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December 1, 2009

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Why Brazil's bankers didn't take a slide

December 1, 2009, Tuesday | Print Edition

AS Brazil bounces back from the global economic crisis - it was the first country in Latin America to stage a recovery - what can other markets, still struggling with sagging economies and lingering recession, learn from its remarkable recovery?

Affonso Celso Pastore, a consultant and former president of the Central Bank of Brazil, expects the country to grow by between 5 percent and 5.5 percent in 2010, echoing the predictions of many others.

Experts point out that Brazil's export diversification, spurred by a more active trade policy and increased focus on "south-south" trade, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries during the downturn.

Moreover, the country has a large and growing domestic market, and its exports account for less than 15 percent of GDP. That's lower than most other emerging markets, and local demand has been sustained through targeted tax breaks and a cycle of monetary easing.

Also, backed by a large cushion of reserves amassed in recent years, the Central Bank was able to offer dollar liquidity at the height of the global financial crisis to companies needing to refinance.

What's more, liquidity was injected by easing reserve requirements, mitigating the credit squeeze.

Banco do Brasil and Caixa Economica Federal - two publicly owned commercial banks which were perhaps regarded during the heady days of global financial innovation as being too conservative - along with BNDES, the well-capitalized state development bank, stepped in to provide credit, cajoled by the government to do so as private banks grew cautious and tightened credit lines.

But all of Brazil's banks can be thankful that, to a large extent, they haven't had to deal with the toxic assets that crippled banks in developed countries.

Unlike their counterparts elsewhere, Brazilian banks were not as exposed to the property sector and credit derivatives, and financial soundness indicators were robust coming into the crisis, according to Fabio Barbosa, head of Banco Santander Brasil and the Brazilian Federation of Banking Associations (Febraban).

He cites the high capitalization requirement as a key reason for the sector's resilience - the minimum capital adequacy requirement in Brazil is 11 percent, compared with 8 percent under the Basel regulations that other banks around the world follow.

In December 2008, the average ratio for the sector in Brazil was 20 percent, and for the country's five largest banks (accounting for 67 percent of total assets) the ratio was 18.5 percent.

He adds that Brazil also didn't have a shadow financial system, like in the US, thanks to tight regulatory and supervisory oversight. All financial institutions (including investment banks) are under the watch of the Central Bank.

Small and medium-sized banks relying on the wholesale money markets for growth suffered the most, but policy makers eased regulations relatively quickly in 2008, provisionally allowing the Central Bank and commercial state banks to acquire the portfolios of banks in difficulty to help strengthen the system.

How can the country maintain the momentum of recent months? Maybe the answer lies in the ability of the country's public and private sectors to tackle its greatest challenge: bridging the gap between big cities with world-leading companies and high purchasing power, and smaller cities where millions live in poverty.

Despite improvements that began in the 1990s, Brazil still has one of the highest income and wealth inequalities in the world, according to the World Bank.

(The article is reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of he University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)

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