Financial Institution Risk Management in Brazil: A Stable System Amidst Recessionary Pressures

Introduction

Brazil’s financial system has demonstrated remarkable resilience in the face of a deep recession, as assessed by the 2012 Financial Sector Assessment Program (FSAP). This stability can be attributed to several factors, including high profitability and a dominant structure of large, vertically-integrated financial conglomerates.

Banking Sector Resilience

Key Factors Contributing to Stability

• High Profitability: Large interest margins have driven the banking sector’s resilience.
• Large Financial Conglomerates: A dominance of large, vertically-integrated financial conglomerates has contributed to stability.
• Concentration in Liquid Instruments: A focus on liquid short-term instruments has helped mitigate risk.

Public Sector Influence

Interconnected Banks and Macroeconomic Shocks

Banks in Brazil are highly interconnected with the public sector. While they have shown broad resilience to severe macrofinancial shocks, supported by current high profits and capital ratios under a stress test scenario, small capital shortfalls would result from such a scenario.

Challenges Ahead

• Capital Shortfalls: Small capital shortfalls would occur accompanied by reduced income and high credit losses on exposures to the corporate sector.
• Deferred Tax Assets: Adjusting banks’ capital for deferred tax assets highlights the need for further action to address bank-specific risk profiles and boost resilience.

Conclusion

Despite these challenges, Brazil’s financial institutions are generally well-positioned to manage short-term and medium-term liquidity pressures, with limited interbank contagion.