## 1braea2026002

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### Executive Summary — Overview and Macro-Financial Context
- Financial system characteristics:
  - Bank-dominated with large capital markets and a sizeable investment fund industry.
  - Top five banks, including two state-owned banks, constitute 60 percent of banking assets.
  - Investment funds concentrated in fixed-income securities.
  - Domestic crypto market significant; USD-pegged stablecoins expanded rapidly since 2017.
- Recent macro-financial indicators:
  - Real GDP growth averaged 3.0 percent from 2022-2025.
  - BCB raised rates from September 2024 to June 2025, then cut rates twice to 14.5 percent in 2026.
  - Gross general government debt rose to 93.3 percent.
  - Net interest bill was 7.7 percent of GDP in 2025.
  - Government cash buffers amount to 14 percent of GDP.
  - Credit developments:
    - Household debt service-to-income ratio high and rising, driven by unsecured consumer loans like credit cards.
  - Natural disasters and climate physical risks (floods, storms, extreme temperatures) are rising and pose growing financial stability risks.
  - Geopolitical shock note: outbreak of the war in the Middle East increased uncertainty; Brazil is relatively cushioned as a net oil exporter but a prolonged conflict could raise inflation, tighten financial conditions, and weaken global demand.

### Banking System Structure, Performance, and Resilience
- Structure and size:
  - Total banking system assets amount to 145 percent of GDP.
  - Five DSIBs represent about 60 percent of banking assets.
- Capital and liquidity:
  - Aggregate CET1 ratio at 14.2 percent at end-2025 (solvency stress test baseline starts at 13.6 percent at end-2025 in some models).
  - System-level Liquidity Coverage Ratio (LCR) stood at 199 percent in 2025.
  - System median LCR: 205 percent; DSIBs median LCR: 167 percent.
  - Net Stable Funding Ratio (NSFR): 121 percent.
- Asset quality and profitability:
  - Banks’ exposures to the sovereign amount to about 30 percent of total assets.
  - NPL ratios increased following COVID-19 and remain at 2020 levels; Non-performing loans to total gross loans: 2.7 1.9 2.1 2.6 2.8 2.7 3.9 (2019–2025 series).
  - Provision coverage ratio pertaining to NPLs amounted to 56 percent at end-2025.
  - Banking system is profitable, well-capitalized, and liquid in aggregate; some banks fall short of capital requirements but their aggregate share of system assets is small.
  - A mid-sized bank faced distress in 2025 and was liquidated by the BCB without system-wide repercussions.

### Systemic Risk Analysis — Scenarios and Market Stress Calibration
- Scenario set (2026–2028):
  - Baseline: follows the IMF’s April 2026 WEO projections.
  - Recessionary scenario:
    - Real GDP contracts by -6.5 percent cumulatively over 2026–2027, 11.3 percentage points below historical mean growth (equivalent to 2.7 standard deviations).
    - Negative output gap and disinflation with falling policy rates below baseline.
  - Sovereign debt distress scenario:
    - Real GDP contracts by -8.3 percent over 2026–2027 (13.1 percentage points below historical mean growth, equivalent to 3.1 standard deviations).
    - Includes sharper FX depreciation, higher risk premia, inflation increases and policy rates hike.
- Market risk analysis:
  - Short-term market distress calibrated to 7- or 30-day windows using tail conditional means.
  - Assumptions include increases in risk-free yields and risk premia, commodity and equity price drops, and BRL depreciation.

### Bank Solvency Stress Testing — Key Findings and Sensitivities
- Scope and baseline dynamics:
  - 83 banks covered, representing 95 percent of banking sector assets; supervisory data end-2025.
  - Hurdle rate: minimum capital requirement (4.5 percent CET1) plus regulatory buffers (DSIB buffers and Pillar II add-on); capital conservation buffer included in baseline but excluded in adverse scenarios.
- Aggregate outcomes:
  - Aggregate CET1 capital ratio starts at 13.6 percent at end-2025 and rises to 15.8 percent by end-2028 in the baseline.
  - Capital depletion relative to starting value: 370 basis points under the sovereign debt distress scenario and 79 basis points under the recessionary scenario.
  - Aggregate capital ratio remains above the hurdle rate in both adverse scenarios.
- Bank-level impacts (sovereign debt distress scenario):
  - None of the DSIBs fall below their hurdle rates; two medium-sized banks and 14 small-sized banks would breach the hurdle.
  - Aggregate capital shortfall is 0.2 percent of GDP (0.1 percent of total system assets, 1 percent of system CET1 capital).
  - At the trough, DSIBs stand on aggregate 210bps above the hurdle; medium- and small-sized banks have buffers over 760bps.
  - Initial CET1 ratios: 12.3 percent for DSIBs and 15.9 percent for non-DSIBs.
  - Capital depletion relative to starting point: 407bps for DSIBs and 305bps for non-DSIBs.
  - Digital banks perform relatively well: lower initial capital ratios but stronger profitability.
- Deferred tax assets (DTAs) transitional impact:
  - DTAs subject to phase-out amount to 3 percent of RWAs for DSIBs and 0.6 percent for non-DSIBs at end-2025.
  - Assuming one-seventh of initial DTA stock is used annually, FSAP finds an additional 64bps decline in aggregate CET1 under the severe adverse scenario; system remains above hurdle.
  - DSIBs most affected: additional 94bps capital depletion by 2027 and one DSIB falling below the hurdle.
  - Number of banks below hurdle rises from 16 to 20; aggregate capital shortfall remains 0.3 percent of GDP.
- Sensitivity exercises highlights:
  - Market price revaluation of amortized cost assets: capital impact 45bps; banks below hurdle increase from 16 to 19; shortfall remains 0.2 percent of GDP.
  - NIM compression from digital bank competition:
    - Assumes fintech lenders increase consumer credit market share by 50 percent (from about 5 to 7.5 percent).
    - Assumes 30bps annual NIM compression; by end-2028 aggregate CET1 impact is 85bps (DSIBs most affected at 115bps).
    - Banks below hurdle rise from 16 to 20; aggregate capital shortfall increases to 0.3 percent of GDP.
  - Additional stress on consumer credit PD:
    - Consumer credit PD increases by 3pp in 2026 and 1.5pp in 2027 relative to sovereign debt distress scenario.
    - Results in additional 90bps capital depletion on aggregate; DSIBs face 100bps additional depletion, remaining on aggregate 112bps above their hurdle.
    - Banks below hurdle increase from 16 to 21; shortfall increases to 0.3 percent of GDP.
  - Large exposures sensitivity: most adverse configuration (75 percent unsecured LGD and 50 percent collateral haircut) leads to substantial aggregate CET1 decline (text truncated in source).

### Bank Liquidity Stress Testing — Funding and Stress Outcomes
- Funding structure:
  - Deposits constitute 56 percent of total funding: corporate 20 percent; household 14 percent.
  - Secured funding accounts for 24 percent of system funding, rising to 30 percent for DSIBs.
  - Investment funds act as main counterparties in repos (78 percent).
- Regulatory ratios and stress results:
  - System median LCR: 205 percent; NSFR: 121 percent; DSIBs median LCR: 167 percent.
  - Aggregate counterbalancing capacity (CBC) remains adequate under one-week and one-month horizons.
  - Three banks experience a gross total shortfall of 30 basis points of the system’s initial CBC but hold sufficient alternative measures.
  - Under a more severe haircut scenario, gross shortfall rises to 33 basis points of the system’s initial CBC and causes an additional overall decline of 7 percentage points of the system’s initial CBC.
  - DSIBs most impacted due to extensive secured funding positions and potential collateral calls.
- Policy recommendations:
  - Expand dedicated liquidity templates to capture maturity ladders at least up to a quarter and monitor significant foreign currencies (e.g., USD).
  - Conduct targeted analyses of DSIBs for contingent liquidity risks from repo dynamics and collateral calls.
  - Implement standardized templates to close data gaps on inflows/outflows.

### Investment Fund and Bank–Fund Interconnectedness Risks
- Investment funds structure and exposures:
  - Investment funds equal 84 percent of GDP and are concentrated in government securities.
  - Reverse-repo exposures: funds extensively use reverse repo cash lending to banks; collateral generally includes longer-duration sovereign bonds.
  - Leverage structurally low due to exposure-to-capital based regulation; no such limits on FIF and FIIM.
- Interconnectedness and contagion amplification:
  - Fund-to-fund chains can extend beyond ten layers; some funds indirectly connected to more than 5,000 others.
  - Estimated spillover amplification: about 38 percent increase unweighted and 14 percent when weighted by assets under management.
- Fire-sale model outcomes:
  - Cross-sectional average losses around 23 percent; losses for the most severely affected funds exceed 40 percent.
  - Fire-sale pressures most pronounced for medium term government bonds.
  - Sensitivity: outcomes parameter-dependent and could become materially larger under higher volatility or alternative liquidation strategies.
- Bank–fund network mapping (CoMap):
  - Mapped 83 banks and approximately 32,000 investment funds with over 183,000 bilateral connections across six exposure layers.
  - Four DSIBs sit at the core of the network with highest contagion impact, particularly on medium-sized banks.
  - Inclusion of investment funds amplifies systemic risk relative to banks-only networks: higher contagion, more frequent simulated defaults and severe distress.
- Monitoring recommendations:
  - Incorporate multi-layer fund-to-fund connections and indirect exposures in monitoring.
  - Grant the central bank explicit authority to conduct secondary market interventions for financial stability and establish liquidity facilities for NBFIs.

### Insurance Sector Stress Tests and Climate Risk Analysis
- Insurance solvency stress test:
  - Scope: 149 institutions, accounting for 96 percent of total assets as of December 2025.
  - System solvency ratio declined from 185 to 177 under the stress scenario.
  - 6 percent of institutions fall below 100 percent solvency ratio, including one S1 institution.
  - Life insurers most affected; reinsurers least affected.
  - Recommendation: SUSEP should systematically use stress testing and strengthen analysis of climate risk transfer mechanisms; outcomes should inform ORSA reviews.
- Climate risk analysis:
  - Method: hazard probabilities from historical disasters; loan portfolios mapped at municipality level; damage for droughts, floods, storms translated into LGD and PD channels and fed into OMEGA model; reinsurance flows analyzed via network framework.
  - Findings:
    - Physical climate risks generate heterogeneous but currently limited system-wide bank impacts; large dispersion across banks.
    - Credit losses arise mainly through LGD increases—especially for mortgage and real estate exposures; PD increases highest for transport sector.
    - LGD-driven capital impacts increase nonlinearly with hazard severity and geographic extent.
    - Reinsurance provides diversification but bilateral dependencies can amplify pricing cycles and settlement frictions, transmitting stress back to banks.
  - Caution: more severe/widespread hazards would materially increase annual impacts.

### Holistic Vulnerability Analysis and Policy Implications
- Composite vulnerability index:
  - Banks ranked 1 (most vulnerable) to 83 (least vulnerable) across metrics: initial capital, profitability, liquidity, solvency, liquidity stress, interconnectedness, climate risk.
  - DSIBs tend to display more vulnerability than other clusters, supporting the appropriateness of additional prudential requirements for DSIBs.
- Stress-testing and data recommendations:
  - Enhance stress testing to capture NBFI risks, market-credit interactions, and large fintechs with bank-like models.
  - Incorporate sovereign and corporate credit risk premia shocks in market-risk analysis.
  - Align credit risk stress-testing methodology with IFRS 9 principles.
  - Require reporting of individual entities (CNPJ for domestic, LEI for foreign) forming internal “Groups of Connected Counterparties.”

### Macroprudential Framework, Borrower-Based Measures, and Supervision
- Macroprudential toolkit and PN-CCyB:
  - CCyB currently at zero.
  - Indicative PN-CCyB range of 1–2 percent informed by stress tests; a 1.5 percent PN-CCyB (mid-point) could fully absorb aggregate capital decline in the first scenario and largely in the second.
- Borrower-based measure simulation:
  - A 40 percent DSTI cap on 2025 originations would have lowered mean DSTI ratio by 5 percentage points (excluding mortgages and most credit card loans) and reduced outstanding household credit by about 5.6 percent.
  - Alternative thresholds of 35 and 45 percent produce directionally similar impacts.
- Supervision strengths and gaps:
  - BCB has state-of-the-art reporting, monitoring, and risk-based supervision but faces staffing resource erosion and needs full budgetary autonomy.
  - Recommendations:
    - Strengthen operational autonomy and budgetary resources for BCB.
    - Enshrine legal protections for supervisors.
    - Extend proportionate recovery planning to selected medium-sized/higher-risk institutions.
    - Build specialist capacity for complex risk measurement, stress testing, and internal models.
    - Increase on-site inspections and deepen off-site supervision.
    - Improve definitions and discretionary powers related to related-party transactions; require board approval for exposures exceeding specified amounts or posing special risks.

### Securities, Crypto, FMIs, Payments, Cybersecurity, and Consumer Protection
- Securities and market infrastructure:
  - Equity market largest in South America; derivatives market well-developed.
  - Money markets dominated by overnight government bond repo market.
  - Investment funds manage assets equivalent to approximately 80 percent of GDP; government debt securities account for 29 percent of bank assets.
  - CVM needs strengthened human and systems resources; resume on-site inspections and upgrade surveillance technology.
- Crypto-assets and CASP framework gaps:
  - Key gaps: segregation and insolvency protection of client assets; legal basis to regulate crypto-asset issuance (including stablecoins); regulation of stablecoin issuers; cooperation channels with foreign regulators; risk-based capital requirements.
  - Recommendation: supplement CASP gatekeeper model with stablecoin regulation aligned with international standards; finalize prudential requirements for stand-alone CASPs and CASP-led conglomerates; clarify custody-chain treatment of client assets.
  - Findings on stablecoins: cross-border crypto flows growing faster than traditional capital flows and nominal GDP; between one-third and two-thirds of variance in stablecoin purchases explained by external factors; stablecoin flows two to three times more sensitive to global shocks than traditional portfolio or FDI flows.
- FMIs and concentration:
  - Multiple systemically important FMI functions concentrated within a single group; require adequate oversight, business-risk requirements, and credible recovery and wind-down plans.
- Pix and payments:
  - Pix catalyzed inclusion and competition; BCB should formalize Pix oversight policy, separate operational and oversight functions, and adopt a comprehensive integrated risk management framework.
- Cybersecurity:
  - Regulatory framework broadly aligned with international standards; recommendations to expand guidance on incident reporting, red teaming, penetration testing, and API security requirements; increase staffing.
- Financial consumer protection and AML/CFT:
  - Establish responsible lending rules and clearer supervisory expectations; consider hard limits in specific circumstances.
  - AML/CFT framework comprehensive but constrained by capacity and sanctioning governance; ensure CASPs apply preventive measures and build supervisory capacity.

### Crisis Management, Resolution, ELA, and Safety Nets
- Resolution framework and deposit insurance:
  - Draft Resolution Law submitted in December 2019 remains with Congress; adopting a modernized resolution framework is critical.
  - BCB has instituted recovery and resolution planning and prepared resolution plans for DSIBs; extending proportionate recovery planning to all banks recommended.
  - FGC issues:
    - FGC is not entitled to confidential depositor data and is not part of a high-level crisis committee; confidentiality constraints hinder payout preparedness.
    - Recommendation: implement plan to reduce payout period to seven days; remove open bank assistance function of FGC as it may expose the fund to significant risk or losses (authorities disagreed with removal).
    - Interim measures: mechanisms to better safeguard FGC lending and add pre-arranged public back-up funding; adopt depositor preference in law.
- Central bank liquidity assistance and ELA:
  - BCB formalized Liquidity Facilities in 2021; Term Liquidity Facility (LLT) serves as the ELA instrument.
  - BCB can intervene in fixed-income markets and deploy FX swaps, U.S. dollar credit lines, and spot FX auctions.
  - Gaps and recommendations:
    - Grant BCB authority to intervene in securities markets for financial stability and establish liquidity facilities for NBFIs.
    - Extend liquidity assistance authority to cover securities markets, nonbank institutions, and FMIs; strengthen collateral prepositioning and revalidate haircut modeling.
    - Communicate forward-looking solvency assessment approach for ELA and reassess spreads on policy rates for facilities.
- Developmental finance:
  - Infrastructure finance: shift toward private financing; recommend cost-benefit analyses for phasing out incentives, stricter use-of-proceeds standards, and review impediments to unlocking pension and investment fund capital.
  - Housing finance: priority reforms include strengthening FGTS external oversight and governance, enabling greater commercial bank participation, transitioning away from declining savings-based funding, and scaling up initiatives for lower-income households.

### Authorities’ Views and Implementation Status Highlights
- Authorities largely concur that the financial sector remains resilient; FSAP findings broadly align with BCB’s Financial Stability Report.
- Authorities’ actions since 2018 include:
  - Improving legal protections and independence of the central bank.
  - Embedding a macroprudential framework and employing macroprudential tools.
  - Implementing IFRS 9.
  - Strengthening regulation of investment funds and governance of deposit insurance fund.
  - Developing recovery and resolution planning for banks.
- Implementation status (selected):
  - COREMEC re-established 2020 with financial stability objective but remains advisory without comply-or-explain mechanism.
  - Complementary Law 179 of 2021 enhanced BCB autonomy but did not establish legal protection for BCB staff or full financial and administrative independence.
  - CVM and SUSEP resource increases partly implemented; CVM hired new examiners early 2025; SUSEP’s 2025 budget increased discretionary resources.
  - Pillar 2 capital add-ons implemented in BCB supervisory methodology.
  - Draft bank resolution law (Bill of Law 281 of 2019) pending in lower chamber.
  - AML/CFT national risk assessment completed and published in 2021.

### Selected Key Recommendations (high level)
- Operationalize a positive neutral countercyclical capital buffer (PN-CCyB) for banks (indicative PN-CCyB range 1–2 percent; 1.5 percent midpoint highlighted).
- Introduce a debt-service-to-income (DSTI) ratio cap tailored to feasibility and impact analysis (counterfactual: 40 percent DSTI cap on 2025 originations reduced mean DSTI by 5 percentage points and outstanding household credit by about 5.6 percent).
- Strengthen BCB capacity and secure budgetary and administrative autonomy; enhance legal protections for staff actions taken in good faith.
- Complete legal and regulatory framework for crypto-assets and CASPs with client asset protection, stablecoin issuer powers, and international cooperation arrangements.
- Adopt a modern statutory bank resolution regime in compliance with international standards; prioritize enactment of Draft Resolution Law.
- Formalize Pix oversight policy, separate operational and oversight functions, and adopt integrated risk management for Pix.
- Enhance market surveillance, trading oversight, and inspection programs for broker-dealers; upgrade CVM resources.
- Strengthen cybersecurity supervision, incident reporting standards, and testing requirements.
- Grant BCB authority to intervene in secondary securities markets for financial stability purposes and to establish liquidity facilities for NBFIs.

### Selected Statistics and Indicators (excerpted)
- Financial Soundness Indicators (selected rows, 2019–2025 in per cent where shown):
  - Regulatory capital to risk-weighted assets: 19.4 19.1 18.4 17.5 17.9 17.1 17.2
  - Regulatory Tier 1 capital to risk-weighted assets: 16.0 16.4 16.0 15.3 15.8 15.4 15.5
  - Tier 1 capital to assets: 9.6 8.7 8.8 8.8 8.9 8.2 8.3
  - Non-performing loans to total gross loans: 2.7 1.9 2.1 2.6 2.8 2.7 3.9
  - Return on assets: 2.0 1.9 2.4 2.1 1.6 1.8 1.6
  - Return on equity: 15.8 11.7 14.9 15.3 13.7 15.3 14.9
  - Liquidity coverage ratio: 221.5 229.0 173.9 169.8 184.6 188.9 199.4
  - Liquid assets to short-term liabilities: 260.8 308.5 199.7 194.5 240.5 238.4 264.9
  - Liquid assets to total assets: 13.6 16.3 12.7 11.7 13.8 13.4 15.0
- Structural observations:
  - Investment funds manage assets equivalent to approximately 80 percent of GDP (also referenced as 84 percent of GDP elsewhere in the chapter).
  - Government debt securities account for 29 percent of bank assets.
  - Household and NFC credit account for 24 and 15 percent respectively.
  - In 2024, the BRL depreciated over twenty percent against the USD, with some reversal in 2025.
  - Inflation declined to levels within the target inflation interval in 2026.
  - Stablecoin usage increased sharply since 2020, especially in cross-border transactions.

*Source: EXECUTIVE SUMMARY and chapter content, 1braea2026002.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Overview
- The Brazilian financial system is large and diverse: bank-dominated with large capital markets and a sizeable investment fund industry.
- The top five banks, including two state-owned banks, constitute 60 percent of banking assets.
- Digital transformation has prompted new competition and efficiency.
- The investment funds sector is concentrated in fixed-income securities.
- Secondary markets have expanded since the 2018 FSAP.
- The domestic crypto market is significant.

### Macro-Financial Context
- Real GDP growth averaged 3.0 percent from 2022-2025.
- The BCB raised rates from September 2024 to June 2025, then cut rates twice to 14.5 percent in 2026.
- Gross general government debt rose to 93.3 percent.
- Net interest bill was 7.7 percent of GDP in 2025.
- Government cash buffers amount to 14 percent of GDP.
- Credit developments:
  - Credit growth supported the consumption-led recovery but is slowing as high interest rates weigh on household and corporate debt servicing burdens.
  - Household debt service-to-income ratio is high and rising, driven by unsecured consumer loans like credit cards.
- Natural disasters and climate physical risks (floods, storms, extreme temperatures) are rising and pose growing financial stability risks.
- The outbreak of the war in the Middle East has increased uncertainty; Brazil is relatively cushioned as a net oil exporter with a relatively clean energy mix, but a prolonged conflict could raise inflation, tighten financial conditions, and weaken global demand.

### Banking System Structure and Performance
- Total banking system assets amount to 145 percent of GDP.
- Five DSIBs represent about 60 percent of banking assets.
- Aggregate capital and liquidity:
  - Aggregate CET1 ratio at 14.2 percent at end-2025.
  - System-level Liquidity Coverage Ratio (LCR) stood at 199 percent in 2025.
- Banks’ exposures to the sovereign amount to about 30 percent of total assets.
- Asset quality:
  - NPL ratios increased following COVID-19 and remain at 2020 levels.
  - Provision coverage ratio pertaining to NPLs amounted to 56 percent at end-2025.
- Profitability and resilience:
  - The banking system is profitable, well-capitalized, and liquid in aggregate.
  - Several banks fall short of capital requirements, but their aggregate share of system assets is small.
- A mid-sized bank faced distress in 2025 and was liquidated by the BCB without system-wide repercussions.

### Systemic Risk Analysis and Stress Testing—Key Findings
- Solvency stress tests:
  - The system remains resilient under severe macro-financial shocks, with high profitability cushioning capital depletion among the largest banks.
  - Planned phase-out of deferred tax assets will strengthen capital quality but may temporarily weigh on resilience of some banks.
- Liquidity stress tests:
  - The system is resilient; stress under a large-outflow scenario is limited to a few banks that make up a small fraction of system assets.
- Insurance sector:
  - The small insurance sector is broadly resilient to severe shocks; life insurers are most affected and reinsurers least affected.
- Nonbank financial interlinkages:
  - Banks and investment funds are highly interconnected.
  - Stress originating in funds could prompt severe adverse price feedback into bond markets.

### Financial Sector Oversight—Assessment and Gaps
- Macroprudential framework:
  - Strengthened since 2018; continued expansion of monitoring and analysis needed as markets innovate.
  - Next steps include operationalizing a counter-cyclical capital buffer (including a positive-neutral reference) and introducing a debt-service-to-income ratio cap to support household borrower and bank resilience.
- Banking supervision:
  - Significant progress since the previous FSAP; BCB has state-of-the-art reporting and monitoring and a comprehensive risk-based supervision framework.
  - Urgent need for additional resources and full budgetary autonomy for BCB to protect gains.
  - Staffing resource erosion has reduced analytical depth and onsite examinations, impeding supervisory intensity.
  - Need for more timely escalation and intervention for identified risks; legal protection and independence have improved but remain a concern.
- Investment funds and securities markets:
  - Regulatory framework improved with developments in data reporting and liquidity requirements.
  - CVM needs reinforcement of human and systems resources to adopt a more hands-on approach as products and trading venues evolve.
- Crypto regulation:
  - New framework in place for crypto assets; further enhancements needed, including:
    - Ensuring legal protection of customer assets under custody.
    - Regulation of stablecoin issuers.
    - Cooperation channels with foreign regulators.
    - Risk-based capital requirements.
- Pix instant payment system:
  - Has become an important catalyst of inclusion and competition.
  - BCB should formalize Pix oversight policy, separate operational and oversight functions, and adopt a comprehensive integrated risk management framework.
- Cybersecurity:
  - BCB has prioritized addressing rising cybersecurity risks.
  - Regulatory framework broadly aligned with international standards but could expand guidance on incident reporting, red teaming and penetration testing, and API security requirements.

### Crisis Management and Financial Safety Nets
- Resolution and deposit insurance:
  - Adoption of a Draft Resolution Law has remained with Congress since 2019; adopting a modernized resolution framework in line with international standards is critical.
  - BCB has instituted recovery and resolution planning and prepared resolution plans for DSIBs.
  - Extending proportionate recovery planning to all banks would further improve supervision.
  - BCB should develop procedures to share information with the deposit insurer (FGC) on early interventions and provide more timely information to prepare depositor payouts.
  - FGC’s open bank assistance function may expose the fund to significant risk or losses and should be discontinued.
- Emergency Liquidity Assistance (ELA):
  - A framework for ELA is in place; collateral prepositioning has been introduced.
  - Improvements include extending liquidity assistance authority to cover securities markets, nonbank institutions, and FMIs, and strengthening prepositioning.
- Central bank powers:
  - Recommend granting BCB authority to intervene in secondary securities markets for financial stability purposes and to establish liquidity facilities for non-bank financial institutions when liquidity-constrained NBFIs or FMIs pose systemic risk.

### Selected Key Recommendations (high level)
- Operationalize a positive neutral countercyclical capital buffer (PN-CCyB) for banks.
- Introduce a debt-service-to-income (DSTI) ratio cap tailored to feasibility and impact analysis.
- Strengthen BCB capacity and secure budgetary and administrative autonomy; enhance legal protections for staff actions taken in good faith.
- Complete legal and regulatory framework for crypto-assets and CASPs with client asset protection, stablecoin issuer powers, and international cooperation arrangements.
- Adopt a modern statutory bank resolution regime in compliance with international standards.
- Formalize Pix oversight policy, separate operational and oversight functions, and adopt integrated risk management for Pix.
- Enhance market surveillance, trading oversight, and inspection programs for broker-dealers.
- Strengthen cybersecurity supervision, incident reporting standards, and testing requirements.

*Source: EXECUTIVE SUMMARY, 1braea2026002.*

### 18.5 percent of GDP in funding to corporates, up from 7 percent in 2018 (Annex Figure 4). The

### 1braea2026002 - 18.5 percent of GDP in funding to corporates, up from 7 percent in 2018 (Annex Figure 4). The

### Financial market structure and crypto-asset developments
- Equity market is the largest in South America; derivatives market is well-developed with sustained demand for hedging across FX, interest rates, equities, and commodities.
- Money markets dominated by the overnight government bond repo market—with banks, investment funds, and the central bank as the dominant players.
- Investment funds equal 84 percent of GDP and are concentrated in fixed income holdings, in particular in government securities.
- Crypto-asset market expansion:
  - The crypto-asset market in Brazil—particularly USD-pegged stablecoins—has expanded rapidly since 2017.
  - Cross-border crypto flows have been steadily increasing, growing faster than traditional capital flows and nominal GDP (Annex Figure 9).
  - Estimates suggest that between one-third and two-thirds of the variance in stablecoin purchases is explained by external factors such as the VIX, Bitcoin prices, the S&P 500, and others—making stablecoin flows two to three times more sensitive to global shocks than traditional portfolio or FDI flows.
  - Domestic factors found relevant include the exchange rate, interest rates, policy uncertainty, and changes in the IOF tax.
  - Conclusion: While systemic financial stability risks related to crypto currently appear contained, the rapid growth of crypto activity, including stablecoins, warrants close monitoring.

### Digital transformation and fintech effects
- Emergence of digital banks and the instant payment system (Pix) has increased competition and enhanced efficiency in the financial system.
- Digital banks have reduced banking sector concentration and foster competition and efficiency, leading to lower lending rates.
- Pix is a low-cost, widely accessible payment system that has catalyzed a shift to digital services.
- Cyber-attacks and digitally-enabled fraud have become primary risks.
- Note: Digital banks can have specific risks not well-captured by current models; recommendation that BCB develop models specifically for this cluster.

### Systemic Risk Analysis — A. Macro-Financial Scenarios
- SRA assessed resilience of banks and other financial sector entities against a baseline and two adverse scenarios spanning 2026–2028.
- Scenario definitions:
  - Baseline: follows the IMF’s April 2026 World Economic Outlook (WEO) projections.
  - Recessionary scenario: synchronized global economic slowdown, widening credit spreads, term premium decompression, and a confidence loss that dampens aggregate demand.
    - Real GDP contracts by -6.5 percent cumulatively over 2026–2027, 11.3 percentage points below historical mean growth (equivalent to 2.7 standard deviations).
    - Negative output gap and disinflation with falling policy rates below baseline; heightened financial market volatility, moderate exchange rate depreciation, and significant equity price drops.
  - Sovereign debt distress scenario: includes the global layer of the recessionary scenario plus a confidence crisis element related to Brazil’s fiscal position, leading to a risk-off event.
    - Real GDP contracts by -8.3 percent over 2026–2027 (13.1 percentage points below historical mean growth, equivalent to 3.1 standard deviations).
    - Sharper FX depreciation, even higher risk premia, inflation increases and policy rates hike.
- Market risk analysis:
  - Short-term market distress scenario calibrated to a window of 7 or 30 days.
  - Variables expressed as 7 or 30 day percentage changes (or percentage point changes for yields).
  - Calibration based on conditional mean of each variable within the 0.1 percent lower (or upper) tail of marginal distribution.
  - Assumptions: risk-free yields and risk premia increase (differentiated for BRL- and USD-denominated instruments); commodity prices and domestic and global stock prices drop sharply; BRL depreciates.

### Systemic Risk Analysis — B. Nonfinancial Corporate Sector Risk Analysis and Stress Testing
- Corporate financing shifts:
  - Earmarked credit for firms decreased from 14 percent of GDP in 2015 to 8 percent in 2025, primarily due to the 2018 reform of the national development bank.
  - Large corporates increased debt securities stock from an annual 6 percent to 19 percent of GDP over the past decade.
  - Both demand and supply factors drove expansion of corporate leverage: investor preference for bonds in a high-interest rate environment; firms favor bond issuance over bank loans due to lower spreads and tax-exempt earnings on certain bonds.
  - Most debentures issued by large companies in services and utilities; typically feature floating interest rates, increasing susceptibility to rising interest rates.
- Stress test methodology:
  - Data from about 8,000 Brazilian firms; corporate balance sheets forecast for 2026-2028 conditional on scenarios.
  - PD and LGD metrics from Moody’s CreditEdge; company financial data from Capital IQ Pro.
  - Simulated variables: total revenues, cost of goods sold, other operating expenses, net interest expenses, and taxes.
- Stress test outcomes:
  - In a sovereign debt distress scenario, total debt among firms with interest coverage ratios below one could more than double—to around 17 percent of GDP—surpassing the peaks of 2015-16.
  - Both large corporations and mid-sized firms would see PDs and LGDs reach levels last seen during Brazil’s 2015-16 recession period.
  - Findings from Figure 4:
    - Firm borrowing costs are historically high and would increase further in the sovereign debt distress scenario.
    - Leverage increased since 2018 for large corporations but declined for MSME.
    - Earnings before interest and taxes and return on assets have improved since 2018, supporting resilience.
    - Proportion of firms with low interest coverage ratios would increase under adverse scenarios, though not as much as in 2015–16.
    - Total debt among companies with low ICR under adverse scenarios would exceed 2015–16 levels due to higher leverage among large firms.

### Systemic Risk Analysis — C. Bank Solvency Stress Testing
- Scope and model:
  - Scenario-based solvency stress test included 83 banks, covering 95 percent of banking sector assets, using end-2025 supervisory data.
  - Model accounts for credit risk, market risk, interest rate risk, fee and commission income.
  - Hurdle rate set to minimum capital requirement (4.5 percent for CET1 ratio) plus regulatory buffers (DSIB buffers and Pillar II add-on); capital conservation buffer included in baseline hurdle but excluded in adverse scenarios.
- Aggregate results:
  - Aggregate CET1 capital ratio starts at 13.6 percent at end-2025 and rises to 15.8 percent by end-2028 in the baseline.
  - Capital depletion relative to starting value: 370 basis points under the sovereign debt distress scenario and 79 basis points under the recessionary scenario.
  - Aggregate capital ratio remains above the hurdle rate in both adverse scenarios.
- Bank-level impacts:
  - In the sovereign debt distress scenario:
    - None of the DSIBs fall below their hurdle rates; two medium-sized banks and 14 small-sized banks would breach the hurdle.
    - Aggregate capital shortfall is 0.2 percent of GDP (0.1 percent of total system assets, 1 percent of system CET1 capital).
    - At the trough, DSIBs stand on aggregate 210bps above the hurdle; medium- and small-sized banks have buffers over 760bps.
    - Initial CET1 ratios: 12.3 percent for DSIBs and 15.9 percent for non-DSIBs.
    - Capital depletion relative to starting point: 407bps for DSIBs and 305bps for non-DSIBs.
    - Digital banks perform better than other clusters, with lower initial capital ratios but stronger profitability.
- Deferred tax assets (DTAs) transitional arrangement:
  - At end-2025, banks—particularly DSIBs—held sizeable DTAs from timing differences between accounting loss recognition and tax deductibility.
  - Under phase-out rule, DTAs subject to phase-out amount to 3 percent of RWAs for DSIBs and 0.6 percent for non-DSIBs.
  - Assuming one-seventh of initial DTA stock is used annually for tax deductions (with unused amounts converted into carryforwards), the FSAP finds an additional 64bps decline in aggregate CET1 ratio under the severe adverse scenario; system remains above hurdle rate.
  - DSIBs most affected: additional 94bps capital depletion by 2027 and one DSIB falling below the hurdle.
  - Number of banks below hurdle rises from 16 to 20; aggregate capital shortfall remains 0.3 percent of GDP.
  - Note: Banks can opt between a 7 and 10 year amortization period; for this exercise, all banks are assumed to have a 7 year transition.
- Sensitivity exercises (reference: sovereign debt distress scenario without DTA transitional impact):
  - Market price revaluation of amortized cost financial assets: capital impact 45bps because most assets classified at fair value; banks below hurdle increase from 16 to 19; shortfall remains 0.2 percent of GDP.
  - NIM compression from greater competition by digital banks:
    - Assumes fintech lenders increase consumer credit market share by 50 percent, from about 5 to 7.5 percent.
    - Scenario assumes a 30bps annual NIM compression throughout the stress test horizon.
    - By end-2028, aggregate CET1 impact is 85bps; DSIBs most affected at 115bps.
    - Banks below hurdle rise from 16 to 20; aggregate capital shortfall increases to 0.3 percent of GDP.
  - Additional stress on consumer credit PD:
    - Consumer credit PD increase by an additional 3pp in 2026 and 1.5pp in 2027 relative to sovereign debt distress scenario.
    - Results in additional 90bps capital depletion on aggregate.
    - DSIBs face 100bps additional depletion, remaining on aggregate 112bps above their hurdle rate.
    - Banks below hurdle increase from 16 to 21; shortfall increases to 0.3 percent of GDP.
  - Large exposures sensitivity:
    - Top 5 nonfinancial exposures for each bank assumed to default under various LGD and collateral haircut assumptions.
    - Loss from each defaulting large exposure is calculated and added to Y2 of the sovereign debt distress scenario.
    - In the most adverse configuration considered (75 percent unsecured LGD and 50 percent haircut on collateral), the aggregate CET1 declines to [text truncated in source].

*International Monetary Fund*

### 8.3 percent, still above the hurdle rate at the

### 8.3 percent, still above the hurdle rate at the

### Solvency Stress Test — Banks
- Number of banks falling below hurdle presented by subgroup (Figure 5): explicit subgroup counts shown in source figures (e.g., DSIBs, Medium, Small, non-Digital, Digital, Private, Public, Total).
- Baseline, Recessionary, and Sov. Debt Distress scenarios applied in solvency stress testing (Figure 5).
- Key finding: Several banks fall below the hurdle under stress scenarios; subgroup breakdowns shown in staff-calculated figures.

### Bank Liquidity Stress Testing
- Funding structure:
  - Deposits constitute 56 percent of total funding: corporate 20 percent; household 14 percent.
  - Secured funding accounts for 24 percent of system funding, rising to 30 percent for DSIBs.
  - Investment funds act as main counterparties in repos (78 percent).
- Regulatory ratios:
  - System median Liquidity Coverage Ratio (LCR): 205 percent.
  - Net Stable Funding Ratio (NSFR): 121 percent.
  - DSIBs median LCR: 167 percent.
- Stress-test results:
  - Aggregate counterbalancing capacity (CBC) remains adequate under one-week and one-month horizons.
  - Three banks experience a gross total shortfall of 30 basis points of the system’s initial CBC but hold sufficient alternative measures.
  - Under a more severe haircut scenario, gross shortfall rises to 33 basis points of the system’s initial CBC and causes an additional overall decline of 7 percentage points of the system’s initial CBC.
  - DSIBs are the most impacted subgroup due to extensive secured funding positions and potential collateral calls.
- Policy recommendations:
  - Expand dedicated liquidity templates to capture maturity ladders at least up to a quarter and to monitor liquidity risk in significant foreign currencies, such as the USD.
  - Conduct targeted analyses of DSIBs to better capture contingent liquidity risks from repo market dynamics, collateral calls, and potential maturity mismatches.
  - Implement standardized templates submitted by financial institutions to close data gaps on specific inflows/outflows and reduce operational burdens.

### Investment Fund Risk Analysis
- Reverse-repo exposures:
  - Investment funds extensively use reverse repo cash lending to banks; collateral generally includes longer-duration sovereign bonds.
- Interconnectedness and leverage:
  - Leverage in Brazilian funds is structurally low due to exposure-to-capital based regulation; no such limits on FIF and FIIM.
  - Fund-to-fund chains can extend beyond ten layers; some funds indirectly connected to more than 5,000 others.
  - Estimated spillover amplification: about 38 percent increase on an unweighted basis and 14 percent when weighted by assets under management.
- Fire-sale (contagion) model results:
  - Cross-sectional average losses around 23 percent; losses for the most severely affected funds exceed 40 percent.
  - Fire sale pressures most pronounced for medium term government bonds.
  - Sensitivity analysis: contagion outcomes are parameter dependent and could become materially larger under higher volatility or alternative liquidation strategies.
- Monitoring and policy implications:
  - Monitoring frameworks should incorporate multi-layer fund-to-fund connections and indirect exposures beyond single-layer analysis.
  - Enhanced oversight of tail risks in large investment funds is warranted.
  - Recommendation to grant the central bank explicit authority to conduct secondary market interventions for financial stability purposes and to establish liquidity facilities for NBFIs.

### Bank — Investment Fund Interconnectedness
- Network scope:
  - CoMap model mapped 83 banks and approximately 32,000 investment funds with over 183,000 bilateral connections across six exposure layers: deposits, loans, bonds, repos, listed equity, and fund shares.
- Key contagion findings:
  - Four DSIBs sit at the core of the network with highest contagion impact, particularly on medium-sized banks.
  - Inclusion of investment funds amplifies systemic risk relative to banks-only networks: higher contagion, more frequent simulated defaults and severe distress.
  - No individual bank currently resides in the quadrant of simultaneously high contagion and high vulnerability.
- Modeling caveats:
  - CoMap stresses cascading defaults without modelling behavioral mitigating actions or extraordinary authority interventions.
  - Exclusion of insurers and pension funds due to data limits constrains completeness.
  - More granular collateral-level mapping of repo volumes is needed to fully capture secured funding runs and collateral fire sales.
- Recommendations:
  - BCB should implement integrated model-based metrics (similar to CoMap) for routine monitoring.
  - Integrate granular datasets from trading platforms, credit registries, and regulatory reporting into unified analytical infrastructure.
  - Require banks to map individual entities (CNPJ for domestic, LEI for foreign) within their internal “Groups of Connected Counterparties” in Large Exposures reporting.

### Insurance Solvency Stress Test
- Coverage and approach:
  - Scope: 149 institutions, accounting for 96 percent of total assets as of December 2025.
  - Market‑risk‑focused stress test using same scenarios as banking exercise; cash‑flow‑based revaluation; excluded unit‑linked products.
- Results:
  - System solvency ratio declined from 185 to 177 under the stress scenario.
  - 6 percent of institutions fall below 100 percent solvency ratio, including one S1 institution.
  - System‑wide financial asset losses occur, milder for reinsurers; life insurers show largest liability revaluation effects.
  - Capital impacts mostly negative though some institutions experience positive effects.
- Sensitivities:
  - Spread between IPCA and IGP‑M assessed; adverse effects particularly on life insurers.
- Recommendation:
  - SUSEP should systematically use stress testing and strengthen analysis of climate risk transfer mechanisms; stress test outcomes should inform ORSA reviews.

### Climate Risk Analysis
- Methodology:
  - Hazard probabilities estimated using historical disasters and structural trends; loan portfolios mapped at municipality level (SSP3, 90th percentile).
  - Damage estimated for droughts, floods, storms; translated into portfolio losses via LGD and PD channels and fed into the OMEGA model.
  - Reinsurance flows analyzed using a network framework to capture insurance-mediated transfers.
- Findings:
  - Physical climate risks generate heterogeneous but currently limited system-wide bank impacts; large dispersion across banks.
  - Credit losses arise mainly through LGD increases—especially for mortgage and real estate exposures; PD increases are sector-specific (highest for transport).
  - LGD-driven capital impacts increase nonlinearly with hazard severity and geographic extent.
  - Reinsurance structure provides system-wide diversification but also pronounced bilateral dependencies that can amplify pricing cycles and create settlement frictions, potentially transmitting stress back to banks.
- Caution:
  - Results subject to analytical limitations; more severe/widespread hazards would materially increase annual impacts.

### Holistic Vulnerability Analysis for Banks
- Composite index:
  - Banks ranked 1 (most vulnerable) to 83 (least vulnerable) across metrics: initial capital, profitability, liquidity, solvency, liquidity stress, interconnectedness, climate risk.
  - A weighted-average ranking (weights displayed in source Figure 14) produced a composite vulnerability index.
- Key result:
  - DSIBs tend to display more vulnerability than other clusters across the metrics, supporting the appropriateness of additional prudential requirements for DSIBs.

### Recommendations from the Systemic Risk Analysis
- Stress-testing and scope:
  - Enhance stress testing to capture risks from NBFIs and market-credit interactions; include large fintechs with bank-like models.
  - Incorporate shocks to sovereign and corporate credit risk premia in market-risk analysis given banking system sensitivity to sovereign exposures.
  - Align credit risk stress-testing methodology with IFRS 9 principles to capture earlier recognition of credit deterioration and cliff effects between Stage 1 and Stage 2 provisioning.
- Data and reporting:
  - Adopt a framework requiring institutions to report specific individual entities (CNPJ for domestic, LEI for foreign) that form their internal “Groups of Connected Counterparties” to enable common-exposure analysis.
- Insurance and climate:
  - SUSEP to use stress testing systematically and assess climate risk transfer mechanisms, including insurance-linked securities.
  - Strengthen structured inter-agency collaboration (MoF, BCB, SUSEP, MDR, MCTI, MAPA, CEMADEN, and others) on climate-related financial risks; a broader scope agency such as the Ministry of Finance should lead efforts.

### Macroprudential Policy and Banking Supervision
- Macroprudential toolkit and CCyB:
  - Toolkit and systemic monitoring have strengthened; CCyB currently at zero.
  - Indicative PN-CCyB range of 1–2 percent informed by stress tests; a 1.5 percent PN-CCyB (mid-point) could fully absorb aggregate capital decline in the first scenario and largely in the second (Figure 15).
  - Calibration should consider multiple approaches, policy judgment, scenario selection, model uncertainty, and ensure the neutral rate exceeds expected CET1 depletion by a prudent margin.
- Borrower-based measures:
  - Counterfactual DSTI simulation: a 40 percent DSTI cap on 2025 originations would have lowered mean DSTI ratio by 5 percentage points (excluding mortgages and most credit card loans) and reduced outstanding household credit by about 5.6 percent.
  - Alternative thresholds of 35 and 45 percent produce directionally similar impacts.
- Supervision strengths and gaps:
  - BCB has a sophisticated risk-based supervisory framework and advanced data/analytical capabilities; staffing shortages and insufficient legal protections remain critical constraints.
  - Recommendations:
    - Strengthen operational autonomy and budgetary resources for BCB.
    - Enshrine legal protections for supervisors.
    - Extend proportionate recovery planning to selected medium-sized/higher-risk institutions.
    - Build specialist capacity for complex risk measurement, stress testing, and internal models.
    - Improve definitions and discretionary powers related to related-party transactions; require board approval for exposures exceeding specified amounts or posing special risks.
    - Increase on-site inspections and deepen off-site supervision; recalibrate supervisory approach and tools.

### Securities, Crypto, Market Infrastructures, and Payments
- Securities and derivatives:
  - Progress made, but supervisory resources at CVM remain inadequate; CVM’s limited budgetary autonomy and Commissioner vacancies constrain effectiveness.
  - Need to upgrade CVM in-house surveillance technology, resume on-site inspections, strengthen broker-dealer licensing, and reduce reliance on market operators and SROs.
- Crypto regulation:
  - BCB oversight introduced for CASPs and crypto flows but framework incomplete.
  - Key gaps: segregation and insolvency protection of client assets; legal basis to regulate crypto-asset issuance (including stablecoins).
  - Recommendation: supplement CASP gatekeeper model with stablecoin regulation aligned with international standards (e.g., FSB Global Stablecoin Arrangement recommendations), finalize prudential requirements for stand-alone CASPs and CASP-led conglomerates, and clarify custody-chain treatment of client assets.
- Financial Market Infrastructures (FMIs):
  - Concentration risk: multiple systemically important FMI functions within a single group (both systemically important CCPs in one corporate group).
  - Recommendations: ensure sufficient oversight resources, mandate adequate general-business-risk requirements, and require credible recovery and orderly wind-down plans that account for group-level interdependencies.
- Fast payments (Pix):
  - Pix’s growing criticality suggests need for strengthened operational resilience, formalized BCB oversight policy, separation of oversight and operational functions, and consideration of liquidity arrangements for stress scenarios.
- Cybersecurity:
  - Cybersecurity risk supervision broadly aligned with international standards but staffing should be increased; incident reporting and testing requirements should be enhanced (e.g., red teaming, threat-led penetration testing); add explicit coverage for APIs in regulation.
- Financial consumer protection:
  - Establish responsible lending rules and clearer supervisory expectations; consider hard limits in specific circumstances (e.g., limits on rollovers of payroll-deducted loans); enhance marketing oversight and disclosure rules.
- AML/CFT:
  - Framework is comprehensive and risk-based for banks but constrained by capacity and sanctioning governance; strengthen resources and sanctioning powers.
  - New CASP obligations introduced but gaps remain: travel rule implementation delayed and suspension of CASPs from FIU reporting portal may impact crime detection and data quality; ensure CASPs apply preventive measures and build supervisory capacity.

### Crisis Management and Financial Safety Nets
- Bank resolution:
  - Improvements since 2018 FSAP: comprehensive RRP framework approved and first plans submitted; BCB autonomy strengthened legally; bilateral agreements with domestic authorities in place.
  - Key remaining gap: absence of legislation establishing a modernized resolution regime; Draft Resolution Law submitted in December 2019 has made no progress.
  - Recommendations:
    - Prioritize adoption of a modernized resolution regime.
    - Strengthen BCB’s operational (financial) autonomy and legal protections for staff, including for acts supporting foreign resolution measures.
    - Establish a formal high-level crisis coordination committee including FGC.
    - Develop internal procedures for information sharing with FGC on early interventions and reflect procedures in MoU.
    - Extend proportionate recovery planning requirements to all banks.

*Source: IMF staff calculations and analyses as presented in the provided chapter content.*

### 68. The BCB has made good progress preparing for the resolution of systemic banks,

### 68. The BCB has made good progress preparing for the resolution of systemic banks,

### Resolution regime: progress and recommended extensions
- The BCB has used the current regime to its maximum.
- A modernized resolution regime should:
  - extend the resolution framework to state-owned banks;
  - add a Bank Resolution Fund, including a temporary public backstop, with statutory conditions protecting the use of public funds;
  - adopt a requirement for building bank-specific loss-absorbing capacity (LAC).

### Deposit Insurance: governance improvements and remaining impediments
- Significant progress has been made to improve governance of the deposit insurance regime.
- Major improvement: removal of active bankers from FGC decision-making bodies.
- Remaining impediments:
  - The FGC is not entitled to confidential depositor data and is not part of a high-level crisis committee.
  - Confidentiality constraints prevent the FGC from receiving deposit information in a timely manner, hindering payout preparedness.
- Recommendation: FGC and BCB should implement a plan to reduce the payout period to seven days to comply with the international standard; this will require addressing legal impediments to the exchange of confidential information.
- If the FGC becomes a public entity, it should be included in high-level crisis management committees.
- Open bank assistance function:
  - The open bank assistance function of the FGC may expose the FGC to significant risk and additional losses and should be removed.
  - As interim measures, establish mechanisms to better safeguard FGC lending against misuse or use for insolvent banks.
  - Strengthen FGC resources by adding pre-arranged public back-up funding and adopting a depositor preference in the law, with the first tier of preference applicable to the claims of insured depositors and of the FGC.

### Central Bank Liquidity Assistance: toolkit and enhancements
- The BCB has a broad toolkit to address financial stability risks arising from liquidity conditions, particularly in fixed-income and FX markets.
- Key elements and developments:
  - In 2021, the BCB formalized its Liquidity Facilities framework, including the Term Liquidity Facility, which serves as the Emergency Liquidity Assistance (ELA) instrument.
  - The BCB can intervene in fixed-income markets, including trading government securities, to support market functioning and financial stability.
  - In FX markets, the BCB actively deploys FX swaps, U.S. dollar credit lines, and spot FX auctions to address episodes of market dysfunction.
  - The BCB has expanded eligible collateral to include CCBs, bank loans to non-financial borrowers issued as securities.
- Gaps and recommendations:
  - Grant the BCB authority to intervene in securities markets for financial stability purposes and establish liquidity facilities for non-bank financial institutions (NBFIs) when liquidity-constrained NBFIs pose systemic risk.
  - The BCB currently requires ex-ante legal authorization to intervene in markets beyond government securities, a process too cumbersome for crisis needs.
  - The BCB does not have authority to extend liquidity to NBFIs, which are not currently systemic but are growing.
  - Further recommended actions:
    - Clearly communicate the BCB’s forward-looking approach to solvency assessments in ELA to strengthen accountability.
    - Regularly reassess the appropriateness of spreads on policy rates for liquidity facilities.
    - Strengthen collateral prepositioning, especially of bank credit notes (CCBs).
    - Reinforce periodic revalidation of haircut modeling.

### Developmental finance: infrastructure and housing finance
- Infrastructure finance:
  - Structural shift toward greater private financing; program sustainability can be improved.
  - Recommended measures:
    - Conduct cost-benefit analyses on the option to phase out the incentives gradually.
    - Establish stricter standards for the use of proceeds.
    - Review impediments to unlocking pension and investment fund capital.
- Housing finance:
  - The housing finance system combines scale and stability under extensive public intervention, but faces rising sustainability pressures.
  - Priority reforms:
    - Strengthen FGTS’ external oversight and governance while enabling greater commercial bank participation.
    - Facilitate a gradual and sustainable transition away from declining savings-based funding and rebalancing subsidies.
    - Scale up initiatives targeted at lower-income households.

### Authorities’ views and reactions
- Authorities welcomed FSAP findings and concurred that the financial sector remains resilient, with banks well capitalized and liquid.
- Agreement points:
  - FSAP assessment of system risks broadly aligns with BCB’s Financial Stability Report.
  - Banking and insurance systems remain resilient to severe shock scenarios used in FSAP stress testing.
  - Climate analysis provided useful insight; authorities already monitor potential impacts of growing climate risks.
  - Authorities continuously evaluate measures to sustain financial system resilience, including treating operational risks, fraud prevention, and financial consumer protection.
  - Priority to strengthen capacity to monitor the non-bank financial system and to incorporate digital banks in regular stress testing.
- Authorities’ acknowledgment of past reforms:
  - Significant progress since the 2018 FSAP, including: improving legal protections and independence of the central bank; embedding a macroprudential framework and employing macroprudential tools; implementing IFRS 9; upgrading the financial system regulatory framework; strengthening regulation of investment funds; enhancing governance of the deposit insurance fund; and developing recovery and resolution planning for banks.
- On bank resolution legislation:
  - Authorities remain committed to further enhancing the bank resolution framework when necessary legislation is enacted and view new legislation as essential for significant improvement.
- Disagreement:
  - Authorities disagreed with the recommendation to remove the open bank assistance function of the FGC, stressing its complementary role with the BCB’s Emergency Liquidity Assistance and calling both functions essential to safeguard financial stability.
- On supervisory capacity and digitalization:
  - Authorities highlighted the strength of financial regulation and supervision, aligned to Basel III and other global financial standards, and emphasized that resource constraints have not prevented decisive action.
  - Digitalization (Pix system, digital banking) has improved inclusion and efficiency; cybersecurity is a clear priority.
  - Authorities are at the forefront of regulating the emerging crypto asset industry and will continue to upgrade the framework.

### Selected statistics and indicators (excerpted)
- Financial Soundness Indicators (selected rows, 2019–2025 in per cent where shown):
  - Regulatory capital to risk-weighted assets: 19.4 19.1 18.4 17.5 17.9 17.1 17.2
  - Regulatory Tier 1 capital to risk-weighted assets: 16.0 16.4 16.0 15.3 15.8 15.4 15.5
  - Tier 1 capital to assets: 9.6 8.7 8.8 8.8 8.9 8.2 8.3
  - Non-performing loans to total gross loans: 2.7 1.9 2.1 2.6 2.8 2.7 3.9
  - Return on assets: 2.0 1.9 2.4 2.1 1.6 1.8 1.6
  - Return on equity: 15.8 11.7 14.9 15.3 13.7 15.3 14.9
  - Liquidity coverage ratio: 221.5 229.0 173.9 169.8 184.6 188.9 199.4
  - Liquid assets to short-term liabilities: 260.8 308.5 199.7 194.5 240.5 238.4 264.9
  - Liquid assets to total assets: 13.6 16.3 12.7 11.7 13.8 13.4 15.0
- Structural and market observations:
  - Investment funds manage assets equivalent to approximately 80 percent of GDP.
  - Government debt securities account for 29 percent of bank assets, while household and NFC credit account for 24 and 15 percent respectively.
  - In 2024, the BRL depreciated over twenty percent against the USD, with some reversal in 2025.
  - Monetary policy embarked on a new tightening cycle in September 2024.
  - Inflation has declined to levels within the target inflation interval in 2026.
  - Non-performing loan ratios have been edging up since 2025.
  - Stablecoin usage has increased sharply since 2020, especially in cross-border transactions.

*Source: IMF staff compilation from the provided PDF content.*

### Annex II. Implementation Status of Key Recommendations in the

### Annex II. Implementation Status of Key Recommendations in the 2018 Financial System Stability Assessment (FSSA)

### Microprudential and Macroprudential Institutional Arrangements
- Recommendation: Establish a multi-agency high-level committee, with an explicit mandate for macroprudential policy and the power to issue policy recommendations on a comply-or-explain basis.
  - Time: ST
  - Authorities’ Actions: Partly implemented. Coordination takes place through COREMEC—which serves as a forum for discussion for financial stability across the BCB, CVM, SUSEP, and PREVIC—and the CMN, which takes decisions on various aspects of regulation. Memoranda of Understanding exist between all institutions and there are no impediments for information sharing. COREMEC was re-established and upgraded in 2020 with an explicit financial stability objective, strengthened governance, a rotating presidency, and the BCB as executive secretariat. It remains, however, only as advisory, without comply-or-explain mechanism.

- Recommendation: Strengthen the crisis management institutional arrangements for inter-agency cooperation and exchange of information, including for contingency planning.
  - Time: MT
  - Authorities’ Actions: Partly implemented, ongoing. Coordination in quiet times takes place through COREMEC and the CMN. For crisis management, bilateral arrangements have been put in place by the BCB with all the financial safety net participants since the previous FSAP but are only bilateral. The BCB considers bilateral agreements more suitable and agile for crisis management. BCB’s contingency planning arrangements have been implemented several times. The “Financial Stability Coordination Law” draft bill proposes creating a “Financial Stability National Committee” with authority over macroprudential policy and crisis management; the Draft Bill on Coordination has made no progress because the BCB considers the current model more suitable. A high-level crisis committee is not yet established and there are gaps in the ability of the BCB to exchange timely information with the FGC.

- Recommendation: Strengthen legal protection of all supervisors (BCB, SUSEP) through clear rules, including fixed term, condition of dismissal, public disclosure of reasons for dismissal and qualification criteria for appointments. Strengthen the independence of the BCB.
  - Time: ST
  - Authorities’ Actions: Ongoing, partly implemented. Complementary Law 179 of 2021 established objectives of the BCB, its autonomy and procedures to appoint and remove Board members; defines price stability as the primary objective; sets four-year terms (with one possible renewal) for Board members; most Board member terms do not coincide with the presidential term. Law establishes cases for removal (i.e. proven and recurring underperformance, with approval by an absolute majority of the Senate). Law provides some operational autonomy, delegation of decisions from CMN to BCB, and enhances policy transparency, but does not establish legal protection for BCB’s staff nor grant effective financial and administrative independence. Bank Resolution bill (Bill of Law 281 of 2019) submitted to lower house provides for protection of public agents and legal defense by the General Counsel to be covered by the BCB. Proposal of Constitutional Amendment (PEC 65/2023) devoted to establishing financial and administrative independence to the BCB (rapporteur senator Plínio Valerio (PSDB-AM)). Decree nº 9.727/2019 and Decree nº 10.829/2021 established qualification criteria for appointments to strategic positions in the Administration, including supervisory institutions.

- Recommendation: Increase resources of CVM and SUSEP.
  - Time: ST
  - Authorities’ Actions: Not implemented. Measures being taken to strengthen institutional capacity, but the 2026 FSAP assessment points to serious resource constraints. For SUSEP, the 2025 budget provides for a significant increase in its discretionary resources, approved by Congress, reversing the reduction observed in 2024. A public service examination launched to fill technical positions, with appointments expected later in 2025. For CVM, in fiscal year 2024 CVM received authorization from the Ministry of Management and Innovation in Public Services (MGI) and held a public selection process for 60 new Capital Market Federal Examiners; the new employees took office in early 2025. CVM plans to hire more examiners subject to budget approval. CVM staffing remains inadequate relative to its mandate in several areas, creating reliance on self-regulatory organizations.

### Systemic Risks
- Recommendation: Use Pillar 2 capital requirements to handle bank-specific risk profiles to boost their resilience as needed and to mitigate risks.
  - Time: ST
  - Authorities’ Actions: Implemented. The structured and by-reference add-ons are implemented in the BCB’s supervisory methodology. The Structured Add-on is fully implemented (segments from S1 to S4). The Add-on by Reference is applied to financial institutions allocated to Segments S1 and S2 and includes metrics for credit concentration risk and Interest Rate Risk of Banking Book (IRRBB). Financial Institutions with exposures not adequately captured by Pillar 1 capital requirements—according to BCB’s estimates—are required to regularly report add-on regularly to the BCB.

### Financial Sector Oversight
- Recommendation: Upgrade the banking sector’s regulatory and supervisory approach to credit risk—including identification and definitions, limits, and reporting requirements—for related party exposures and transactions, large exposures, country and transfer risk and restructured loans.
  - Time: MT
  - Authorities’ Actions: Implemented. CMN issued Resolution 4,677/2018 (Basel III reform on Large Exposure Limits) establishing limits and reporting requirements for single client and large exposures. Rules applied for Prudential Segments S1 and S2 since January 2019 and for Segments S3, S4 and S5 since January 2020. The Report on Operational Limits—DLO (Circular Letter 3,926) includes information on large exposure limits. CMN issued Resolution 4.693/2018 addressing credit operations between related parties; accounting items created as of January 2019 to collect information from Related Parties. CMN amended regulation on risk management (Resolution 4.557/2017) to include specific requirements for country and transfer risks and indirect risks. IFRS 9 regulation implemented since January 2025.

- Recommendation: Strengthen enforcement function of CVM by raising the level of sanctions and ensuring adequate resources for prosecution; strengthen cooperation allowing CVM proper oversight of ANBIMA’s SRO activities in the investment fund sector.
  - Time: ST
  - Authorities’ Actions: Partly implemented, ongoing. CVM has used enhanced enforcement powers under 2017 legislation, including settlement agreements and higher financial sanctions. Commissioner vacancies appear to align with fewer enforcement cases taken to trial sessions. The Technical Cooperation Agreement between CVM and ANBIMA was reviewed and updated on December 19, 2024. On January 24, 2025, the 1st Addendum included FIDCs and FICFIDCs; as of January 2025 the Agreement is understood to cover over 90% of Brazil's fund industry, including more than 28,000 Investment Funds. CVM Resolution No. 175 (dated December 23, 2022) strengthened fund regulation more broadly, but lack of CVM resources continues to constrain oversight of SROs.

- Recommendation: Implement (BCB, ANS and SUSEP) consistent group-wide supervision of insurance groups and conglomerates with joint rulemaking, implementation, and on-site inspections and granular data sharing.
  - Time: MT
  - Authorities’ Actions: Partly implemented. Each organization has improved group and conglomerate supervision and some impediments to information sharing have been removed. However, a joint approach to group supervision is not yet in place. Further improvements needed to facilitate joint examinations and co-working projects, develop platforms to share confidential granular data, and establish partnerships among supervisors.

### Crisis Management and Bank Resolution, Safety Nets
- Recommendation: Revise the draft resolution law in line with the FSAP team’s recommendations and promptly enact it.
  - Time: ST
  - Authorities’ Actions: Partly implemented. The Central Bank analyzed FSAP 2018 recommendations and included a large part in the bill. The draft bill was submitted to Congress in December 2019. The Bill of Law 281 of 2019 is pending appreciation by the Lower Chamber.

- Recommendation: Revise the ELA framework to provide for a solvency test tied to enhanced supervision, remedial plans, and possibly restructuring measures, and allow for ELA in systemic circumstances upon a MoF indemnity.
  - Time: ST
  - Authorities’ Actions: Partly implemented. The BCB does not plan to fully adopt this recommendation. While solvency analysis is important for ELA assessment, the BCB does not agree that point-in-time solvency should be the main determinant of ELA approval, preferring discretionary flexibility given systemic impact considerations. A law was passed obliging the government to automatically recapitalize the BCB in the event of losses, providing coverage against ELA losses. A further indemnity agreement would enhance protection for uncollateralized lending in systemic situations, but the BCB disagrees it is necessary. In April 2020 the BCB deployed Temporary Liquidity Facilities (ELA for the COVID-19 crisis) without incurring balance sheet losses. New permanent liquidity facilities introduced in November 2021: the Immediate Liquidity Facility (LLI) and the Term Liquidity Facility (LLT). As of Q3 2024, the LLT has included CCBs (“Cédula de Crédito Bancário”), corporate bonds and commercial paper as eligible asset classes. LLT serves as both a backstop liquidity facility and an ELA mechanism. Regulation focuses on mitigating stigma, ensuring operational preparedness, and managing central bank risk.

- Recommendation: Put in place mechanisms to ensure lending from the deposit insurance fund is not used to maintain weak or insolvent banks in operation; and transform FGC into a fully owned public institution.
  - Time: ST; MT
  - Authorities’ Actions: Partly implemented. FGC amended by-laws to establish communication to the BCB prior to each liquidity assistance operation. BCB signed a MoU with the FGC to grant access to detailed supervisory information on FGC member institutions. Management Committee of the MoU set as a permanent forum for information sharing and collaboration to facilitate FGC assessment. However, FGC is still able to offer open bank assistance, which should be eliminated from the legal framework. The recommendation to transform the FGC into a fully public-owned institution will not be implemented.

### Financial Integrity
- Recommendation: Complete the national AML/CFT risk assessment and introduce a risk-based approach specific to AML/CFT supervision.
  - Time: ST
  - Authorities’ Actions: Implemented. Coordination attributed to the Brazilian Intelligence Unit (Coaf). Decree to establish the Strategic Committee for the National AML/CFT Risk Assessment issued in March 2020. The risk assessment was completed and published in 2021.

### Financial Intermediation Efficiency
- Recommendation: Foster competition through client mobility and financial product cost transparency and comparability.
  - Time: ST
  - Authorities’ Actions:
    - Resolution CMN 5,058/2022 grants customers the right to have their salary deposited in their preferred institution. Key points:
      - (i) Salaries can be transferred to deposit or payment accounts, allowing banks and payment institutions to compete equally;
      - (ii) Customers can directly request salary portability to avoid friction with banks when switching institutions.
    - Credit Registry Law (in effect since 2011) amended by Complementary Law 166/2019 and regulated by Resolution CMN 4,737/2019 to adopt an opt-out instead of an opt-in model.
    - Resolution CMN 4,734/2019 and Resolution BCB 264/2022 set rules for registering and blocking credit and debit card receivables used as collateral; ensure blocked receivables don't exceed the transaction's outstanding balance and allow retailers to discount receivables at any financial institution.
    - 2022 regulations related to credit portability consolidated under Resolution CMN 5,057/2022; clarifications to promote portability for legal entities. Resolution CMN 4,762/2019 expanded portability to credit granted to individual microentrepreneurs and legal entities; additional credit modalities incorporated, including conversion of revolving credit operations into personal credit lines with a fixed number of installments.
    - In December 2023, BCB amended Resolution BCB 96/2021 with Resolution BCB 365/2023 to enhance transparency in payment accounts, including credit cards, to help cardholders better understand statements and promote responsible credit practices.
    - The Open Finance model regulated by Joint Resolution CMN-BCB No. 1/2020 and the General Data Protection Law (No. 13,709/2018) enhances client mobility and transparency of costs via data and service sharing at customers' discretion.
    - Next steps under consideration by the Central Bank of Brazil: expansion of data scope to allow clients to share data on insurance and pension funds; evolution of direct debit to be called Automatic Pix; credit, wage and investments portability processes through Open Finance; and a credit marketplace to allow clients to request credit proposals on a single journey and contract selected offers.

### Reform of Public Banks
- Recommendation: Change product offering of BNDES under new strategy with focus on catalyzing private sector finance and developing the financial sector.
  - Time: ST
  - Authorities’ Actions: In 2024, BNDES maintained agenda to revitalize industry and promote an inclusive, green, digital, innovative, and creative economy. BNDES seeks private sector partnership, diversifying funding sources, particularly by issuing the development bond (LCD), a tax-exempt bond, and increasing resources from sustainable funds. Efforts to enlarge and develop market-based financial instruments to promote long term development and decarbonization; foster domestic credit and capital markets; improve access to international funding; and improve lending operations through partnerships with multilateral development institutions. Strategic plan envisages reduction of risks on infrastructure investment to catalyze private sector finance and embraces climate agenda. Social inclusion initiatives include promoting credit cooperatives and microcredit. BNDES intends to design better financial solutions dedicated to SME’s, including through capital markets.

- Recommendation: Focus Caixa on core activities, improve governance, and invite a strategic investor.
  - Time: ST
  - Authorities’ Actions: CAIXA maintains strategic focus on credit operations prioritizing loans to micro companies, payroll-deducted loans, and housing sector financing, strengthening role in the “Minha Casa Minha Vida” program. Advancing corporate governance practices in line with integrity, transparency, accountability, equity and sustainability; gender diversity remains a priority. Since 2019, Caixa entered strategic partnerships in insurance and card segments. Caixa Seguridade Participações S/A raised capital through an IPO in April 2021 and a follow-on in March 2025. CAIXA's investment banking group strengthened by internal reallocation of professionals to expand fixed income capital markets operations and create a full investment bank product structure. With dissolution of CAIXAPAR in 2021, CAIXA incorporated its equity holdings and spun off payment processing, asset management, and lottery operations into specialized subsidiaries.

*Source: Annex II. Implementation Status of Key Recommendations in the 2018 Financial System Stability Assessment (FSSA).*

### Annex III. Risk Assessment Matrix (RAM)

### Annex III. Risk Assessment Matrix (RAM)

### Conjunctural Risks
- Protectionism and Trade Disruptions.
  - Likelihood: High
  - Impact: "Tariff and nontariff measures disrupt global supply chains, weighing on activity while increasing inflation. Trade diversion triggers broader protectionism."
  - Brazil-specific note: "Brazil could experience modest positive trade diversion effects, including for agricultural products, although these are likely to be more than offset by negative indirect effects from global policy uncertainty, as elevated and wide-ranging policy uncertainty weighs on sentiment and holds back consumption and investment."

- Geopolitical Tensions and Intensification of Conflicts.
  - Likelihood: High
  - Impact: "Rising geopolitical tensions, and a weakening of multilateralism, raise the risk of an escalation in military conflicts, accompanied by damage to key physical and financial infrastructure, disruptions in major transit routes and supply chains, higher migration pressures, additional financial frictions and market volatility."
  - Brazil-specific note: "Lower economic productivity and higher input costs weaken economic activity for all jurisdictions engaged in trade. Brazil’s trade-to-GDP ratio is relatively low, which would contain negative growth effects to an extent."

- Commodity Price Volatility.
  - Likelihood: High
  - Impact: "Supply and demand imbalances—triggered by geopolitical tensions, coordinated production decisions, shifts in investor preferences, or structural changes in demand—fuel commodity price swings, amplifying external and fiscal pressures, social unrest, and macro instability."
  - Brazil-specific note: "With Brazil having transitioned from a net importer of energy to a net exporter, low and volatile energy prices could have a negative impact. Higher prices would have a positive effect on revenue but could increase inflation pressures. An extended period of commodity price volatility, regardless of the direction of change in prices, would weigh on investment."

- Fiscal Vulnerabilities and Higher Interest Rates.
  - Likelihood: High
  - Impact: "Higher public debt and deficit levels put further upward pressure on long-term interest rates, sharply tightening global financial conditions, amplifying currency volatility, and reducing consumption and investment that exacerbate adverse debt dynamics. Disruptions are amplified by increased role of price-sensitive investors and leveraged NBFIs in sovereign debt markets, limited market absorption capacity when NBFIs offload debt securities, higher roll-over needs on shorter sovereign debt maturities, and strong sovereign-financial nexus. Concurrently, capital outflows from emerging and developing economies elicit a sharp increase in short-term rates."
  - Brazil-specific note: "External shocks could trigger a concern over risks of the Brazilian sovereign debt burden growing too high, resulting in higher debt service costs. Slower-than-envisaged fiscal consolidation would further pressure public debt, risk premiums, and borrowing costs, which subsequently would weaken investment and growth. Currency depreciation would occur amid lower investor sentiment."

### Structural Risks
- Cyberthreats.
  - Likelihood: High
  - Impact: "Cyberattacks on physical or digital infrastructure, technical failures, or misuse of AI technologies could trigger financial and economic instability."
  - Brazil-specific note: "Cyberattacks could disrupt economic activity and adversely affect the financial sector given the high degree of digitalization in Brazil. A resulting loss of confidence could hinder the digitalization process going forward."

- Climate change.
  - Likelihood: Medium
  - Impact: "Extreme climate events in parts of Brazil could cause loss of life, damage to infrastructure, food insecurity, supply disruptions, and heighten economic and financial instability."
  - Brazil-specific note: "Droughts and extreme temperatures threaten electricity and agricultural sector productivity, while floods and severe storms could affect and destroy buildings and livelihoods in parts of Brazil. Growth and urbanization are increasing exposures, there is a high protection gap, and sizable exposure from financial institutions to climate-sensitive industries."

### RAM note on likelihood interpretation
- "The RAM shows events that could materially alter the baseline scenario. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (with respective probabilities as “low” = below 10, “medium” = 10–30, and “high” = 30–50 percent) in the next 1–3 years."

*Annex III. Risk Assessment Matrix (RAM) — IMF staff compilation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1braea2026002.pdf_