BB lends BRL 775 million to federal entities without guarantee

Last year, Banco do Brasil lent R$ 775 million to states and municipalities in 161 operations without any guarantee in case of default.

If the beneficiary government fails to pay the installments, the financial institution will not be able to appeal to the Union (as occurs in operations guaranteed by the Treasury).

The operations were located by leaf in the Central Bank’s database. The monetary authority itself confirmed to the report that the type of record used to classify the contracts indicates the absence of any material guarantee linked to the financing.

To compensate for possible losses, the bank relies on a contractual authorization to debit the amounts of the installments directly from the accounts of the entities that contracted the financing.

The guarantee is also enshrined in local legislation (municipal or state) and does not require the issuance of a commitment note — that is, the bank does not need a new consent from the government to deduct the amounts of the installments.

The Constitution prohibits the linking of taxes to specific expenses, except in guarantee or counter-guarantee contracts with the Federal Government.

Former members of the economic team, heard privately by the report, assess that the format of BB’s operation may represent a circumvention of the fence, as the discount ends up falling on eventual ICMS (state) and ISS (municipal) revenues deposited in that account.

Technicians from the current government also find the arrangement adopted by the bank strange and say that the solution is risky, as it can be interpreted as a circumvention of the prohibitions imposed by the Constitution.

Interlocutors of the institution, however, affirm that there is comfort from a legal point of view with the adopted design.

funds as collateral

BB prefers this model, instead of linking installments directly to transfers made through the FPE (State Participation Fund) or the FPM (Municipal Participation Fund) – a model adopted by Caixa.

In 2018, the AGU (Advocacia-Geral da União) issued a binding opinion allowing federal banks to accept FPE and FPM funds as collateral, after government officials questioned the operation’s regularity.

The funds are a vehicle for transferring federal tax revenues to regional governments, which, in the opinion of government technicians, made the guarantee illegal. Amid the controversy, Caixa came to suspend this type of operation, which faced resistance within the bank itself.

The AGU (Advocacia-Geral da União) took the field and issued a binding opinion stating that the funds’ revenues are transfers and, therefore, change in nature. If they weren’t taxes, the guarantee would be legal.

Caixa is the main user of this file. In 2021, BRL 5.4 billion were granted to states and municipalities, with the collection of FPE and FPM as an immediate guarantee.

According to the AGU, the opinion allowed regional governments to offer this guarantee to all federal financial institutions – which includes Banco do Brasil. The bank may or may not accept the offer.

Within BB, however, the assessment is that there is no legal certainty to directly link participation funds as loan guarantees, even with the opinion of the AGU.

The absence of any guarantee formalized in the contract draws the attention of government officials, due to the risk posed to the financial institution and the burden for those who contract the operation.

more risk, more cost

To compensate for the risk, the states and municipalities that contract these credits agreed to pay interest rates that vary between 159.4% and 230% of the CDI (Interbank Deposit Certificate, an application with a yield close to the Selic, today at 9.25% per year).

That means governments may need to pay fees close to 20% a year to get the credit.

The percentages are considered high. In the opinion of technicians who have already worked in the analysis of this type of operation within the federal government, it is as if the institution had no interest in financing those who requested the credit and, therefore, the interest bar has risen.

The danger in these situations, according to these technicians, is that money is released in the short term, while payments are made over several years, often a decade. Occasion managers may feel compelled to accept high costs because they won’t have to pay the bill.

In this context, the cost of financing can create a snowball for future administrations in these municipalities or states.

In 2020, the volume of BB loans to states and municipalities without any guarantee was lower, at R$ 298.2 million. There is no record of contracts in this format in 2019.

‘technical criteria’

When contacted, BB informed that it has been carrying out this type of operation since 2009, based on the observation of “technical criteria”.

“In these operations, BB has its own methodology for evaluating the credit and payment capacity of states and municipalities”, he said.

“These financings are backed by the future cash flow of the public entity that transits through the bank, a structure that guarantees the sustainability of the portfolio, whose current default is zero”, said the institution.

In 2018, after the controversy involving Caixa, the Central Bank tightened capital allocation rules in loans to states and municipalities without a guarantee from the Union.

In practice, the BC measure requires banks to lock in a larger share of their equity whenever they want to lend in this modality. This comes at a cost to the institution, as it misses the opportunity to leverage larger volumes of credit. The change was made considering the higher risk of unsecured operations.

A leaf questioned the BC about Banco do Brasil’s operations, but the monetary authority declined to comment.

The Treasury informed that questions about commercial relationships and guarantees “must be directed directly to the financial institutions that credit the aforementioned credit operations”. BB said it follows the rules of the Central Bank.