Banks will have losses for having cheap loans before interest rates rise, says FGC director

The rapid deterioration of the post-pandemic macroeconomic scenario, with inflation and high interest rates, created a risk for banks in Brazil, said the executive director of the FGC (Credit Guarantee Fund), Daniel Lima.

“The macroeconomic scenario is worrying,” Lima said in an interview with Reuters. “Banks will still take losses from borrowing cheap money before interest rates rise,” she added.

Often pointed out as companies that manage to benefit from different economic scenarios, large retail banks in the country were surprised by a spike in inflation in 2021 that led the BC (Central Bank) to increase the basic interest rate of the economy from 2% to 13. 75% annual in 17 months.

As a result, some banks had a mismatch in their main operation, that of managing the cost of funding and the value of granting loans. The recent third-quarter earnings season has proved especially cruel for the sector, with Santander Brasil and Bradesco reporting significant profit declines and analysts predicting tough quarters ahead for the segment.

According to Lima, despite this, the system as a whole is very capitalized and historically has been resilient to different crisis profiles, such as the pandemic itself.

On the other hand, he cited emerging risks, such as cloud computing and the proliferation of cybercrime, which could invite an expansion of prevention mechanisms, such as the FGC itself, for eventual urgencies.

Cloud computing is one of the factors that allowed a proliferation of payment institutions in Brazil in recent years, since it eliminated the need for billionaire investments in setting up data processing centers, such as those owned by the largest banks in the country.

“The service in the cloud can be a problem, because the service providers are few, this market is quite concentrated”, said Lima.

The statements by the executive, a veteran of the banking industry and pension funds, come at a time when the entity defends an institutional apparatus that allows it to prevent crises, instead of just paying customers of failed banks.

Created in 1995 in the wake of the Real Plan, whose economic stabilization resulted in the bankruptcy of banks that benefited from an environment of persistently high inflation in the country, the FGC is a private body, whose 221 members contribute monthly to the entity’s equity, today of little more than R$ 100 billion.

The FGC pays up to BRL 250,000 per CPF or CNPJ in case of bankruptcy of an associated institution, valid for assets such as demand deposits, savings, CDB, LCIs and LCA (real estate and agribusiness credit bills).

Fund resources must be sufficient to pay 2.3% to 2.7% of financial system resources eligible for coverage. This percentage even dropped to around 1.9% during the pandemic, a period of sharp growth in banking digitization in the country. As an effect of the increase in interest on the FGC securities portfolio, the index returned to 2.3%.

In the last three years, the agency paid just over R$900 million to clients of smaller financial institutions that were liquidated by the BC.

POWER TO PREVENT

With the combination of a fragile economic scenario and technological challenges, in addition to potential risks linked to the emergence of new credit modalities, the FGC is now defending the approval of a bill that will allow it to provide support to institutions in a fragile situation. This proposal is part of PL 281, of 2019, which is under analysis by the National Congress.

In fact, the FGC has already done this. The best-known case was that of 2015 when, faced with a serious risk of liquidity due to the arrest of its then chief executive, André Esteves, BTG Pactual turned to the agency for a line of R$ 6 billion.

“In the past, the FGC was more of a paying box, then it gained powers to provide assistance. Now we need a framework that gives us more legal security”, he defended.

Asked about the entity’s interest in eventually operating in emerging markets, such as cryptocurrencies, Lima said that there are no plans in this regard.

“I don’t see the FGC participating in cryptoassets, it wouldn’t be good for the market,” he said. According to him, the digital currency sector itself may in the future create a reimbursement mechanism along the lines of what B3 does with brokerage firms.