for different financial sector segments upon adoption of the new regime. — BCB — Medium - Review Draft Law provisions to ensure BCB has clear powers to resolve holding companies and entities providing necessary services. — BCB — High - Crisis Prevention - Link early warning indications to specific supervisory actions. — BCB — High - Inform FGC of any bank placed on the watch list once confidentiality procedures are in place. — BCB/FGC — High - Crisis Preparedness - Expand RRP regulations to include all banks (notably for recovery planning), using proportionality. — BCB — High - Undertake formal inter-agency crisis simulations and exercises. — BCB — Medium - Ensure supervisory MoUs include exchange of information with foreign authorities on resolution plans. — BCB/MoF — Medium - ELA - Revise ELA framework to provide for a solvency test tied to enhanced supervision, remedial plans, and possible restructuring measures. — BCB — High - Finalize arrangements for prompt operationalization of ELA. — BCB — High - Allow ELA in systemic circumstances upon a MoF indemnity. — BCB — High - Resolution Framework - Ensure new resolution framework and stabilization tools can apply to medium and small-sized banks where appropriate. — BCB — High - Provide forward-looking criteria based on non-viability to allow timely entry into resolution. — BCB — High - Broaden options for bail-in, bridge banks, and AMCs. — BCB — High - Introduce tiered depositor preference, with first tier for insured depositors and the FGC. — BCB — High - Clarify creditor safeguards and effects of stabilization and compulsory liquidation; strengthen rules on independent evaluation of failed banks. — BCB — High - Funding - Strengthen information sharing between BCB and FGC with safeguards. — BCB/FGC — High - Consolidate FGC’s resolution funding into the Resolution Fund; incorporate medium-term viability into borrowing criteria; clarify remit between deposit insurance and resolution funding; allow Resolution Fund solvency support in systemic cases; rule out open bank assistance by the deposit insurance fund once ELA operational. — FGC — High - Deposit Insurance - Give FGC timely access to supervisory information for all members, subject to confidentiality. — FGC — High - Require banks to produce deposit data in Single Customer View (SCV) format. — FGC — Medium - Move the FGC into the public sector as a fully owned public institution performing a public interest function; if short-term reform is challenging, put mechanisms in place to prevent misuse of FGC lending. — FGC/BCB — Medium - Remove restriction on covering deposits of foreign residents. — FGC — High - Crisis Management - Remove impediments to public support in resolution processes when necessary for financial stability. — MOF — High - Review budgetary rules and procedures to allow prompt temporary recourse to public funds, and amend legal framework accordingly. — MOF — High - Establish a high-level, inter-agency crisis coordination committee with an effective Secretariat. — MOF/BCB — High - Legal Protection - Adopt the legal protection regime provided under the Draft Law. — MOF — High - Extend legal protection to acts or omissions taken in support of foreign resolution measures. — MOF — High - Priority timing legend included in the source: - High: 6–12 months - Medium: 1–2 years *Source: EXECUTIVE SUMMARY (Technical Note prepared by David Hoelscher and Alessandro Gullo) — cr18341* ### 4. The BCB is the resolution authority for deposit-taking institutions, although it does ### cr18341 - 4. The BCB is the resolution authority for deposit-taking institutions, although it does ### Institutional framework and mandates - The BCB is responsible for licensing, ongoing supervision and resolution of banks, and can: - intervene in problem institutions; - manage a temporary special administration regime; and - initiate and lead extra-judicial liquidation proceedings. - The law does not grant the BCB an explicit financial stability mandate. - The National Monetary Council (“CMN”) has the broader responsibility to ensure the soundness of Brazil’s financial system and is established under Law 4,595 of 1964 (“the Banking Law”) with objectives including ensuring liquidity and solvency of financial institutions. - CMN composition includes the Minister of Finance (Chairperson), the Minister of Planning of Economic Affairs and the BCB Governor; the BCB provides secretariat services. - The legal framework does not explicitly grant rule-making powers on resolution matters to either the CMN or the BCB. - The BCB Board has no fixed term for members; the Constitution gives the President of the Republic exclusive power to appoint the “President and the Directors” of the BCB, upon prior consent of the Senate. - Board is composed of eight deputy governors, with different deputies responsible for supervision and resolution. - There is no fixed term and the President can dismiss the Governor and Deputy Governor at any time without legal requirement to publicly disclose reasons. - The CMN and the MoF exercise administrative power over BCB budgetary and administrative matters, including resolution mandate: - Under the Banking Law, the CMN approves the bylaws and accounts of the BCB and decides on its budget and accounting system, technical and administrative structure, and staff. - BCB bylaws place the BCB under the remit (“autarquia federal vinculada”) of the MoF. - Resources allocated to the BCB resolution department are determined by an annual decision of the BCB Board, within the budgetary envelope approved by Congress for organizational expenses of BCB. - Inter-institutional arrangements exist for regulatory and supervisory matters: - Complementary Law 105/2001 authorizes the BCB to enter into agreements with other financial sector supervisors. - BCB has cooperation and information exchange arrangements with CVM and SUSEP. - COREMEC (Presidential Decree 5,685 of 2006) coordinates financial sector regulatory and supervisory activities under the lead of the MoF. - In resolution of financial conglomerates, the BCB would assume a lead role: - Private and non-federal public financial institutions, and credit cooperatives, are subject to intervention and extra-judicial liquidation by the BCB; regimes also apply to brokerage companies; federal, state-owned public banks are exempted. - The BCB can extend intervention or extra-liquidation to legal entities involved in integrated activities or attached by common interests (e.g., shareholders with more than 10 percent). ### Envisaged reforms (Draft Law) - Draft Law retains BCB as resolution authority for banks and seeks to grant broader rule-making powers: - BCB would continue to resolve banks by commencing either a stabilization regime or a compulsory liquidation regime. - BCB would be authorized to issue a wider range of implementing regulations, within directives adopted by the CMN. - Draft Law introduces sectoral responsibilities and broadens resolution regime scope: - BCB would be resolution authority for financial institutions licensed by it and for financial market infrastructures. - CVM and SUSEP would be empowered, respectively, to resolve securities and insurance companies. - Cooperation and exchange of information between resolution authorities is stated as a principle of the resolution regime. - BCB could extend the resolution regime to legal entities with related interests (e.g., same economic group or conglomerate), to controlling shareholders and managers, and to companies holding ownership stakes in the resolved institution that provide services essential for continuity of the business. ### Assessment: limitations and gaps - The BCB is effectively in charge of resolution processes, but formal mandate has limitations: - Laws regulate proceedings and BCB role without defining an overarching objective for the BCB in resolution. - Banking Law vests the overall competence regarding the soundness of the financial system in the CMN, not the BCB. - Absence of a formal financial stability mandate for the BCB could complicate public, Congressional and government understanding of duties, powers and accountability. - Limited legal autonomy for the BCB: - International best practices recommend operational independence and shielding against undue political or industry influence, including rules for appointment/dismissal and statutory constraints on removal only for reasons specified in law. - These legal arrangements for autonomy are not in place, though no evidence of undue political influence was found by the mission. - CMN’s determination of BCB organizational rules and resources may infringe on BCB autonomy. - Inter-institutional arrangements do not cover resolution or crisis preparation matters: - Existing cooperation arrangements among BCB, CVM, SUSEP are supervisory and do not address resolution or contingency planning. - No formal arrangements exist between the BCB and the FGC; legal impediments related to FGC’s private law status hinder establishing an MoU. - COREMEC’s mandate does not include resolution issues nor crisis planning and management. - Draft Law partially addresses issues but leaves others for separate legal reforms: - Draft Law clarifies resolution objectives and fosters inter-agency cooperation but requires improvements in: autonomy, objectives alignment, rule-making clarity, inter-institutional cooperation, and treatment of holding companies and group entities. - Specific concerns on holding companies and group entities: - Draft Law provisions extending resolution to entities with ownership stakes and providers of essential services conflate distinct cases (holding companies vs. IT service providers). - Not all resolution powers and tools should apply identically to different entity types; lack of clarity may hinder effective implementation of resolution plans. - Draft Law extends regime to individuals (e.g., controlling shareholders and managers) reflecting special liability regimes; legal certainty is needed to minimize legal risks and identify which provisions apply to holding entities, group companies, directors and related parties. ### Recommendations (as stated) - Provide for a financial stability mandate of the BCB as a resolution authority. - Strengthen the operational autonomy of the BCB as a resolution authority by: - providing for a fixed term of the members of the BCB Board of Governors, statutory constraints for possible removal from office, and public disclosure over the reasons of any early dismissal; and - clarifying the powers of the CMN and the MoF to regulate BCB administrative and organizational functioning, by ensuring its operational autonomy. - Clarify the allocation of powers between the CMN and the BCB to issue regulations implementing the provisions of the Draft Law. - Strengthen inter-institutional arrangements among financial safety net participants to require cooperation and exchange of information among them. - Formalize, upon adoption of the new resolution regime, arrangements among resolution authorities for different financial sector segments, clarifying leading role and coordination mechanisms in resolution of financial conglomerates. - Review Draft Law provisions on scope of the resolution regime to ensure BCB has clear and strong powers to resolve holding companies of banking groups and to apply the regime to entities providing services necessary for continuity of critical functions of the firm under resolution. ### Crisis prevention — Early intervention - Supervisory approach and early detection: - BCB supervisory process uses a supervisory cycle with onsite and offsite activities; banks are ranked on quantitative and qualitative indicators. - BCB maintains a watch-list comprising banks with rating “3-” or higher and banks that face continuity risk and whose condition is deteriorating quickly. - Early intervention powers and tools: - BCB has preventive supervisory measures to preserve soundness, stability and regular functioning of the national financial system; objective is early problem addressing. - Measures are deployed at BCB’s discretion; there are no automatic enforcement triggers. - If preventive measures fail, BCB can impose intervention, extra-judicial liquidation, or temporary special administration. - Early warning structure: - Composed of two departments: The Supervisory Department and the Financial System Monitoring Department. - Integrated Monitoring System (SIM) focuses integration and information exchange between the two departments. - Financial System Monitoring Department receives daily transaction-level information on a variety of market instruments (over-the-counter and exchange-traded derivatives, private and public securities, foreign exchange, equity and other fixed income bonds) and monitors loan delinquency, provisions, migration matrix for credit operations, and data from clearing houses and trade repositories. - Indicators are supplemented by qualitative indicators to detect emerging vulnerabilities. - Supervisory actions and heightened monitoring: - Supervisory Department can take actions ranging from discussions with senior management to measures including: (i) imposition of controls; (ii) reduction of risk exposures; (iii) increases of minimum capital levels; (iv) adoption of more restrictive operational limits; (v) increase of liquidity level; (vii) restrictions on managers’ compensation as well as on payments to shareholders; (vii) restrictions on operations, acquisitions, and opening of new branches; and (viii) sale of assets. - Banks subject to enforcement/corrective actions can be placed on a watch list and subject to heightened monitoring involving: (i) monitoring implementation of corrective actions; (ii) requirement for a regularization plan; (iii) appointment of an independent auditor to monitor bank activities; and (iv) expanded reporting. - Watch-list classifications: - Two levels: banks “under attention” and banks “under observation”. - Banks “under observation” are at a higher risk of failure and must have formal correction letters and a supervisory action plan. - Banks “under attention” are those supervisors are concerned about medium-term viability. - Information on watch-list status is not passed to the FGC. - If potential failure could have systemic implications, BCB initiates a financial crisis management plan to coordinate actions with the FGC for each scenario. *Source: cr18341* ### 22. When the Supervision Department determines that an institution is failing or about to ### 22. When the Supervision Department determines that an institution is failing or about to ### Supervision–Resolution coordination and notification - When the Supervision Department determines that an institution is failing or about to fail, it notifies the Resolution Department. The Supervision Department determines the non-viability. - At that point, the two departments jointly consider—informally—resolution options, updating the resolution plan and determining resolution options. - Resolution action is determined by the BCB Board, upon a proposal that can be submitted only by the Deputy Governor for Supervision. - Once the institution fails, the Resolution Department then implements the identified resolution plan. - In case of concerns about the financial conditions of a foreign subsidiary, the supervisor informs the home supervisor about the bank’s conditions and any actions being considered or taken in Brazil. The home supervisor can then adopt appropriate actions in its jurisdiction. - Cross border arrangements are governed by MoUs. The MoUs between the BCB and foreign supervisory authorities focus on the exchange of supervisory information and detail the circumstances and the type of information that can be exchanged, subject to the bank secrecy laws of each jurisdiction. - Typically, the agreements provide that, in the performance of their duties, both authorities must meet the requests for information from the other party, except under a few exceptional circumstances specified in the MoU. ### Early warning framework and supervisory action Findings - The early warning framework is effective and identifies banks with emerging financial difficulties, but the process could be tightened by a stronger linkage between a bank’s financial indicator and supervisory action. - The offsite monitoring has up-to-date information that is quickly processed and it is shared within supervision. - Supervisors have considerable flexibility in determining which actions to take. - A closer linkage between the build-up of risk and specific actions to mitigate those risks could be warranted (e.g., specific actions required as a bank’s capital begins to deteriorate or as liquidity stress emerges). - Supervisory measures could include more formal escalating measures such as enhanced supervision to reduce supervisory forbearance and increasing resolution costs. Recommendations - Link the early warning indicators to specific supervisory actions, reducing the risk of forbearance or delayed response to risk build-up. - The Resolution Department should be notified whenever an institution has a correction order affecting capital, liquidity, or viability and its role in the decision-making process leading to the resolution of a bank by the BCB Board should be formalized. - The FGC should be informed of any bank placed on the watch list. It should be informed whenever supervisory actions are required that affect the solvency of the bank or medium- term viability, even before the bank is classified as weak or about to fail. The FGC, in turn, must establish procedures to ensure that such information remains confidential. ### Contingency plans, recovery plans, and RRPs Findings and existing requirements - Banks are currently required to prepare contingency plans for liquidity and capital shortfalls under Resolution 4,557. - Resolution 4,557 requires that the capital management framework of all banks and banking conglomerates must comprise a capital contingency plan, establishing responsibilities, strategies, and procedures to face stress conditions. - The same Resolution requires that financial institutions implement a risk management structure, which must include a liquidity contingency plan. The verification of these plans is part of the supervisory process. - These plans may be supplemented by the introduction of formal recovery plans. - RRPs are now mandatory for domestic systemically important banks (“D-SIBs”). - The BCB will also evaluate the possibility of extending the requirement to other institutions, possibly including two cooperatives. - The BCB began requiring banks to prepare more detailed recovery plans in 2016. - Recovery plans add requirements including for detailed stress testing, identification of critical functions, a description of governance arrangements, and a communication program. - Recovery plans are currently required from all systemically important institutions: Plans have been required from the five D-SIBs, including the subsidiary of one G-SIFI (Santander). - A phase-in schedule was established: development began in December 2016; preliminary plans are expected to be presented to the BCB in December 2017 and the final approval and implementation by July 2018. After that, the D-SIBs will update their recovery plans annually. - The Supervision Department will assess the recovery plans and will share this content with the Resolution Department. - The BCB has detailed the components of recovery plans in regulation. Banks have been asked to identify: - Critical functions (e.g., critical lending facilities, special financial services, clearing activities, IT and risk management). - Monitoring program: qualitative and quantitative indicators with triggers (an alert for preliminary actions and critical level for more aggressive recovery actions). - Stress scenarios: two types — idiosyncratic events and market-related or systemic shocks; BCB analyses individual results and conducts peer analysis. - Recovery scenarios: range of actions to restore capital and liquidity (e.g., asset sales, expenditure reduction, branch closures); subsidiaries of international banks are not to assume financial support from the parent in their recovery scenarios. - Governance mechanisms: internal governance arrangements specifying responsibilities and authority for implementing recovery mechanisms. - Resolution plans are currently based on the existing resolution framework but will be modified in light of the Draft Law, which will have a wider range of instruments to be considered in the plans. - The Draft Law would provide for resolution planning requirements, under the responsibility of the supervisory authority. These plans will be developed jointly between the supervisory and resolution departments, based on information provided by the banks but under the responsibility of the BCB. - Plans are being developed for banking conglomerates that are domestically systemivally important. The first round of resolution plans is due in mid-2018. - The Draft Law also requires the BCB to assess the effectiveness of the resolution planning for systemically important banks (resolvability assessments). - The Resolution Department has responsibility for both developing the resolution plans and the resolvability assessments. Work on resolvability assessments has yet to be initiated. - The Resolution Department has been focusing on completing the resolution plans for the five D-SIBs. Assessment and issues - The scope for RRPs should be extended to include most banks in the system, with proportionality: small and medium sized banks could provide simpler information and fewer stress tests, larger banks fuller RRPs. - Banks are strictly following the BCB structure but have diverse structures and business models; more flexibility and proportionality could make RRPs more useful. - Potential correlation among recovery measures across banks (e.g., asset sales, branch closures) could hamper implementation in a system-wide disturbance; BCB should analyze overlap and modify plans if overlap is significant. Recommendations - The regulations requiring RRPs could be expanded to include (notably for recovery planning) all banks in the system, with flexibility so the definition of systemic institutions can encompass medium-sized banks as appropriate. - The BCB could urge banks to tailor their recovery plans to match more clearly the bank’s structure. - The BCB should carefully analyse all the recovery plans together looking for correlation among measures. ### Stress testing, crisis simulation, and crisis preparedness Findings - The BCB conducts stress tests including foreign exchange and credit shocks, as well as shocks to liquidity, NPL, funding, and total capital ratio. The results are presented at the joint regulators forum (COROMEC) and used to identify potential weaknesses and in supervisory activities. - In 2017, a crisis simulation tested coordination within the BCB and among safety net players using the “Contingency Plan for Confronting Financial Crises”. - The objective of the Contingency Plan is to prepare the BCB to act quickly and in a coordinated fashion when facing a financial crisis, focusing on policy development within the BCB and coordination with national entities and international authorities. - FGC and FGCoop, although part of the safety net, have not taken part in such tests because they are private associations and are not part of the public sector. - Considerable progress has been made in running crisis simulation and testing of BCB mechanisms; lessons have been learned and incorporated into BCB operations. - Simulations have focused on the BCB; there is scope to expand crisis preparedness to include inter-agency crisis simulations with all safety net regulators and the MoF. - Annual inter-agency tests could be run either on specific operations of the BCB or addressing information sharing and policy development across institutions. Recommendations - The BCB should undertake a formal program for inter-agency crisis simulations and exercises. ### Cross-border coordination Findings - The BCB is both home and host supervisor for several cross-border institutions and has developed arrangements and coordinating mechanisms to exchange information and share analysis. - The BCB is the host supervisor for a subsidiary of a G-SIB (Santander). Resolution of the holding company will be conducted using a multiple point of entry resolution strategy, leaving the BCB also as home resolution authority for the subsidiary. - The BCB has agreed to Cross-border Cooperation Agreements (CoAg) with authorities from EU, Spain and the United Kingdom concerning the Santander Group. This CoAg sets out how members cooperate during normal periods and in times of crisis and would guide resolvability, recovery, or resolution of Santander. - BCB is host supervisor for six other international SIBs and participates in supervisory colleges for Credit Suisse; UBS; Deutsche Bank; JP Morgan Chase; Citibank; and Rabobank. - The BCB is a home supervisor for the two cross-border domestic banks: Banco do Brasil and Itaú-Unibanco. Those institutions have some cross-border activities and have the largest international presence among Brazilian banks. The BCB hosts the supervisory college meetings of these two institutions. However, as Banco do Brasil has concentrated on domestic operations, reducing its international presence, the BCB has temporarily suspended its supervisory college. *Source: IMF staff assessment and recommendations as presented in the provided chapter excerpts.* ### 43. Information sharing poses an obstacle to cross-border cooperation. The BCB has MoUs ### 43. Information sharing poses an obstacle to cross-border cooperation. The BCB has MoUs ### Information sharing and MoUs - The BCB has MoUs with relevant jurisdictions to address information-sharing obstacles to cross-border cooperation. - The MoUs are bilateral and can limit the effectiveness of supervisory colleges if participants have different components in their MoU. - The BCB is in the process of standardizing the MoUs of all members of their supervisory colleges. - Progress on extending MoUs: - The BCB has MoUs with supervisory authorities from countries where Brazilian banks have foreign operations (host authorities) and those where foreign banks have operations in Brazil. - These MoUs aim at facilitating information flows and to allow on-site examinations of subsidiaries in: Cayman Islands, Germany, Indonesia, Mexico, Panama, Paraguay, Portugal, Spain, and the United States and Uruguay. - Most MoUs focus on exchange of supervisory information. - As the review of MoU with the most relevant jurisdictions is underway, consideration should be given to expanding their scope to include exchanging information on early warning of problems and on resolution planning. - Recommendation: - Ensure that the review of the supervisory MoUs, currently underway, include the exchange of information on resolution plans. ### Emergency Liquidity Assistance (ELA) — legal framework and practices - Legal and institutional basis: - The regime for ELA by the BCB is framed within the BCB general authority to provide loans and rediscount operations under Law 4,595 of 1964. - The CMN is authorized to regulate limits, terms, and other conditions. - The Fiscal Responsibility Law (“FRL”) prohibits the use of public funds to rescue or seek the recovery of financial institutions, but carves out from this prohibition BCB’s discount window operations and loans with maturities of less than 360 days.11 - Law 11,882 of 2008 set out collateral policies for loans and rediscount operations, allowing BCB to accept security interest on real property and personal guarantees and authorizing the CMN to set criteria for acceptance and assessment of assets regarding rediscount operations in national currency and loans in foreign currency. - Operational features: - Eligible counterparties for ELA are banking institutions. - Required collateral is determined based on credit risk scores of debtors of securities and loans maintained in the BCB credit information system (SCR); non-marketable assets can also be accepted. - Haircuts apply in accordance with a pre-determined schedule based on types of assets and credit scores. - No explicit solvency test of the recipient institution is in place; the BCB will consider consequences for financial stability if ELA is not disbursed. - A penalty rate applies, with a steeper charge for operations longer than 90 days. - Decision authority: - Deputy Governor for monetary policy decides when maturity is 15 days or lower. - Board of Governors decides in all other cases. - Accountability and confidentiality: - The BCB is accountable to Congress ex post for ELA provided. - The BCB must submit to the National Congress, at the end of each quarter, a report setting out total outstanding amount of rediscount operations and loans, general terms, information detailing performing and non-performing status, and a statement about the impact on the BCB financial condition. - The BCB Governor must present findings in congressional hearings. - Consideration should be given to mechanisms to delay or maintain confidential such reports if public disclosure of ELA operations could undermine confidence in the banking system. - Creditor safeguards: - In case of default, the BCB may alienate, through public offer, assets that secured loans or rediscount operations; alienation not obstructed by intervention, judicial recovery, liquidation, bankruptcy, or civil insolvency proceedings. - These assets will not be part of the estate of the defaulting entity. - Intervention, liquidation, or bankruptcy shall not affect the BCB claims arising from rediscount operations or loans. - Authorities interpret these provisions as giving a super-priority creditor status to the BCB. ### ELA usage and recent practice - The Draft Law contains a very general provision on ELA: - The BCB would be authorized to provide loans and rediscount operations with financial institutions for liquidity, including entities subject to a stabilization regime. - Authorities intend BCB to be able to provide liquidity to the FGC, as owner of the deposit insurance fund and of the resolution fund, as well as to central clearing counterparties. - Recent practice: - The BCB has not granted ELA in recent times. - Ordinary liquidity operations are conducted through the discount window facility on an overnight or intra-day basis. - No ELA has been granted over the last years. - The role of lender of last resort in favor of troubled institutions has been provided by FGC, including recently in the case of the financial assistance to a systemic institution, BTG Pactual. - Factors for the shift of a quasi-ELA to the privately-owned FGC include: - Concerns about lack of legal protection in the public sector; - Preference of banks to borrow from the industry to avoid reputational issues connected with borrowing from BCB; - Avoid triggering enhanced supervisory actions. ### Assessment of the ELA framework - Maintain flexibility: - The BCB currently has wide discretion to give ELA and determine rules and conditions; this can allow performance of lender-of-last-resort role as appropriate. - The Draft Law provision on ELA appears very broad and does not include general principles (e.g., on collateral or a solvency test) to safeguard the central bank. - Specific criteria implementing safeguards could be spelled out in BCB regulations. - Solvency test and remedial requirements: - ELA should be subject to a solvency test tied to a remedial plan and to restructuring measures. - Rules could specify ELA be provided only to viable but illiquid institutions. - When a bank receives ELA, it should be required to submit a remedial action plan and be subject to enhanced supervision. - Plans should be revisited on an ongoing basis, with detailed measures and benchmarks. - In periods of financial turmoil, medium-term, forward looking viability assessments with agreed restructuring measures might be necessary. - Repetitive borrowing from the central bank should represent a red flag and may prompt resolution processes. - Systemic circumstances: - When systemic circumstances are at stake, the BCB could provide ELA under adequate safeguards. - The BCB should ensure a time-bound, qualitative restructuring program that results in a solvent institution within a short period of time (3-6 months) and that the institution is viable in the medium run. - In systemic circumstances when solvency or viability is in doubt or collateral quality unclear, the BCB should seek a guarantee from the government and be indemnified against losses incurred—possibly provided in the context of envisaged amendments to the FRL in the Draft Law. - While authorities believe the MoF obligation to recapitalize the central bank is adequate protection, an explicit indemnity for ELA losses allows faster support for the BCB and enhances credibility. - Such indemnity places decision making on liquidity support and resolution in the remit of both the BCB and the MoF within their respective responsibilities. - Decision-making formalization: - Decision-making should be formalized, leaving general ELA policies to the Board. - Rules should specify roles of various departments (supervision, monetary policy, and resolution) and responsible deputy governors, procedures, and documentation to be examined. - Rules and procedures should aim to reconcile divergent views within the central bank on the condition of the bank and merits of disbursing ELA. - For expediency, consideration could be given to leaving the decision on specific ELA disbursement to the Governor. - Preparedness: - As ELA has not been used recently, it is crucial to review BCB rules and procedures to avoid being unprepared when circumstances materialize. - This entails reviewing templates, processes, standard contracts, collateral requirements, and procedures for prompt assessment of collateral. - Role of the safety net: - Liquidity assistance is a core part of the BCB mandate and should not be the responsibility of private agencies. - The FGC performing lender-of-last-resort poses challenges and sets wrong incentives: risk of confidential information leak, private sector unwillingness or inability to resolve liquidity problems in large or systemic institutions, FGC not equipped to analyze and monitor clients or assess viability. - Concerns about BCB exposure to risks and litigation can be addressed by reviewing rules and procedures and ensuring processes are properly followed when ELA is disbursed. - Strengthening legal protection regime is key to provide assurances to the BCB when disbursing ELA. - Returning the ELA function to the BCB should be a high priority; continued private-sector responsibility could undermine the safety net. - ELA Recommendations: - Revise the ELA framework to provide for a solvency test that is tied to enhanced supervision, remedial plans, and possibly restructuring measures; - Allow for the provision of the ELA in systemic circumstances, when the BCB has concerns about the viability of the recipient institution or the quality of the collateral, upon a MoF indemnity; - Establish the decision-making process for the disbursement, by clarifying the roles of the various BCB departments and deputy governors, through a circular of the Board; and - Enhance preparedness and test ELA against the BCB’s current rules and procedures. ### Resolution framework and funding mechanisms — Resolution powers (current system) - Current proceedings in Brazil’s resolution framework: - Temporary special administration (RAET): - Upon issuance by the BCB of a temporary special administration decree, the bank’s managers and members of the audit committee are replaced by a directors’ council appointed by the BCB, with full management powers over the ordinary course of business. - The bank under RAET remains operational. - Further to a proposal of the directors’ council, the BCB may: - authorize the merger, spin-off or transfer of the shareholding control of the institution; - propose the expropriation, for reasons of public interest, of the shares of the institution, which would be taken over by the state against a contribution determined based on the balance sheet of the institution, prepared by the directors’ council; - initiate the extra-judicial liquidation of the institution. - Under the decree law of 1974, the BCB is authorized to use the monetary reserve fund to remedy the financial condition of the institution; this provision has not been used recently. - Extra-judicial liquidation: - The BCB is empowered to conduct an extra-judicial liquidation by appointing a liquidator to manage the institution, establish value of creditor’s claims, and sell assets with BCB authorization through public auction. - Liquidation triggers payout to insured depositors and suspension of enforcement proceedings against the liquidated institution and acceleration of its obligations. - Acts of the liquidator can be appealed before the BCB. - The law authorizes the liquidator, upon prior authorization of the BCB and to protect public economy and private savings, to alienate institution's properties, settle liabilities, and assign assets to a third party to ensure general or partial continuity of the business. This provision has not been applied due to concerns about possible exposure of the BCB and the liquidator to legal risks. - Intervention: - The BCB can appoint an interventor with full management powers for a period of six months which can be extended for no longer than six additional months. - Intervention triggers depositors’ payouts and suspension of enforcement of matured liabilities against the bank. - The interventor can dispose of assets or encumber them upon BCB authorization. - Intervention has not been applied in recent times by the BCB. - Other proceedings: - Court-led bankruptcy and ordinary liquidation are frequently used, often as a subsequent step to extra-judicial liquidation. - The BCB may authorize the liquidator to file for bankruptcy when assets are not sufficient to cover at least half of the value of the non-privileged credits or when there are indications of bankruptcy crimes. - Extra-judicial liquidation or intervention can be converted into ordinary liquidation conducted under shareholders’ control, in the existence of assurances to the satisfaction of the General Creditor’s Meeting about continuity of the institution—often preferred as an amicable settlement route. - Triggers and powers: - Triggers for RAET, intervention, and extra-judicial liquidation are broad and qualitative (e.g., repeated infractions, existence of covered liabilities, losses putting creditors at risk, engendered financial and economic situation) and are not specifically based on an assessment of non-viability. - Law 9447 of 1997 (Article 6) authorizes temporary special administrator, liquidator and interventor to: - (i) transfer assets, rights and liabilities of the company or of its businesses, individually or together, to other entities; - (ii) assign assets and rights to third parties and agree with the assumption of its liabilities by other societies; and - (iii) work on the constitution or reorganization of an entity or entities to which the assets, rights, and liabilities of the institution submitted to intervention, extra-judicial liquidation, or RAET shall be transferred, partially or as a whole, to permit general or partial continuity of its business. - It is not clear if any requirement for creditors or shareholders’ consent to perform these acts is overridden. - Missing modern resolution features: - The current framework does not provide for FSB Key Attributes–recommended features such as: - “no-creditor worse off than in liquidation” safeguard; - stays from early termination rights; - principle allowing departure from pari passu treatment of creditors in the same class under certain circumstances. - Recent application of proceedings: - Over the last five years, extra-judicial liquidation was the only one of the three main proceedings applied. - RAET and intervention remained unused except for one bank—Banco Cruzeiro do Sul—which was briefly under RAET and then subject to extra-judicial liquidation. - The BCB commenced extra-judicial liquidation processes over six institutions, none deemed systemic. - Of these, three proceedings are ongoing and the other three liquidations have been converted into either bankruptcy or ordinary liquidations conducted by shareholders. - Typically, proceedings are lengthy, with very low asset recovery rates and protracted litigation. - When the liquidator applies for bankruptcy, the proceeding is often left in limbo, with the bankruptcy judge not formally starting the review and the extra-judicial liquidation not yet formally closed. *Source: IMF country report excerpt (as provided).* ### 64. A strict liability regime over controlling shareholders and management of a failed ### 64. A strict liability regime over controlling shareholders and management of a failed institution is in force ### Strict liability regime over controlling shareholders and managers - Persons or legal entities having a control relationship with the institutions subject to RAET, intervention, or extra-judicial liquidation are jointly liable with the managers for the institution’s liabilities. - Their property is unalienable and cannot be encumbered until the relevant proceeding is concluded and their responsibility ascertained by the court. - The prohibition may be extended to those who have acquired assets from managers when this occurred with the intent of avoiding liability. - An objective test for liability applies, whether or not fraud or negligence has been established. - Controlling shareholders are liable only for the uncovered liabilities of the institution. ### Recent liquidation cases (Box 2) — factual summary and selected issues - Over the last five years, six banks were subject to liquidation. - Banco Cruzeiro do Sul S.A.: Initial date 04/Jun/2012 — Closing Date 03/Sep/2015 — Duration 39.5 months - Banco Prosper S.A.: Initial date 14/Sep/2012 — Closing Date 06/Jan/2016 — Duration 40.3 months - Banco Bva S.A.: Initial date 19/Oct/2012 — Closing Date 15/Oct/2014 — Duration 24.2 months - Banco Rural S.A. (conglomerate): Initial date 02/Aug/2013 — Closing Date Ongoing — Duration Ongoing - Banco Brj S.A.: Initial date 13/Aug/2015 — Closing Date Ongoing — Duration Ongoing - Banco Azteca do Brasil S.A.: Initial date 08/Jan/2016 — Closing Date Ongoing — Duration Ongoing - Note: BRJ filed for bankruptcy but the liquidation hasn’t been closed by BCB yet. - Selected case issues: - Banco Cruzeiro do Sul: BCB initiated a RAET with respect to the bank, the holding company and other group companies; FGC attempted market sale; liquidation due to serious irregularities; investigations ongoing with respect to shareholders and directors. - Banco BVA: Certain depositors filed a lawsuit claiming that FGC should pay a higher coverage based on new depositor protection rules passed after commencement of the extra-judicial liquidation (the trigger for depositor payout). - Banco Rural: A regional court suspended payments by FGC in favor of insured depositors for more than two months, claiming that employees should have priority over depositors. ### Judicial review of BCB resolution actions - Resolution decisions taken by the BCB Board can be challenged before federal courts, with the superior court of justice being the last instance. - Other acts (for instance, of the liquidator) can be challenged before state courts; in such cases BCB must be summoned as an interested party and can request that the lawsuit be heard only by the federal courts. - Competent courts can, at least in principle, overturn or suspend resolution decisions while judicial review is pending. - In general, federal courts tend not to enter into the merits of BCB resolution decisions due to the principle of deference to specialized regulatory agencies. ### Envisaged reforms — structure and objectives of the Draft Law - The Draft Law overhauls Brazil’s resolution framework by introducing two different proceedings: stabilization and compulsory liquidation. - Objectives include preserving the public interest and the continuity of critical functions. - Key institutional arrangements: - Stabilization: BCB appoints an administrator (a legal entity or a board of officers) with full management powers and responsibility to execute the resolution strategy determined by the BCB. - Compulsory liquidation: BCB appoints a liquidator (an individual or a legal entity) with full powers to manage and liquidate the failed firm. - In both cases, shareholders’ rights are suspended and taken over by the BCB as resolution authority. - These two regimes would replace the RAET, intervention, and extra-judicial liquidation; court-led bankruptcy processes for banks would remain in place. - BCB would be authorized to resolve all financial institutions licensed by it, including state-owned banks. ### State-owned banks — considerations (Box 3) - State-owned banks account for 40 percent of banking sector’s assets and have aggregate liabilities of R$3,561 billion (57 percent of 2016 GDP), 95 percent of which is owed by Banco do Brasil, Caixa Econômica Federal, and BNDES. - Key design issues for public banks: - Recovery and resolution planning: require state-owned banks to prepare recovery plans and provide input to resolution plans. - Autonomy: operational autonomy of supervisory and resolution authorities supports early intervention and restructuring. - Restructurings: public money injections should be subject to constraints and safeguards, accompanied by restructuring plans or orderly wind-down provisions. ### Triggers and choice of regime - Triggers for stabilization and compulsory liquidation are the same; BCB has discretion to opt for either regime. - Resolution can be activated when institution is not viable, or likely not to be viable, including when it: - (i) is insolvent; - (ii) has insufficient liquidity; - (iii) is failing to observe regulatory requirements; and - (iv) is exposed to risks, or has incurred in losses that may compromise its regular functioning. ### Effects and tools of stabilization and compulsory liquidation - Stabilization (aimed at preserving continuity): - Suspends, for two business days, contractual clauses providing for early maturity, cancellation of service agreements, or exclusion from access to financial market infrastructures; suspension can be extended for up to two business days in certain cases. - BCB may order temporary suspension, for up to two business days, of the maturity of the institution’s obligations, including deposits and investment, except obligations with the central bank and financial market infrastructures, and “offsetting of derivatives”. - Debts and claims under stabilization shall be offset; trading of publicly listed securities automatically suspended. - Administrator hires an appraiser to assess market value of assets and liabilities. - BCB may order transfers of assets, entitlements, and obligations individually or as a pool; formation of subsidiaries, corporate reorganizations, or spin-offs. - Acquiring party entitled to terminate, within twelve months from the transfer, the obligations assumed. - Transfers shall include mechanisms to ensure their “economic and financial equilibrium”; the exact meaning is unclear. - Compulsory liquidation: - Produces effects typical of insolvency proceedings such as acceleration of obligations and suspension of enforcement actions by creditors against the institution’s assets. - Liquidator disposes of assets and verifies and satisfies liabilities; council of creditors provides opinions on settlements and oversees liquidator. - BCB may order the liquidator to transfer assets to an investment fund for managing portfolio and refunding proceeds to shareholders. - BCB, as resolution authority, can advance funds to the liquidated institution to cover essential expenditures. - It is understood compulsory liquidation would trigger depositor payouts by the FGC; it is not fully clear if the liquidator can transfer assets and liabilities (other than insured deposits) in bulk or whether procedural steps are required. - When BCB detects liabilities not covered by the assets, it may require the liquidator to file for bankruptcy. ### Bail-in and bridge bank powers - Bail-in: - BCB empowered to convert certain categories of debt into equity. - After full losses allocated to equity, claims of controlling entities and former directors, and subordinated debt, bail-in would be applied to senior, unsecured debt as well. - For conversion, value of instruments subject to bail-in must be based on their book value. - Certain liabilities automatically excluded from bail-in: insured deposits, financial instruments held under custody, claims of legal entities under domestic public law, and secured claims. - BCB can exclude other liabilities from bail-in upon certain grounds (e.g., risks to financial stability). - Authorities conveyed that, during stabilization, all voting rights would be suspended. Any shareholder that acquires a controlling interest via bail-in or other means will only be able to exercise related voting rights after regime is lifted. BCB intends to establish in secondary legislation that approval of the new shareholder must be decided before regime is lifted. - Bridge banks: - Assets and liabilities of resolved entities may be transferred to bridge banks (“transitional financial institutions”), which would be owned by the FGC (as manager of the resolution fund), with management appointed by the BCB. - Bridge banks would be shell entities under private control of the FGC and not allowed to engage in any financial activity until activated in a resolution process. ### NCWOL safeguard and creditor treatment - The Draft Law introduces NCWOL (no-creditor worse off than in liquidation) only in the case of bail-in. - BCB shall compensate creditors if the amount they would have received in liquidation is higher than what they received as consequence of conversion in a bail-in. - Compensation paid by the resolution fund if the firm under resolution is a member of the resolution fund—which would be intended to be always the case. - Compensation determined based on a report assessing market value of assets and liabilities. - Pari passu treatment: - Draft Law provides that contractual clauses imposing equal treatment of creditors of same class can be disregarded in context of a bail-in or other stabilization tools; unclear whether this permits departure from pari passu in all relevant circumstances with adequate legal certainty. - Creditor hierarchy: - Draft Law does not change general creditor hierarchy rules; insured depositors remain under same status as unsecured creditors. - Previous version of Draft Law explicitly provided depositor preference; current position not settled. ### Judicial curtailment under the Draft Law - Draft Law prohibits suspension of decision to adopt a resolution or granting of provisional measures by the court. - Judicial decisions of first instance affecting acts undertaken by the BCB shall have effect only after being confirmed by a court of second instance. - Authorities consider a provision stating the court may not reverse resolution measures but only award damages to be legally problematic; they note possibility of reversal would be remote. - Relevant provisions are being revised; authorities have designed a provision to circumscribe judicial review to legality of actions and limit remedy to award of damages. ### Assessment and recommendations (excerpt) - Recognition that existing resolution framework is not in line with international standards and must be revised. - Current framework cannot ensure speedy and effective resolution powers; temporary administration does not clearly impose losses on shareholders, and liquidation can be lengthy and costly. - General resolution powers available are not promptly operationalized and have not been applied in recent times. - The Draft Law represents a major improvement: - Provides comprehensive framework with options to restore financial strength and viability, plan orderly failure, and apply broad toolkit including bail-in and bridge bank schemes. - Strives to balance preservation of public interest and financial stability with allocation of losses to shareholders and creditors and allowance for government support in exceptional circumstances. - Issues warranting close attention: - Legal drafting is not always clear; certain areas are not specific or defined enough, increasing legal risks and potentially hindering prompt resolution action. - Technical improvements recommended to remove ambiguity and provide an efficient and cost-effective framework; more specific rules can be added in regulations or secondary legislation. *Source: IMF Country Report excerpt (cr18341).* ### 78. There is scope for improving the design of the various proceedings for failed banks, ### 78. There is scope for improving the design of the various proceedings for failed banks, ### Design and scope of the resolution regime - Unclear decision framework between stabilization and compulsory liquidation: triggers are identical, making it "not fully clear when the BCB would opt for stabilization or compulsory liquidation." - Bankruptcy can only be activated when the BCB decides so; existence of bankruptcy process may create uncertainties and appears to overlap with extra-judicial (compulsory) liquidation. - BCB views extra-judicial/compulsory liquidation as mechanism to control orderly wind-downs, while court bankruptcy "cannot be relied upon." - Need to clarify a resolution strategy that guides BCB action to initiate either stabilization or compulsory liquidation; tools and outcomes differ materially: - Compulsory liquidation → orderly wind-down. - Stabilization → some form of resolution (e.g., purchase and assumption or a bridge transaction). - Importance of retaining flexibility to apply stabilization to small and medium-sized banks where appropriate. ### Triggers for entry into resolution - Current triggers in the Draft Law are "adequately broad" but lack forward-looking criteria (e.g., "likely default" or "likely breach") that would allow earlier intervention. - Draft Law allows, but does not require, the BCB to begin intervention once triggers are met; suggestion to consider automatic triggering "upon a determination that its conditions have been fulfilled" to minimize risk of forbearance, while preserving some BCB discretion to select strategy based on systemic impact. ### Bail-in technique specifics that need review - Haircuts and other loss-absorption tools: - Draft Law contemplates bail-in only as debt-to-equity conversion; it appears not to permit termination or write-down of debt instruments (e.g., reducing principal and/or interest) or other typical bail-in actions (overriding pre-emption rights, exchanging different types of equity/debt, issuing warrants). - Valuation: - Legislation should allow a mechanism to override book value where BCB or independent valuation determines liabilities are incorrectly recorded; otherwise insufficient loss absorption risks requiring public funds. - Voting rights: - Suspension of voting rights in case of debt-for-equity conversion is limited to controlling interest; unclear why not applied to significant holdings (e.g., 10 percent, 20 percent). - Need to specify who would exercise voting rights (e.g., the resolution authority) and how. ### Bridge banks, AMCs, and transfers - Bridge banks: - Draft Law sets regime for bridge banks "before their effective operationalization" but gives limited rules on establishment, governance, and operations after transfers. - Bridge banks would be owned by the FGC (a private association owned by banks), creating need for primary law to spell out general governance principles and the authorities' role over strategy and risk profile. - Asset Management Companies (AMCs): - Unclear if Draft Law empowers establishment of AMCs; a provision allows authorities to "operate a spin-off," but not clearly the legal basis for an AMC. - Suggest adding specific provisions on setup, governance, and strategy of AMCs in the law, with implementation details in regulations. - Transfers of assets and liabilities: - Acquirer’s ability to terminate assumed obligations "within 12 months from the acquisition" should be revisited — risk of leaving transfers in limbo and undermining resolution objectives. - Critical that the BCB has authority to arrange transfers leaving certain liabilities in the shell of the liquidated institution; mechanisms to return assets/liabilities should be under tightly defined circumstances, short timeframes, and close control of resolution authority. ### Creditor treatment, NCWOL, and depositor preference - Pari passu and equal treatment: - Need clarification whether BCB can depart from equal treatment of creditors of the same class in bail-in and other stabilization tools; consider specifying circumstances allowing departure from pari passu treatment. - No Creditor Worse Off (NCWOL) safeguard: - Recommendation to extend NCWOL safeguard to other resolution tools beyond bail-in (e.g., transfers of assets and liabilities that can have equivalent economic effects). - Tiered depositor preference: - Recommendation to introduce tiered depositor preference: - First tier: insured depositors and the FGC (subrogating to their claims). - Second tier: uninsured depositors ranking higher than other unsecured creditors. - Expected benefits: - Facilitates deposit transfers in purchase-and-assume or bridge bank transactions. - May allow FGC to obtain higher recovery rates over the failed institution’s estate. - Helps preserve FGC financial condition and protect the public purse by avoiding depletion of deposit insurance funds. ### Evaluation, valuations, and stabilization effects - Evaluator requirements: - Improve provisions on evaluation of failed bank assets/liabilities: eligibility criteria (e.g., independence), main principles, maintaining list of qualified evaluators for rapid deployment, and mechanisms for preliminary evaluations with ex post final opinions. - Stabilization regime effects: - Clarify distinct effects triggered by stabilization: - Commencement of stabilization should not entitle counterparties to terminate bonds early. - Distinguish moratorium powers to suspend payments from power to temporarily stay specific contracts (e.g., derivatives); clarify the latter in the Draft Law. - Consider making power to suspend trading of securities discretionary rather than automatic and provide coordination measures between resolution authority and securities regulator. ### Recommendations (excerpted and consolidated) - Ensure that the new resolution framework—and its stabilization tools—can apply also to medium and small-sized banks, as appropriate under circumstances. - Upon introduction of the new resolution regime, adopt a resolution strategy that would also inform the authorities’ approach toward stabilization and compulsory liquidation. - Provide for forward-looking criteria, based on the non-viability of a bank, that allow for an early and timely entry into resolution. - Revise the provisions on the resolution toolkit by: - Broadening bail-in options. - Specifying rules for bridge bank transactions. - Clarifying availability of powers to establish an AMC. - Facilitating transfer of assets and liabilities to a healthier purchaser. - Introduce tiered depositor preference, with the first tier applicable to insured depositors and the FGC. - Clarify safeguards available to creditors under the resolution regime and the effects of the stabilization and compulsory liquidation regimes, and strengthen rules regarding independent evaluation of the failed bank. *Source: IMF staff assessment and recommendations on Brazil’s Draft Law on bank resolution (excerpts).* ### 99. In the new law, the use of deposit insurance funds to finance resolution may become ### 99–121. In the new law, the use of deposit insurance funds to finance resolution may become inefficient ### Resolution funding, deposit insurance remit, and systemic banks - Treating resolution of systemically important banks separately from open bank assistance and resolution for non-systemic banks may be ineffective. - Risks and inefficiencies identified: - Continued use of the deposit insurance fund for open bank assistance, without an adequate emergency liquidity back up system, could raise depositor concerns about the solvency of the deposit insurance fund. - Open-bank assistance could deplete the fund and lead to uncertainty about the strength of the deposit insurance system. - Resolution functions for managing systemically important banks and non-systemic banks are similar; having both the deposit insurance fund and the resolution fund undertake resolution raises the question of duplication of work. - The resolution fund will be used infrequently for the resolution of systemically important banks; banks will raise concerns about contributing and, as the fund accumulates resources, pressures would develop to use them for other activities. - Such pressures will be mitigated if the resolution fund is used for more frequent resolution activities. - Proposed institutional change: - The FGC could consolidate all resolution funding into the Resolution Fund and reserve the depositor insurance fund for reimbursing deposits either through direct payout or for financing the transfers of depositors to other viable institutions. - Public confidence would be strengthened if depositors understand that the deposit insurance fund remains for their protection. - Emergency liquidity provision by the FGC should be discontinued once the BCB ELA framework has become fully operational. - If solvency support is required in systemic circumstances, it should be provided from the resolution fund (subject to safeguards, such as prior dilution of existing shareholders and subordinated debt) and open bank assistance from the deposit insurance fund should be ruled out. - Recommendations (from section on resolution funding) - The BCB and FGC should strengthen information sharing and related safeguards. - The remit of the deposit insurance fund should be limited to the payout or the funding of the transfer of insured deposits in resolution processes. - The FGC should consolidate all resolution funding into the Resolution Fund, including by allowing it to provide solvency support in systemic circumstances, subject to safeguards in the interest of taxpayers. - Open bank assistance by the deposit insurance fund should be ruled out once the BCB ELA framework has become fully operational. - The FGC should incorporate an analysis of the medium-term viability of an institution borrowing from it. - In the interim BCB should have to give a “no objection” to any liquidity support, even DPGE2. ### The FGC: membership, guarantees, and coverage - Institutional profile: - The FGC is a non-profit private association composed of financial institutions; its function is to protect depositors and investors by guaranteeing deposits up to a maximum level and provide open bank assistance to members. - Because it is a private institution, its access to information is limited, and so is its participation in crisis preparation and management with other safety net members. - Membership: - FGC membership becomes compulsory for all deposit-taking institutions when the license is issued. - As of the end of June 2016, the FGC had 183-member institutions. - Guarantee schemes: - Ordinary Guarantee: currently limited to the amount of R$ 250,000 per depositor per institution or conglomerate; covers demand deposits, savings deposits, time deposits, bills of exchange, real estate notes, mortgage notes, real estate letters of credit (LCI), agribusiness letters of credit (LCA), repo deals involving securities issued after March 8, 2012. - Special Guarantee: covers creditors holding investments in Time Deposits with Special Guarantee (Depósito a Prazo com Garantia Especial – DPGE) up to R$ 20 million. There are two Special Guarantee programs in place—DPGE1 and DPGE2. - Exclusions and forthcoming changes: - The FGC does not cover deposits, loans or funds held abroad, balances related to programs of government interest, judicial deposits, shares in investment funds, financial instruments with subordination clauses or any other credits not specified in the list. - The FGC also does not cover deposits of nonresidents in the Brazilian banking system nor deposits denominated in foreign exchange. - The bylaws of the FGC are being modified and coverage will be extended to nonresident depositors. ### Funding, limits, and statistics - Funding and premiums: - The FGC funds activities through ex-ante premiums charged to members. Contributions are based on eligible deposits held by each institution and paid on a monthly basis. - The premiums are not risk-based; the rate is identical for all institutions, regardless of their risk profile. - The FGC cannot set its own premiums; it is dependent on the Monetary Council and BCB. - Fund size and targets: - The FGC will soon reach its target level of 2 percent of insured deposits. - As of the end of 2016, FGC had R$ 33.8 billion in immediately available funds, corresponding to 1.78 percent of the balance of eligible deposits in the financial system. - Operational limits on assistance: - Open bank assistance is limited by a least-cost test and by quantitative limits: - Maximum that would be paid out in a liquidation, - 25 percent of the FGC’s net assets per institution/conglomerate, - 50 percent of the FGC’s net assets (aggregate). - FGC’s board can authorize transactions that exceed these limits if the Central Bank issues a document recognizing that the situation at hand is adverse and put at risk financial stability. - Emergency funding constraints: - The FGC does not have access to emergency liquidity funding from the authorities. - The FGC may ask its members for extraordinary contributions of up to 50 percent of the monthly contribution or payment in advance of up to 60 monthly contributions. - It may also borrow from other financial institutions or issue negotiable credit instruments. ### Payout performance, information gaps, and contingency planning - Payout speed and impediments: - Depositor payout is slow and limited by structural impediments; the FGC takes from several weeks to several months to reimburse covered deposits largely due to delays in obtaining depositor data from the liquidator and the absence of a single customer view (SCV). - Case example (Banco Cruzeiro, 2012): - Wholesale deposits equivalent to R$1.8 billion (379 depositors) were paid out in within 6 days. - The remaining R$79 million (2026 depositors) of “ordinary deposits” took the FGC two months to pay. - Information sharing and contingency planning: - There is no formal, comprehensive framework in place for the coordination of activities and information sharing between the deposit insurer and other safety-net participants; coordination is based on personal connections and informal meetings. - The FGC carries out stress tests but does not participate in contingency planning activities. - Greater contact is warranted at both senior and working levels to further improve crisis preparedness, communication, and management. ### Assessment: operational weaknesses and risks - Identified design weaknesses: - FGC cannot prepare for effective evaluation of banks seeking open bank liquidity assistance because it does not receive timely financial data; supervisory information and notification of pending supervisory actions that affect bank viability should be immediately given to FGC, subject to confidentiality safeguards. - FGC cannot prepare for payout because it does not receive adequate deposit information in a timely manner, resulting in slow depositor payout and difficulties in evaluating the strength of borrowers. - The FGC should aim, over time, to develop the capacity to payout in 7 days following a bank’s failure. - The lack of back-up funding is a serious constraint; arrangements should be made with the MoF (or the BCB) for immediate and unambiguous access to emergency liquidity to fulfill its deposit payout obligations. - Contingency plans and tests of operations are limited and could be enhanced; the Draft Law should also introduce emergency back-up funding, preferably from the MoF. - The funding framework is precarious: FGC covers a wide range of instruments outside the normal scope of a deposit insurer and its open bank assistance is set at a maximum of 50 percent of its net assets to a single borrower. Were demands on FGC to exceed available resources, it has no access to emergency backup funding and must turn to the industry. - Overall coverage of deposits is extremely wide and unusual in international comparison; this breadth increases the work of the FGC and the prohibition on covering nonresident deposits is unusual and could create adverse incentives in the financial market. - Governance and conflict-of-interest concerns: - Maintaining the FGC as a private sector association owned and managed by the banking industry raises concerns: limited access to bank data and no access to supervisory reports constrain analysis and preparedness. - Ownership by the banking industry may not provide appropriate incentives to act quickly if systemic risks are at hand; this arrangement can limit the effectiveness of the resolution process and lead to higher resolution costs. - The FGC’s provision of open bank assistance is a quasi-central bank function but without central bank safeguards; automatic access to FGC financing if collateral is adequate could support weak institutions without restructuring plans, delaying resolution. ### Recommendations (FGC structure, operations, and legal changes) - Operational and information reforms: - The FGC should have access to timely, direct information for all of FGC’s members, including supervisory data subject to appropriate confidentiality safeguards. - Banks should be required to provide depositor data in SCV format. - The FGC should develop a time bound plan to reduce the payout period. - The FGC should have contingency plans and procedures for payout, financial assistance, and assistance to systemic banks, also to facilitate prompt transfers of insured deposits in the case of a purchase and assumption transaction. A multi-year plan could be devised outlining payout simulations using de-identified data, failure simulations, and desktop communication exercises with other safety-net organizations. - The restriction on covering deposits of foreign residents should be removed. - Institutional and governance reforms: - The FGC should be moved into the public sector—by transforming it into a fully owned public institution, performing a public interest function regulated by law – and included in high-level crisis management committees. - Even if this reform proves challenging in the short term, adequate mechanisms should ensure that FGC lending does not artificially maintain the operation of weak banks without restructuring plans (including through a right of “no objection” by the BCB for any liquidity support, and by incorporating an analysis of the medium-term viability of an institution borrowing from the FGC). - The FGC should have access to emergency liquidity support from the MoF (or the BCB) in case it is unable to meet the demands for deposit payout. - The FGC should evaluate more completely its revenue base. Given the wide scope of its coverage, consideration could be given to expanding its revenue base. ### Crisis management regime and legal constraints on public support - BCB crisis management capabilities: - BCB can monitor deposit runs on a daily basis and with one-day lag and can conduct stress tests targeted to identify and monitor sound banks exposed to deposit runs due to flight to quality behavior. - BCB has established a high-level policy group for managing systemic-wide crises composed of the BCB’s governor and deputy governors and other internal and external relevant stakeholders; supported by teams charged with rapid collection and analysis of information and preparation of clear policy options. - Coordination gaps: - While Brazil has several formal high-level policy bodies, they do not fully conform with the requirements for a systemic monitoring regime; the CMN does not provide a forum for discussing and analysing broad financial issues and high-level coordination arrangements remain ad hoc. - Legal constraints: - The FRL restricts the injection of public money into troubled financial institutions: “unless provided otherwise under specific law, public funds must not be used to rescue financial institutions, even through recovery loans or financing aimed at enabling the transfer of the shareholders control.” - The FRL also requires that the prevention of insolvency and other risks be exercised through funds and other mechanisms established by the industry. - The Constitution provides that a legal entity indebted to the social welfare system may not contract with the government nor receive benefits or fiscal or credit incentives; this is applied, for instance, when the BCB considers giving ELA and verifies that the potential recipient has no debts vis-à-vis the social welfare system. - Draft Law change: - The Draft Law would remove some of the impediments to public support in the context of a resolution by introducing an exception in the FRL to carve out support given in the context of resolution processes, under the conditions set out in the law. *International Monetary Fund — Selected excerpts from PDF chapter/section cr18341.* ### 122. As described above, the Draft Law allows for the possibility of support for the ### cr18341 - 122. As described above, the Draft Law allows for the possibility of support for the ### Resolution funding and public support for large complex institutions - The Draft Law allows for the possibility of support for the resolution of large complex institutions. - The Resolution Fund, managed by the FGC, will have the ability to fund large bank resolution. - If resources from the write-down of equity and subordinated debt, capital buffers, and bail in of senior creditors is insufficient, the treasury will be able to lend to the Resolution Fund to cover the remaining resolution costs. - The Treasury will be repaid by future contributions of the industry. - The mechanism may be effective for individual failures but additional mechanisms may be needed for broader public sector support to the financial sector in a systemic crisis. - The FGC could play a role but more direct lending could be required. ### Assessment of removing impediments to public support (paragraphs 123–126) - The removal of the impediments to public support in resolution is appropriate, insofar as: - it is temporary, - based on financial stability reasons, - and subject to adequate safeguards. - International standards recognize that resolution regimes may provide for temporary recourse to public funds when necessary for financial stability and safeguards are in place to recover the costs from the industry. 23 - Amending the FRL to provide for this possibility is appropriate, while preserving fiscal discipline by ensuring: - recourse to public funds is temporary, - recourse is justified on financial stability reasons, - appropriate mechanisms allocate losses to shareholders and creditors of failed banks, - costs are recovered from the industry. - Further analysis is required to understand procedures and mechanisms that would allow prompt support of public funds in resolution: - Authorities’ understanding: when public support is needed and is confined within the budget approved by Congress, funding would take place through a presidential decree and no burdensome procedures for budgetary appropriation would be needed. - This conclusion needs confirmation, including whether different considerations apply based on the nature of support provided (e.g., equity or loans). - Establishing a formal high-level crisis coordination committee is recommended to strengthen the crisis management framework: - Current structure is ad hoc and not formally designed to address broad issues driving a systemic crisis. - The committee could be made more effective by establishing an effective Secretariat, capable of gathering data from a wide range of agencies and preparing policy options. - Consideration could be given to using, for these purposes, COREMEC by expanding its mandate. - The restrictions on public funding currently limit policy tools needed in a systemic crisis; the new law introduces the option but procedures and policies must be developed to govern provision of such funds as part of a crisis situation. - Authorities should ensure mechanisms are available should multiple banks need financial support. ### Recommendations (resolution funding and crisis management) - Remove, as provided under the Draft Law, impediments to public support in resolution processes, when such support is necessary for financial stability reasons and under safeguards allowing for the recovery of the support. - Review the budgetary rules and procedures to allow prompt temporary recourse to public funds subject to the above constraints, and amend the legal framework accordingly. - Establish a formal high-level crisis coordination committee with an effective Secretariat. - Ensure that the emergency mechanisms for funding the resolution of a G-SIB or highly complex financial institution are developed. - Develop contingency plans for public support in the event of a systemic crisis. ### Legal protection: current regime and proposed changes (paragraphs 127–130) Findings - The Constitution provides a general liability regime applicable to public entities (including to BCB as a resolution authority). - BCB staff is liable for acts or omissions that are willful or negligent. - Under the Constitution, public legal entities are liable for damages that any of their agents cause to third parties, and will have the right of recourse against the agent in cases of malice or fault. - The party seeking damages only has to prove a causality nexus—i.e., that the damage was caused by the action of the agent—regardless of any culpability of the agent. - BCB staff is liable for any acts or omissions relating to resolution actions which are willful or negligent and cause damage. - The BCB Governor has the status of a minister, and his/her actions can be challenged only before the superior court of justice. - Interventors, temporary administrators, and liquidators are not subject to the liability regime of civil servants, but are liable under the rules of the civil code, which provide for a liability test based on willful default or negligence, and on the existence of damages. - When lawsuits are brought against them, the BCB Governor, deputy governors, and staff are represented by the BCB Legal Department; the same protection applies to those who had these positions at the time of the relevant act or omission; the BCB would cover the costs and expenses of the legal assistance. - Challenges against BCB officials have been rare in recent times; authorities report very few cases of challenges against BCB officials for resolution measures, and no recent cases where damages have been awarded. - The Draft Law would significantly enhance the legal protection regime: - The bar to ascertain liability would be raised so that BCB officials would be liable only in case of fraud or willful misconduct. - The legal protection regime would extend to the managers of the FGC, the administrators and liquidators of failed institutions, and to the management of bridge banks. - The BCB—as a resolution authority—would continue to be liable according to the objective test set out in the Constitution. - Given limitations of the existing framework and the risk that fear of unjustified liability leads to inaction, it is critical that the legal protection regime be promptly enhanced. Recommendations (legal protection) - Adopt the legal protection regime provided under the Draft Law. - Extend the legal protection regime for acts or omissions taken in support of foreign resolution measures. *Source: cr18341 - 122. As described above, the Draft Law allows for the possibility of support for the — PDF chapter/section.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18341.pdf_