Front Matter Page

IMF Country Report No. 18/339

November 2018

BRAZIL

FINANCIAL SYSTEM STABILITY ASSESSMENT

This Financial System Stability Assessment paper on Brazil was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with Brazil. It is based on the information available at the time it was completed on June 22, 2018.

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© 2018 International Monetary Fund

Front Matter Page

November 2018

BRAZIL

FINANCIAL SYSTEM STABILITY ASSESSMENT

Approved By

James Morsink and Krishna Srinivasan

Prepared By

Monetary and Capital Markets Department

• The FSAP team was led by Jodi Scarlata (IMF) and Mariano Cortes (World Bank), and included deputy mission chiefs Ivo Krznar (IMF) and Steen Byskov (World Bank); Majid Bazarbash, Richard Berkhout, Fabian Bornhorst, Kelly Eckhold, Alessandro Gullo, David Hofman, Phakawa Jeasakul, Purva Khera, Steve Philips, Martin Saldias, Katharine Seal, and Nobuyasu Sugimoto (all IMF); Pasquale di Benedetta, Ana Carvajal, Dorothee Delort, Tatiana Didier, Eva Gutierrez, Damodaran Krishnamurti, Claudia Ruiz Ortega, Bujana Perolli, Heinz Rudolph; and external experts Ricardo Cavalheiro, David Hoelscher, Richard Stobo, and Marguerite Zauberman. The team also thanks Shiyuan Chen, Daniel Cunha, Geoffrey Khaminwa, and Daniela Santos (all IMF), Pietro Calice and Alvaro Enrique Pedraza Morales (all World Bank) for very valuable support and inputs.

• The mission met with senior leaders and officials from regulatory and government agencies in Brasilia, Sao Paulo, and Rio de Janeiro, including the Central Bank of Brazil (BCB), Ministry of Finance (MoF), Securities and Exchange Commission (CVM), Insurance Supervisor (SUSEP), and Pension Supervisor (PREVIC). It also met with representatives from financial institutions, and market participants.

• FSAPs assess the stability of the financial system as a whole and not that of individual institutions. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk affecting financial institutions, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.

• Brazil is deemed by the Fund to have a systemically important financial sector according to Mandatory Financial Stability Assessments Under the Financial Sector Assessment Program—Update (11/18/2013), and the stability assessment under this FSAP is part of bilateral surveillance under Article IV of the Fund’s Articles of Agreement.

• This report was prepared by Jodi Scarlata and Ivo Krznar with inputs from the FSAP team.

Contents

• Glossary

• EXECUTIVE SUMMARY

• MACROFINANCIAL DEVELOPMENTS

• A. Structure of the Financial System and Role of the Public Sector

• B. Despite the Recession, the Financial System Remained Resilient

• C. Developmental Issues

• RISK ASSESSMENT

• A. Materialization of Risks Could Result in a Double Dip Recession…

• B. …Which Could Affect the Financial Sector Amplified by the Nexus with the Sovereign…

• C. …And Vulnerabilities in the Household and Corporate Sectors

• D. Interconnectedness Underpinned by the Role of the Government

• RISK OVERSIGHT: POLICIES TO MITIGATE RISKS AND ENHANCE RESILIENCE

• A. The Architecture of Regulation and Supervision

• B. Systemic Risk Monitoring has Improved, but Gaps in the Oversight Framework Remain

• C. Prudential Supervision Supported Banking Sector Resilience

• D. However, Inefficiencies Linger Due to Government Interventions

• E. Further Progress is Needed to Address Governance Risks

• F. Oversight of FMIs is Effective

• G. Material Gaps Remain in Insurance Supervision

• H. Securities Supervision Faces Resource Challenges to Meet Market Growth

• CRISIS MANAGEMENT: ENHANCING POLICY RESPONSE

• A. Work Should Continue to Strengthen the Resolution Framework

• SYSTEMIC LIQUIDITY MANAGEMENT

• ENHANCING FINANCIAL SECTOR DEVELOPMENT, EFFICIENCY AND INCLUSION

• A. Financial Intermediation Efficiency

• B. SME Financing

• C. Digital Access to Payment Services and Financial Inclusion

• D. Long-Term Financing and Institutional Investors

• FIGURES

• 1. Financial Sector Developments

• 2. Macrofinancial Developments

• 3. Banking Sector Developments

• 4. Public Banks Operations

• 5. Macrofinancial Scenarios

• 6. Bank Solvency Stress Test Results

• 7. Vulnerabilities in Household Sector

• 8. Vulnerabilities in Corporate Sector

• 9. Structure of Key Liquidity Markets

• 10. Structure of Credit, by Firm Size and Type of Credit

• TABLES

• 1. 2018 FSAP Key Recommendations

• 2. Financial Sector Structure

• 3. Selected Economic Indicators

• 4. Financial Soundness Indicators

• 5. Risk Assessment Matrix (RAM)

• 6. Progress on Implementing the 2012 FSAP Recommendations

• 7. Financial Sector Authorities

• ANNEXES

• I. Directed Credit

• II. Deferred Tax Credits in Brazil

• III. The BCB’s Risk Monitoring System

• IV. Renegotiated and Restructured Loans in Brazil

• V. Resolution Reform

• VI. Financial Inclusion

• VII. Bank Solvency and Liquidity Stress Test Results

• VIII. Results of the Corporate Sector’s Sensitivity Analysis

• IX. Stress Test Matrix (STeM) for the Banking Sector: Solvency, Liquidity, and Contagion Risks

• APPENDIX

• I. Report on the Observance of Standards and Codes: Basel Core Principles for Effective Supervision

Glossary