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The Brazilian benchmark interest rate—known as Selic—has never been so low as it is today. However, any benefits from this move have yet to reach final consumers. As a way of tackling this, Brazil’s Central Bank (BCB) has been implementing measures to increase competition but recent developments show that facing the problem requires a more comprehensive approach.  

First and foremost, Central Bank President Roberto Campos Neto and his team are gambling on more competition to reduce bank spreads, building on the work of his predecessor Ilan Goldfajn. Currently, the country’s top five banks control 82 percent of the domestic market in Brazil. In developed economies, only in the Netherlands is the banking system more concentrated (89 percent).

</p> <p>Economist Cleveland Prates, a former counselor at Brazil&#8217;s antitrust watchdog Cade explains that many factors impact spreads, such as lower demand for credit and cuts to the Selic rate. However, in his view, &#8220;the real problem is the lack of competition and strategies adopted to neutralize new players.&#8221;&nbsp;</p> <p>In a recent interview, João Manoel Pinho de Mello, the BCB director of Financial System Organization and Resolution said open banking regulations, set to be implemented in Brazil in 2020, might shatter the grip the top players have on the sector. Mr. Mello believes that third-party applications will be able, in theory, to provide assistance to clients in budgeting, paying bills, or making investments—giving them conditions to negotiate better interest rates.</p> <p>However, the Central Bank also reckons that simply tackling concentration won’t solve the problem. &#8220;An increase in competition levels by itself will probably not be able to cut spreads significantly. It is necessary to consider other factors, such as financial defaults, collateral recovery capability, and increased information sharing,&#8221; says the bank in a <a href="https://www.bcb.gov.br/content/publicacoes/Documents/reb/boxesreb2018/boxe16.pdf">report</a>.</p> <div class="flourish-embed" data-src="visualisation/991605"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>A multifaceted issue</h2> <p>While competition does play a major role in spreads, data shows that defaults actually have the highest weight in the formation of spreads—an average of 37.2 percent from 2016 to 2018. “This is the cost of providing credit services. Of course, this ends up being passed on to prices,&#8221; said Mr. Pinho de Mello.&nbsp;</p> <p>The same Central Bank data also shows that the weight of defaults on bank spreads has been falling, reaching 33 percent in 2018. But, as Brazil still has 63 million people defaulting on their debts—representing some 40 percent of the adult population—this remains a serious issue.&nbsp;</p> <p>Recently, the Central Bank announced a partnership with Febraban, the Brazilian banking federation, in order to keep bank branches open for longer, giving people an opportunity to renegotiate their debts before the crucial holiday shopping season.&nbsp;&nbsp;</p> <div class="flourish-embed" data-src="visualisation/991684"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>Additional steps</h2> <p>In an attempt to release money into the economy and allow banks to provide more credit, the Central Bank has been cutting its reserve requirements since 2017. These limits consist of a share of all the deposits received by financial institutions that must be kept with the BCB. Though they may be used as a form of monetary policy tool, increasing or diminishing the amount of money in the economy, reserve requirements have the primary goal of ensuring the security of the banking system, providing a margin of safety.&nbsp;</p> <p>There are different rates for each kind of deposit—on-demand, on credit, or into savings accounts. After several cuts, the reserve requirements for on-demand and credit deposits went down from 45 and 36 percent in 2017 to 21 and 31 percent in 2019, respectively. Earlier this year, Economy Minister Paulo Guedes said that the Central Bank is considering diminishing reserve requirements even further in the future, <a href="https://www.poder360.com.br/economia/guedes-diz-que-liberacao-de-compulsorios-pode-chegar-a-r-200-bilhoes/">releasing up to BRL 200 billion</a> into the economy. That would be nearly half of the reserve requirements currently held at the Central Bank.&nbsp;&nbsp;</p> <p>To make sure the system remains solid, the Central Bank is coming up with a Financial Liquidity Support (AFL) system, by which banks would have access to private sources in order to boost liquidity. “The idea is that financial institutions would have a financial limit continuously available to them—not only at times when they need liquidity—based on private bonds deposited as guarantees to the Central Bank”, <a href="https://www.bcb.gov.br/detalhenoticia/16801/nota">said the autarchy</a>.</p> <p>But, ultimately, it is up to the banks to increase available credit. Research from consultancy firm MCM Consultores, published by newspaper <em>Valor</em>, shows that it would have little effect on banking spreads. According to the survey, a 20 percent cut in reserve requirements would reduce spreads by only 0.7 percentage points. “The effective rate reduction reduces banking spreads and boosts the credit market. (&#8230;) However, the effects are limited,” says the study.&nbsp;</p> <p>In the same direction, in April 2018, BCB reduced the mandatory deposits made by banks to the Credit Guarantee Fund (FGC) from 0.0125 to 0.01 percent of banks’ total account balances for guaranteed instruments. The FGC was founded in the 1990s to intervene in the case of banks breaking, covering up to BRL 250,000 deposited in bank accounts or applied in investments.

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MoneyNov 26, 2019

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BY Brenno Grillo

Brenno is a journalist specialized in covering the Brazilian legal and Justice system.

BY Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.