Aug 07, 2012
Brazil's financial system has grown in size, diversification, and sophistication, hand in hand with the country's economic progress;
Due to deft policy responses and built-in financial system buffers, the financial system weathered the global crisis remarkably well. A range of complementary measures were adopted to maintain market stability and preserve confidence. These included (i) fiscal and monetary policy stimulus, including a significant release of bank reserves to preserve market liquidity; (ii) a quasi fiscal stimulus through the national development bank; (iii) other public banks expanding lending; (iv) foreign exchange intervention and the establishment of a swap facility with the U.S. Federal Reserve; and (v) measures to channel liquidity to small and medium-sized banks facing stress;
Like the rest of the Brazilian economy, the financial system is exposed to the effects of volatility in international markets. While the handling of the impact of the last crisis was swift, flexible, and successful, financial safety nets could be further strengthened;
There is a risk that the financial system may become a victim of its own success. Rapid credit expansion in recent years has supported economic growth and broader financial inclusion, but could also pose risks. Concerns are mitigated by the fact that the level of credit is still low relative to GDP, micro- and macro-prudential oversight is strong, banks have significant buffers, and stress tests suggest that the banking system is robust to a variety of severe shocks, although small and medium-size banks, which rely more on wholesale funding, are relatively more vulnerable to liquidity risk. Nonetheless, there are indications of emerging strains in some sectors and asset classes, notably indebted households and rapidly rising housing prices in prime locations.
Closer monitoring and proactive measures to contain these emerging vulnerabilities are critical;
The system is still stuck in a high interest rate-short duration equilibrium, which limits capital market development and potential growth;
Financial sector oversight and infrastructures are strong, but there is room for improvement in some areas to stay ahead of the rapidly evolving system. Banking supervision, which already had a high degree of compliance with Basel Core Principles in 2002, has been strengthened further; it is risk-based, intrusive, and sophisticated, and leverages strong off-site analytics. In capital markets supervision, transparency standards have been raised and risk-based supervision implemented, improving substantially compliance with IOSCO principles, although a few challenges remain Insurance supervision has also been strengthened, but the independence of supervisory agency needs to be strengthened and the supervision of brokers and insurance groups enhanced. A cross-cutting challenge for all supervisors is the need to keep pace with an evolving system given constraints on budgets and human resources, as well as the strengthening of legal protection to the agencies or employees.
Ruban Selvanayagam www.brazilinvestmentguide.com
