Brazil has a very sophisticated and solid banking system. As an extremely important component in fostering economic growth, the Brazilian banking industry and, consequently, Brazilian banking regulation, are constantly developing, providing local market participants with the tools required to enable them to structure complex and innovative products.
Banking regulation has played a crucial part in setting the limits and procedures that allow local players to operate in one of the most important markets in the international economy,2 ensuring a secure environment for investors and for the public in general. Local regulators do not limit their activities to the issuance of rules and guidelines for the banking industry; they also closely supervise market participants to verify whether regulatory requirements are being duly complied with.
An example of this practice is the extensive amount of information that must be provided by banks and other entities to the regulators, sometimes several times in one day. As a result of this constant verification, in the past few years the Brazilian banking industry has not seen any unpredictable failing of local banks, as the Central Bank of Brazil (the Central Bank) has intervened prior to the severe deterioration of a local bank. Banco Azteca do Brasil SA in 2016, Banco BVA SA in 2014 and Banco Cruzeiro do Sul SA in 2012 are examples of intervention and subsequent extrajudicial liquidation of local banks, which, even though not completely eliminating them, did help to reduce the effects of insolvency on stakeholders and mitigate the systemic risk that could arise thereunder.
The Brazilian banking system also provides mechanisms for liquidity problems faced by financial institutions. For instance, the Credit Guarantor Fund, a private non-profit organisation authorised to be incorporated by the National Monetary Council (CMN) and composed of local banks, which was originally intended to protect investors of insolvent financial institutions, has provided assistance to financial institutions with liquidity problems on more than one occasion.
In addition to the precautionary and reactive measures adopted by local regulators to prevent insolvency scenarios, the applicable rules also enable Brazilian banks to issue several types of funding instruments in Brazil and abroad to finance their operations, thereby maintaining acceptable liquidity levels. This variety of instruments is a result of market demand and a positive response by regulators to the needs of market participants, which have recently resulted in new regulations permitting the issuance of new forms of funding instruments, as further addressed in Section V.
By doing business in such a regulated but rather secure financial environment, Brazilian banks have been able to succeed and, many times, foster results in the middle of the economic crises that Brazil has faced in the past.
The regulatory regime applicable to banksi General aspects
An important aspect to consider when discussing banking regulation in Brazil is that there is no legal definition of 'bank' under Brazilian law. The Banking Law,3 which sets forth the basis of the National Financial System (SFN),4 defines in Article 17 the term 'financial institution' as those public or private companies whose principal or secondary activity is the collection, intermediation or investment or custody of their own or third-party funds. It is therefore left to local regulators to determine the types of financial institutions and the activities that may be performed thereunder.
Banks are thus defined in terms of their permissible functions. The main categories of banks are:
- commercial: financial institutions whose main activities, inter alia, are receipt of time deposits, offering checking facilities, providing short-term lending, collecting trade acceptance bills and other credit documents, and accepting and processing utility bill payments;
- development: intended to foster the economic growth of specific regions or industrial sectors. Financing tends to be long term and related to specific projects;
- multi-service: aggregate of more than one type of banking activity, of which one must be either commercial or investment. Thus, a multi-service bank may, for instance, apply for one or more of the following:
- commercial bank licence (if the entity was originally established as an investment bank);
- investment bank licence (if the entity was established as a commercial bank);
- real estate finance licence;
- consumer credit licence;
- leasing licence; and
- foreign exchange authorisation; and
- savings: federal and state-owned financial institutions very similar to commercial banks, which accept savings from individuals by means of deposits in checking accounts for a fixed term or in savings accounts, provide loans and perform various services in the public interest, such as the receipt of federal taxes and charges.
All these types of institutions are highly regulated. Different from individuals or corporations, which under Brazilian civil law are authorised to undertake any act that is not expressly forbidden, regulated entities may only perform activities that have been expressly authorised by law or regulation. As such, the role of regulators has become very important in relation to this type of activity.ii Regulators
The three entities primarily entrusted with the role of regulating and overseeing financial institutions in Brazil, including banks, are the CMN, the Central Bank and the Brazilian Securities Commission (CVM).5
The CMN was created by the Banking Law and is the highest authority in the Brazilian financial system. Among the CMN's responsibilities are supervising the monetary and currency exchange policies for the purpose of the economic and social development of Brazil, as well as operating the Brazilian financial system.
Among its duties, the Central Bank has the obligation to assure the stability of the purchasing of the national currency and the solidity of the national financial system. The Banking Law granted powers to the Central Bank to implement monetary and credit policies issued by the CMN, and to regulate public and private financial institutions and payment arrangements, arrangers and institutions.
The Central Bank is responsible, inter alia, for exercising control over credit and foreign capital, receiving mandatory payments and voluntary demand deposits made by financial institutions, engaging rediscount transactions and providing funding to financial institutions, as well as exercising its function as the depository of national gold and foreign currency reserves. It is also responsible for controlling and approving the incorporation, functioning, transfer of control and corporate reorganisation of financial institutions and payment institutions.
The third regulator, the CVM, which was created by the Capital Markets Law,6 regulates the securities markets in Brazil. As securities activities are strictly connected with banking activities, especially investment banking, the CVM also has an important role as regulator of the banking industry.
Pursuant to the Capital Markets Law, the CVM shall implement policies pertaining to the organisation and operation of the securities industry. Accordingly, the CVM's responsibilities encompass the regulation and supervision of all securities activities, including issuance, distribution and trading of securities; the organisation and functioning of the stock exchanges; and practices in the management and custody of securities portfolios.