Brazil’s Restructuring of the Banking Sector

This paper primarily focuses on the development of the Brazilian financial system and its institutions. It talks about the post-real plan period and the role of state-owned banks in compensating for the impact of the international crisis of 2008. In addition, talks about the banking growth in Brazil and also challenges faced.


Banks play a central role within the development of each economy – by mobilizing resources for productive investments, and by being the conduit for the implementation of monetary policy. Well functioning bank-based financial systems are ready to mobilize household savings, to allocate resources efficiently, to reinforce the flow of liquidity, to scale back information asymmetry and transaction costs, and to supply an alternative to raising funds through individual savings. it’s going to confidently be stated that banks have a positive impact on growth. Brazil, the banks have historically been viewed as playing a special role within the financial sector due to their critical role in facilitating payments and channeling credit to households and businesses.

In Brazil, the bank-based segment of the financial sector, as in the other banking sector, plays an important role in both financial sector development and economic development. The banking industry ensures the efficient allocation of resources within the economy, through lending to businesses and individuals, and by using credit-scoring systems. Additionally, the banks facilitate business through the settlement of funds and therefore the provision of credit to consumers. Although banks play such a crucial role within the economic development of Brazil, the Brazilian banking sector has not really received adequate coverage in terms of research. Moreover, previous studies wiped out Brazil tend to generalize the financial sector – without paying specific attention to the bank-based segment of the financial sector.

Credit in Brazil until the middle of the 2000s was portrayed by these five notable highlights

  • Shortage
  • High instability

The evolution of bank loans and corporate debt represents the above aspects. Between the start of 1996 and the end of 2004, total bank loans to GDP vacillated between at least 24.3% and a limit of 33.3%; the average was 27.5%. This was a low level compared with the figures of other nations, especially industrialized nations.

  • High cost

All through the 1990s and 2000s loan costs were kept up at very high levels in both nominal and real terms. For instance, the Brazilian Central Bank’s basic rates ( Selic), collected in the year held a distinction of 12% points ahead of inflation, on average.

  • Role played by large banks, specifically big state-owned banks

From 1995 to 2012, the investment of the 10 biggest banks in the absolute resources of the financial business expanded from 71% to 89%, an aftereffect of union and focus. The share of state-owned commercial banks in total loans grew from 34% towards the start of 2008 to more than 47% by the end of 2012

  • Segmentation

The last significant element was segmentation. Huge quasi-fiscal funds reserved credit for investments. They financed practically almost all long-term loans to industry, infrastructure, and housing. The expenses and the length of those credits were set notwithstanding the predominant conditions in the remainder of the financial market, which followed the Central Bank rate and were generally short term.

The Crisis of 2008

The crisis of 2008 strongly affected the Brazilian credit market. The frenzy following the breakdown of Lehman Brothers and the unexpected freeze inside the international financial system set off a sharp inversion in the development of credit, especially to business. Towards the end of 2009, the pace of development of the corporate loan market became almost zero. A few organizations specifically parts, for example, sugar and ethanol, mash and paper, and meat were not really influenced.

The principal issues were identified with the long theoretical places that a few organizations had taken on the trade and the derivative markets. Because of the sharp devaluation of the Brazilian money, no bank knew without a doubt how much the loss of their customers would add up to and what sway that would have on the monetary record of the banks. Liquidity in the interbank market evaporated and the Central Bank needed to mediate to save the smaller banks from a serious liquidity deficiency. export credit lines turned out to become scarce and had to be substituted by new lines from the Central Bank and the Development Bank (BNDES). Alongside the high liquidity preference of the companies, the state-owned banks additionally assumed a significant part in dealing with the effect of the national crisis.

Households were likewise influenced. Banks restricted new loans for the securing of durable purchaser products, increasing down payments, and cutting the length of the tasks. As a result, the demand for automobiles, for instance, crumpled before the end of 2008. So as to stay away from a recession in the industrial sector and a huge loss of jobs, the administration chose to step in and Banco do Brasil, a state-owned bank, expanded its loans to make up for the retreat of its private rival. Simultaneously, BNDES expanded its disbursements, ensuring the flow of funds to long term ventures. These measures helped in balancing out the degree of home-grown demand in the industrial sector, which was at that point experiencing an extreme contraction of exports. As an outcome, private banks lost to state-owned competitors the majority of the market share they had won after 2004.

3. Changes in the Financial Architecture and Organizational Structure

The changes in the institutional system in the financial market after 1994 focused on strengthening the role of the regulatory agencies and on the coordination among them. The case of the Central Bank is extremely illustrative. A similar law that made the new currency – the real – additionally changed the composition of the National Monetary Council (CMN). Until June 1994, the CMN had twenty individuals, with seven of the agents of the private sectors. From that point forward, it has contracted to three individuals; the President of the Central Bank, the Minister of Finance, and the Minister of Planning.

Between July 1994 and December 1995, the CMN instituted 154 goals that changed the scene of the financial market. The formation of the Money and Credit Council (COMOC) and the Committee of the Surveillance and Regulation of Financial Markets, Capital Markets, Insurance, Pension Plans and Capitalization (COREMEC) had the target of harmonizing the activities of the Ministry of Finance, the Central Bank, and the National Treasury. It additionally aimed to set basic rules for those answerable for the guideline and oversight of major financial market members – financial institutions, issuers of security, portfolio managers, pension funds, and insurance agencies.

Bank System Reforms

The building of the modern architecture of the Brazilian financial system began in tandem with the Real Plan. The Real was first presented in February 1994, as a unit of account, under the name of Unidade Real de Valor (URV; Real Value Unit) and turned out to be full cash – the Real – after five months in July.

Around then, the relaxation of capital controls over outflows just as inflows had already begun, alongside the last phases of the renegotiation of the external debt. As indicated by Goldfajn (2005), the liberalization process occurred without major changes in the overall legislation. Each new liberalizing rule was inserted at the margin of the existing legal framework.

The initial step of the financial regulatory reform was the accession of Brazil to the Basel Accord. As indicated by this new regulation, banks would be required to maintain a relation between their Net Worth and Total Assets weighted by risk factors of at least 8%, identical with that suggested by the Bank of International Settlements (BIS). In November 1997 this minimum was changed to 11%.

Simultaneously, the minimum capital limit for the working of all institutions authorized to work by the Central Bank of Brazil was raised. This second measure meant an increase of over 60% of the minimum capital required for opening or operating a bank in Brazil. For investment banks, it was 37%. As a result of this necessity, numerous small banks voluntarily shut down their operations or changed their business activities and some non-bank institutions left the market.

The second step was to restructure the banking system as many banks were adversely affected by the loss of floating gains related to inflation. Those revenue streams accounted on average for almost 40% of the revenues of these institutions in the initial four years of the 1990s while in 1993 the participation of financial institutions in the GDP reached 15.6%, after two years this percentage had dropped to 6.9%. A critical aspect of this contraction can be explained by the elimination of inflationary revenue.

To put it plainly, after inflation came under control, it was evident that the financial system was too huge for the new size of the market. In this way, the main legacy of monetary stability was to expose the dysfunctionality of the existing institutional arrangement and to create the conditions for the authorities to establish reform, the execution of which would have been unfeasible in a setting of uncontrolled inflation.

In this situation, the Central Bank made two distinct regulations to deal with the banks under stress: PROER, which focused on private banks, and PROES,8 which aimed to deal with the banks owned by local state governments. Both had an extremely important role in forestalling bank runs or systemic crises caused by the imbalances of financial institutions of various sizes.

PROER comprised of a series of initiatives to promote administrative, operational, and corporate restructuring of private institutions that were financially delicate. Troubled institutions were split into two: “good banks”, comprising of assets and liabilities of good quality, and “bad banks”, which held assets of dubious quality and liabilities established with the Central Bank, employees, the public sector in general, etc.

The control of the good banks was transferred to healthy institutions. The bad banks were liquidated by the Central Bank and a trustee delegated to manage the mismatch between the liabilities and the assets of the liquidated part. The shareholders and board members lost their assets and were prohibited from having any role in the financial market.

Upon acquisition, the government fixed a “toll” that was used to repay the public costs related to the restructuring process. In all circumstances, the mediation of the Central Bank had the main objective of protecting the depositors and safeguarding the payment system, avoiding contagion to other healthy institutions leading to the stoppage of the functioning of the financial system. Foreign banks were allowed to buy some of the good banks”; for instance, Banco Santander from Spain and HSBC from the United Kingdom took this opportunity to enter the Brazilian market.

PROES had the same goals as PROER. Its aim was to secure the depositors of banks owned by sub-national governments and to avoid a systemic crisis or the collapse of payment systems. The primary distinction between them was that PROES was also part of a broader initiative to reorganize the accounts of sub-national governments and their financial relations with the federal government, particularly the Central Bank. Some banks were already in a delicate situation before the Real Plan as a result of political interference by state governors in their administration. Two of the federal-owned banks, Banco do Brasil and CEF, additionally had to be rescued by the federal government after the Real Plan. Notwithstanding, most of the problems in the books of those two banks were related to losses due to financial operations under federal earmarked credit programs in agriculture and housing. As remuneration for their misfortunes, these banks were capitalized by the Treasury (Vidotto 2005).

A similar sort of adjustment happened among non-bank institutions. They were heavily dependent on the intermediation of public securities. To the degree that the spreads of these operations were becoming smaller, a noteworthy number of brokers and dealers had to close their doors. To complete the new regulatory framework of the financial system, two other measures were also taken in order to isolate the Central Bank from liquidity problems or failure of financial institutions. The first one was the creation of the Deposit Insurance Fund (FGC; Fundo Garantidor de Créditos) in 1995 as a private organization. The FGC receives 0.3% per annum from all insured deposits and guarantees any balance up to R$20.000. The Fund is managed by the financial institutions and controlled by the large banks, which are the main contributors. The second measure was to transfer responsibility for the payment system from the Central Bank to the commercial banks.

Banking sector growth in Brazil

The banking sector reforms attempted in Brazil since the last part of the 1980s, saw the start of the development of the Brazilian bank-based financial system – prompting changes in how banks work (Resolution 1524), and a resulting increment in the number of banks. Goal 1524, gave in 1988, exemplified a key move in approach – away from a financial system made out of specialised institutions, restricted by regulations to narrowly defined operating modalities, to a different type of configuration closer to the model of the so-called “universal institutions”. This methodology has affected a  number of banks in the Brazilian financial sector (Central Bank of Brazil, 2012b).

Following the introduction of new legislation in September 1988, the banking system expanded at such a pace that the number of institutions increased dramatically, totaling 244 by December 1994. In any case, the Real Plan, which was implemented in the second half of 1994, introduced radical changes into the Brazilian banking scenario, and, therefore turned around the growth trend (Central Bank of Brazil, 2012b).

Declining inflation and the opening of the economy to the international community not only demanded the development of an agile and flexible array of products and services; however, it also revealed a series of inefficiencies in the banking operations. Simultaneously, banking institutions were clearly affected by the inefficiencies of other sectors of the economy, and, more explicitly, by their inability to honour loans contracted with banks (Central Bank of Brazil, 2012b).

Private banks were more adaptable in adjusting to the conditions of a stable economy and in adopting the needed changes in the technologies and processes applied to the production of the services offered to their clientele.

Difficulties faced by  bank-based financial development in Brazil

In spite of the fact that Brazil is one of the rising economies, with a fairly developed economy, having accomplished a solid strategy system (fiscal responsibility, inflation targeting, and a flexible exchange rate), its bank-based financial sector actually faces numerous difficulties. The effectiveness of the financial framework falls behind that in other Latin American nations (Belaisch, 2003). The intermediation is moderately low and inefficient, because of the presence of a non-competitive market structure (Belaisch, 2003). A portion of the difficulties confronting the bank-based financial sector in Brazil includes adapting to requirements for a financial plan and human resources, guaranteeing sufficient lawful insurance, an ascent in non-performing credits, and cuts in lending rates.


Above, an overview has been given about the banking sector in Brazil. It has tracked the growth of the banking sector, and also highlighted the reforms implemented undertaken. It has also pointed out the challenges faced by the Brazilian banking sector. The reforms implemented included programmes for creating specialised financial institutions, the restructuring of the private sector, and state-controlled banks. It is important that the country continues to pursue and promote innovative financial inclusion policies so that affordable financial services are made available to all segments of society.

Frequently asked questions

  1. How can we highlight the credit in Brazil in the middle of 2000s ?
  2. What was PROER all about ?
  3. What were the challenges faced by the bank based financial development in Brazil?
  4. How did the crisis of 2008 affected the Brazilian credit market?
  5. What were the bank- based reforms in Brazil?


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