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Prudential regulation

i Relationship with the prudential regulator

As indicated above, the Central Bank is the main regulator of banking activities, as it is responsible for supervising the banking activities of local banks and financial institutions. That supervision relies on the following principles: supervision focused on risk, continuous supervision and transparency.

Inspection is an essential element of the supervision process to assess the economic and financial situation of supervised entities, and their management and compliance with the applicable laws and regulations. It aims to identify the relevant risks of financial institutions and evaluate their respective controls.

As per the information made available by the Central Bank for the improvement of the processes of supervision of financial institutions and conglomerates whose businesses encompass subsidiary entities in other countries, various procedures are adopted, such as:

  1. elaboration of supervision agreements with foreign authorities;
  2. monitoring of activities of international organisations in matters related to supervision;
  3. exchange of information with foreign supervisory authorities;
  4. coordination, support and follow-up of missions by foreign supervisors in the country; and
  5. dissemination of the Brazilian supervision to the international context.

In addition to physical supervision, financial institutions are subject to regular reporting requirements to the Central Bank. Several types of detailed reports and financial information are submitted by local institutions to the Central Bank, enabling the authority to keep a very close eye daily on the financial situation of the market players.

In addition to the reporting and inspection requirements, the applicable rules are very restrictive on the management of banks. Prior to a final appointment as administrator of a financial institution, individuals must submit an exhaustive list of documents, information and declarations to the Central Bank, which may even prevent a person from being nominated if that person does not have a good reputation.

ii Management of banks

Pursuant to the organisation of a financial institution, it is important to highlight that with few exceptions, a financial institution, such as a bank, must be incorporated as a sociedade anônima, which is the corporate form that most closely resembles a joint-stock company or corporation. The legal requirements pertaining to joint-stock companies are governed by the Corporations Law.

Joint-stock companies are managed by an executive committee and, if applicable, a board of directors. In addition, a board of auditors may be set up, either provisionally or permanently, to inspect the activities of the other management bodies. The executive committee and the board of auditors must be composed of individuals residing in Brazil and meeting the requirements prescribed by law. Members of the board of directors do not need to reside in Brazil.

Members of administrative bodies of financial institutions are subject to civil liability, similar to the potential liabilities to which administrators of any company are subject, in addition to further criminal and administrative liabilities applicable to managers of financial institutions.

Civil liability and exceptional rules

In the ordinary course of the transactions of financial institutions, the civil liability of administrators (including directors and officers) is regulated by the Corporations Law. Article 158 of the Law provides that an administrator will not be deemed personally responsible for the obligations incurred on behalf of the company and on account of a regular act of his or her administration. However, an administrator will be responsible under civil law for losses caused by acts carried out with guilt or malice, and in violation of the law.

An administrator will not be responsible for unlawful acts practised by other administrators except when, for connivance therewith, he or she fails to reveal them, or when, upon being aware thereof, he or she refrains from acting for the purpose of barring the practice thereof. There is joint liability of the administrators when the decisions are taken by collegiate bodies, such as the decisions taken by a board of directors. In this regard, any act or omission committed by a board is the personal responsibility of each of the members who form it, and to be exempt from any future responsibility, a dissident administrator should express his or her disagreement with the resolutions taken through a clear and express record in the minutes of the meeting of the relevant administrative body.

An administrator who agrees with the practice of acts in violation of the law or a company's by-laws will be deemed jointly liable for the losses resulting therefrom, and be compelled to provide indemnification for the losses caused.

The Corporations Law imposes the duty of diligence on administrators of institutions during the performance of their duties, providing that they shall be guided by the care and diligence that every active and honest person uses in the administration of his or her own business. Administrators are otherwise subject to the duty of loyalty to their company, and must maintain reserve and diligence when dealing with the company's affairs.

There are also some exceptional rules. Pursuant to the terms of Article 40 of the Bank Bankruptcy Law, administrators of financial institutions under a special administration regime, intervention or extrajudicial liquidation are jointly responsible for the obligations undertaken by the institution during their terms of office until those obligations are actually satisfied (that is, liquidated). Pursuant to the terms of the sole paragraph of the aforementioned provision, the administrators' joint responsibility referred to therein shall be limited to the amount of the losses caused during their term of office.

Administrative responsibility

Administrative responsibility is subject to the same principles as criminal responsibility (i.e., it does not admit an agent's strict responsibility). This means that a penalty shall only be imposed on a person in the event that the act – commission or omission – is described in the law or the normative rule issued by the applicable authority, in particular the Central Bank of Brazil, as being an administrative infringement.

In fact, in the opinion of jurists and case law, it is incontestable that administrative responsibility is always individual and subjective. Only those (the financial institution, administrators or controllers) who practice the punishable act (which may be an act or an omission) may be punished.

iii Regulatory capital and liquidity

In March and October 2013, the Central Bank published a set of resolutions and official letters relating to the adoption of the Basel III global standards of capital requirements. The new rules aim at increasing the capacity of financial institutions to absorb shocks, increasing the strength of the financial system and promoting sustainable economic growth.

By this set of rules, financial institutions may determine presumed credit based on the provisions made for doubtful receivables in each calendar year, whenever credits arise from temporary differences resulting from provisions for doubtful receivables existing in the preceding calendar year, and from the balance of the accrued fiscal losses of the preceding calendar year. New rules were also issued concerning financial bonds pursuant to which companies shall compose the prudential consolidated balance to be used in assessing the capital and requirements as well as the possibility for the Central Bank to limit payment of dividends by financial institutions in the event that the latter should disregard the prudential requirements defined by the CMN.

The implementation of the new capital structures in Brazil began on 1 October 2013, and shall follow the agreed international time frame until the conclusion of the process on 1 January 2022. Changes regarding the capital ascertainment for credit risk that do not result in additional capital and that can easily be implemented by the institutions became effective as of the issuance of the new rules.

iv Recovery and resolution

The Bank Bankruptcy Law specifically governs the insolvency regimes of financial institutions. It essentially provides for two different regimes, both administratively conducted by the Central Bank: the intervention regime and the extrajudicial liquidation regime.

Intervention

If a financial institution is unable to stabilise and resume operations while overcoming a financial crisis, or carry out an orderly liquidation, the intervention may be converted into an extrajudicial liquidation or bankruptcy liquidation, as applicable.

The Bank Bankruptcy Law stipulates that intervention may be decreed ex officio by the Central Bank for a period of six months (which may be postponed for an additional six months) when a financial institution suffers a loss due to mismanagement that generates risk for its creditors, or repeated breaches of banking laws are verified and not rectified after orders from the Central Bank. The intervention process is conducted by an individual appointed by the Central Bank.

After the intervention period, the Central Bank may decide to cease the intervention and allow the bank to return to its normal activities; to decree the extrajudicial liquidation of the bank; or to authorise the intervener to file for voluntary bankruptcy liquidation of the bank.

Intervention has the following effects on the obligations of a financial institution:

  1. suspension of enforceability of matured obligations for the duration of the intervention;
  2. suspension of the flow or count of the term of maturity of the previously existing obligations;
  3. enforceability of all pre-intervention obligations is stayed for the duration of the intervention period; and
  4. creditors are generally prohibited from enforcing and collecting their respective claims against the financial institution undergoing an intervention irrespective of the cause of the event of default and the nature of the claim.
Extrajudicial liquidation

Extrajudicial liquidation of financial institutions may be decreed by the Central Bank ex officio or at the request of the intervener, in the event that the relevant financial institution, inter alia:

  1. has its economic or financial conditions affected by relevant events, especially if it fails to punctually satisfy its commitments or could be declared bankrupt;
  2. seriously violates the legal rules and regulations; or
  3. suffers a loss that subjects its non-privileged creditors to an abnormal risk.

Extrajudicial liquidation is carried out by a liquidator appointed by the Central Bank, and may be defined as an administrative bankruptcy or liquidation proceeding.

The decree of extrajudicial liquidation will result in:

  1. the suspension of any action (for collection) or enforcement proceedings pending against a financial institution concerning its rights or interests (i.e., creditors will not be able to foreclose on respective collateral, since the assets of the financial institution will remain frozen until the end of the extrajudicial liquidation);
  2. automatic acceleration of the maturity of the obligations of the financial institution; and
  3. interruption of the satisfaction of any obligations assumed by the financial institution.

In addition, interest ceases to accrue on the obligations assumed by the financial institution.

The extrajudicial liquidation will cease:

  1. when the Central Bank accepts that the necessary guarantees are in place to allow the institution to take back control;
  2. with the approval of the final accounts of the liquidator and registration of those accounts in the appropriate registry to evidence the termination of the legal entity; or
  3. with the decree of the entity's bankruptcy when the assets of the entity are not sufficient to cover at least half of the non-preferred credits, or if there is evidence of bankruptcy crimes.