IMF Survey: Brazil's Banks Need to Serve Economy, Navigate Global Risks

IMF News, July 31, 2012

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Publication: IMF Survey online, July 31, 2012
Context: Brazil is a member of the Group of Twenty advanced and emerging economies and the world's fifth biggest economy with a vibrant financial sector that faces both domestic and international risks.
Recent developments: Over the past decade, financial sector assets more than doubled owing to the stable economy, the expansion of the securities and derivatives markets, and money pouring in from institutional investors from home and abroad.
Past shock resilience: Thanks to deft policies and built-in cushions, Brazil’s financial system weathered the global crisis that began in 2008 remarkably well.

Exposure to volatile international markets, especially for commodities and capital.
Rapid credit expansion:
- “Rapid credit expansion in recent years has supported domestic economic growth and broader financial inclusion, but could also create vulnerabilities.” — Dimitri Demekas
- Risk that the financial system “may become a victim of its own success at home.”
Emerging strains in sectors and asset classes:
- Indebted households.
- Rapidly rising housing prices in prime locations, such as São Paulo and Rio de Janeiro.
- These concerns are mitigated by strong banking supervision and significant capital and liquidity buffers in banks, but require close scrutiny, better data, and readiness to intervene to cool these hot spots, if necessary.
Search for yield as interest rates decline toward international levels may lead to underpricing of risk and buildup of asset price bubbles.
Forward-looking caution: “A new set of risks may lie just over the horizon. This will require watchful monitoring going forward.” — Dimitri Demekas

Strengthen information and supervisory frameworks:
- Issue regulations on credit bureaus to ensure widely available information about borrowers’ creditworthiness.
- Strengthen the central bank’s mechanism for providing emergency funding to banks in the event of a crisis in the financial system.
- Strengthen legal protection for all financial sector supervisors.
Crisis management and safety net enhancements:
- Reform the governance of the deposit insurer, Fundo Garantidor de Créditos—a step that was already implemented shortly after the assessment—tighten the criteria for providing assistance to banks, and ensure a secure and adequate source of funding in case of a crisis.
- Upgrade the committee in charge of systemic risk monitoring, crisis preparedness and management, and include the Fundo Garantidor de Créditos.
Broader market development measures:
- Move the financial system away from the “high interest rate-low duration equilibrium” to support private long-term finance.
- Steps to lengthen the duration of financial contracts, reform housing finance, and shift the role of state-owned banks—especially the development bank Banco Nacional de Desenvolvimento Econômico e Social—toward supporting capital market development through crowding-in private sector finance.
Complementary nonfinancial policies:
- Continued economic stability, strengthening domestic savings, and improving the business environment are required alongside financial-sector reforms.

Financial Sector Assessment Program (FSAP) history:
- Since 1999, the IMF has monitored countries’ financial sectors on a voluntary basis through the FSAP, conducted jointly with the World Bank in low-income and emerging market countries.
- In 2010, the Fund made these checks of financial health a mandatory part of its surveillance every five years for 25 countries with systemically important financial sectors, including Brazil.
2012 IMF activity: The IMF evaluates 18 countries’ financial health in 2012—ranging from Japan and France to Vietnam and Nigeria—to spot potential trouble and produce detailed reports with recommendations.

Source: IMF Survey: Brazil's Banks Need to Serve Economy, Navigate Global Risks (IMF Survey online, July 31, 2012).