Presidential decree facilitates access to Brazilian banking market

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Marcelo Godke
Godke Advogados, Sao Paulo
marcelo@godke.law

Background

Banking activities are strictly and thoroughly regulated in Brazil. The opening of branches of Brazilian banks outside of Brazilian territory; share ownership, inside and outside of Brazil, of Brazilian banks; the appointment of board members and high level executives; the form and the contents of banking services provided in Brazilian territory; and minimum capital levels of Brazilian banks are only a few examples of how detailed and thorough banking law and regulations are in Brazil.

This concern by the financial authorities stems from the need to protect the economy from unregulated and rogue banking activity. After all, a sound banking system is essential for a national economy to work properly. Without a strictly regulated and protected banking system, economic exchanges will be somewhat restricted and negatively affected.

This concern may also lead to the suffocation of banking activities. A clear example of this are the provisions of Article 18 of Federal Law 4,595, dated 31 December 1964: ‘[f]inancial institutions may only operate in the country with the prior authorisation of the Central Bank of the Republic of Brazil or by decree issued by the executive branch in the case of foreign institutions’.

Another example is Article 52 of the Temporary Constitutional Provisions Act: ‘[u]ntil such time as the conditions referred to in Article 192 are established, the following are forbidden: (1) the installation, in the country, of new branches of financial institutions domiciled abroad; and (2) increase of percentual participation of individuals and legal entities resident or domiciled abroad in the capital of financial institutions with headquarters in Brazil. The prohibition referred to in this article does not apply to the authorisations resulting from international agreements, from reciprocity or from interest of the Brazilian Government’.

Both statutory provisions grant the executive power the authority to restrict access to domestic markets for foreign financial institutions and investors.

Such provisions have had both positive and negative consequences. On the positive side, they create highly regulated, controlled and stable financial markets in Brazil, where there are few bank bankruptcies and forced liquidations are rare. It is a system that effectively protects domestic depositors.

On the negative side, they have created difficult hurdles for non-Brazilian banks seeking to access domestic financial markets. The decisions made by the executive branch, namely the President of Brazil, take a long time to be made and issued, and are usually not based upon transparent and objective criteria. Also, when access to financial markets by foreign banks is hampered, there is no real competition in place, making the Brazilian banking market highly concentrated, with the three largest financial conglomerates holding more than 85 per cent of all loans.

Introduction of Decree 10,029/19

Having this in mind, the presidency issued Decree 10,029/19. This Decree provides that the Central Bank of Brazil may recognise, as being of interest to the government: (1) the installation of new branches of foreign banks in Brazilian territory; and (2) an increase of the percentage of shares held by non-residents in banks located in Brazil. Also, according to the Decree, the Central Bank will have to abide by rules to be issued by the National Monetary Council, an office with power to regulate financial markets in Brazil. Such rules should create objective and transparent criteria for foreign banks to be granted access to Brazilian financial markets.

In reality, the Decree will allow a regulatory agency with high technical capabilities – the Central Bank of Brazil – to make decisions in lieu of the presidency, as the latter is not a technical body with knowledge of the ‘ins and outs’ of financial markets. Also, the Central Bank will be able to carry out faster and more consistent analysis, always based on objective, clear and transparent criteria that do not exist today, so that foreign banks may enter Brazilian markets.

Conclusion

If the new regulatory regime provided in the Decree works as expected, creating real competition in Brazilian financial markets, we may see as consequences: (1) a reduction in spread levels practised by financial institutions; (2) an increase in the quality levels of banking services provided to clients in Brazil; and (3) an increase in access to banking services to the population in general (as about 40 million people have no access to such facilities in Brazil).

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