Daniel Lima notes that smaller banks have increased their presence in the assets insured by the fund, but advises against increasing the limit: “it makes credit more expensive”
BRASÍLIA – The executive director of The Credit Guarantee Fund, Daniel Lima, says there is no technical need to increase the value of insurance for financial assets, from the current R$ 250,000 to R$ 1 million. Lima specifies that the measure would benefit a few investors, while the increase in costs would affect all consumers, through an increase in the cost of credit.
“There is no lack of liquidity and there are no financial stability problems, so why change the limit? My technical answer is that there is no technical reason to do so,” Lima said in an exclusive interview with Estadao.
The FGC is a fund made up of contributions from banks to guarantee deposits of up to R$250,000 for CPF or CNPJ, with the aim of guaranteeing payment to account holders in the event of collapse of the financial institution.
How will this interfere with the distribution of CDBs via investment platforms?
I don’t think it changes much in this sense. Everyone is heading in that direction. Previously you had a bank that collected if the customer showed up at the branch, with the manager selling a CDB to the customer. This dynamic has changed. So either the bank will have its own application to raise funds or it will rely on the distributor. I think technology will continue to play this role of facilitating capture. Perhaps what we need is for banks that receive funding exclusively through platforms, over time, to also develop their own applications to start accessing direct customers. But this isn’t a big deal in the industry yet, and it’s something that could happen in the future.
Does the marketing of investment platforms bother selling CDBs by focusing exclusively on profitability and offering FGC coverage as a guarantee?
We may not be happy with the outcome, but there is no rule being broken. So, if we are not satisfied with the result, we must change the norm. There are no restrictions because no one violates any regulations.
Is anyone discussing limiting this type of practice?
No, we have already tried to discuss sustainability rules for the distribution of bank funding products, but this debate has not yet matured.
And for the investor, is there any advice for those who purchase these assets without considering the risk of the issuing bank?
FGC is well capitalized and if you are under the coverage limit, with the incentives provided, you don’t care. You only start counting when you have money above this limit. It’s like this all over the world, but it ends up being more pronounced in Brazil, because we leave a more concentrated market and enter this market with more offers. Here’s why (the FGC) has more visibility. In the USA there is a sticker with the name of the American guarantee fund on the bank window. And it must be so, because this mechanism exists to avoid panic. Therefore, for the guarantee principle to be effective, it is necessary for the population to have broad knowledge of the coverage of the protection mechanism.
Was the BC initiative aimed at providing greater prudence or regulating the use of money raised by these banks?
That’s a bit of everything, regulation reacts to concrete facts. Banking supervisors have probably identified what they believe to be excesses.
What do smaller institutions do with this money raised? Is it very different from banking practice in other countries?
There are different types of business models, some people raise funds to create a salary portfolio, others invest in the middle market, others invest in investment banks. I think the big difference we have compared to the world is the cost financing which is covered by the warranty and the cost of financing not covered by warranty, which is much higher in Brazil. In Brazil, there is a big difference in cost to start a business based on a fund, an FDIC or a financial company. What we see is a proliferation, an ease in raising funds via platforms, and this has increased the amount of funds raised using FGC coverage.
Can you understand that a part of the banking market has become dependent on CDB financing?
Markets react to incentives. If we think there is too much CBD and that this creates risks, other forms of financing emerge that will channel the money. The regulator is paying attention and that is why it has changed some rules.
And what is the composition of the FGC? Do larger banks pay more than smaller ones?
Over 95% of the FGC’s contribution is proportional to the amount the bank issues from the resources covered by the fund. If you issue a lot of covered products, you pay more. In 2021, the additional contribution came into force, in which the most indebted banks, most dependent on FGC coverage, pay an additional contribution.
Is there a resource dispute between large and small institutions?
The FGC covers all banks in case of bankruptcy. The amount collected is proportional to that issued in resources covered by the FGC.
If the limit increased from R$250,000 to R$1 million, what would happen?
The contribution for everyone, large and small, would need to be increased, because the risk borne by the mechanism would be much greater, therefore the mechanism would be decapitalized and the contribution for everyone would need to be increased to capitalize the mechanism.
How much should it increase?
The calculations must be done, but they will have to be adjusted based on the financing dynamics of the banks. If we did a very simple calculation, by quadrupling the coverage limit, you would have to quadruple the contribution rate. But the matter is more complex than that. The fact is that credit becomes more expensive.
Why?
When the bank collects a contribution at the end of the day, it passes the costs on to its customers. This current contribution of 0.01% is already in the credit spread. The new rate would also be transferred to the credit spread. This is not a large impact given the size of our credit spread, but it would still have an impact.
Have you spoken out against raising the limit?
We have given our technical opinion, we believe that 99.6% of the balances are less than R$ 250 thousand, 50% of the financial volume of the balance is covered. When we look at some countries comparable to Brazil and look at the FGC limit divided by GDP per capita, in general the multiple is between two and four times. In Brazil it is five times higher. Above countries comparable to Brazil. So our limit is well defined and there is no technical reason to increase the coverage limit. Furthermore, in Brazil, R$250,000 per financial institution covers an overwhelming portion of the population. People don’t have much money. Most Brazilians are debtors, they are not even savers. And then, by increasing the limit to R$1 million, the portion of the population you will benefit from will be very small. But the cost increases for everyone with credit. Thus, through the cost of credit, the increase in coverage for a small part of the richest investors would be financed.
When the government increased the FGC from R$70,000 to R$250,000, it did so to increase financing from small banks. Why wouldn’t it be positive now?
That’s not exactly what happened. We were in the middle of a liquidity crisis, so it was a financial stability issue. It increased because this flushed the liquidity market. Remember that multiple we talked about? From the limit divided by GDP per capita? What is five times today was ten times then. So the market flooded to solve financial stability, because the average banks were not able to capture it, and therefore many people perceived it as a business opportunity. Brokers saw it as a business opportunity and it has since become a tool to popularize CBD investing. Now, there is no lack of liquidity and there are no financial stability problems, so why change the limit? My technical answer is that there is no technical reason to do this.
Source: Terra
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