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Brazil’s top banks – including  Itaú Unibanco (photo) -- risk ratings downgrades if they are forced to pay compensation to depositors.  (Photo: Itaú Unibanco)
Wednesday, June 18, 2014

Brazil Banks: Uncertainty Continues

It is still unclear how a multi-billion dollar lawsuit will affect Brazilian banks.


Inter-American Dialogue 


Brazil's highest court, the Supreme Federal Tribunal, on May 28 delayed a ruling on a landmark case in which banks could be forced to pay 341 billion reais ($153 billion) to savers who incurred losses in their savings accounts related to government policies to fight hyperinflation in the 1980s and 1990s. The court's delay followed a ruling by Brazil's second-highest court, the Supreme Court of Justice, in the depositors' favor. What are the central issues in the lawsuits, and were the banks at fault? What is at stake for banks in the case and their customers? How would a ruling against the banks affect Brazil's financial system and broader economy?


Sergio Garibian, analytical manager for financial services in Latin America at Standard and Poor's: The Brazilian Supreme Federal Tribunal (STF) on May 28 indefinitely postponed its ruling on the constitutionality of the macroeconomic stabilization programs that were implemented during the late 1980s and early 1990s. An unfavorable ruling will revise the indexation rates for the savings accounts during those years, which could result in the Brazilian banks paying out a significant compensation to depositors who initiated lawsuits against the large Brazilian retail banks. Both the timeframe for the STF's deliberation and the potential outcome remain uncertain at this point. Nevertheless, according to the different estimates that market participants and government agencies have presented, the potential costs are likely to range from 150 billion reais (3.1 percent of GDP) to 341 billion reais (7 percent of GDP), although the final resolution of the multiple lawsuits could fall below the lower range of the scale. We estimate the seven largest Brazilian commercial banks currently have a combined buffer of 140 billion reais to absorb losses without affecting their creditworthiness. However, the composition of the cushion for individual banks varies. Combined losses in excess of 211 billion reais could trigger rating downgrades of Banco do Brasil, Banco Bradesco, Itaú Unibanco Holding, and Banco Safra, given that their weakening capitalization levels could breach the minimum regulatory requirements. On the other hand, we also believe banks could suffer a loss of reputation and investor confidence in a negative ruling leading to tighter liquidity. Still, we believe the government could provide support through the legal infrastructure, regulatory framework and various funding mechanisms, thus maintaining investors' confidence in the financial system.


Walter José Faiad de Moura, partner at Moura Lamounier Advogados in Brasília and Marilena Lazzarini, president of the board of directors of the Brazilian Institute for Consumer Defense (IDEC): Brazilian banks know that they should reimburse the losses of savers because they did not respect savings contracts. It's true that different economic plans were needed to control the inflation, but there was no authorization within the legal framework to disrespect the monetary correction stipulated in each savings contract with clients and retroactively impose the new indexes. So there is no doubt that banks owe these amounts as determined by the orders of the Brazilian courts, including the Supreme Court, which has ruled in this way in more than 300 cases. The alleged amount of 341 billion reais is not correct, and the real amount is less than 5 percent of that, even including the interest for late payment, according to a recent decision by the Supreme Court of Justice (STJ). However, banks and Brazil's financial authorities will face a major problem if commercial banks and the central bank confirm that this amount is correct: where are the provisions for these absurd sums? Surely, they do not exist and serve only to terrorize judges. If the values are correct, however, it is time for serious evaluations by the G-20 and other international entities of Brazil's debt.


Thomas Rideg, managing director of Global Intelligence Alliance: Inflation in Brazil at the time reached outrageous levels of up to 1,000 percent, and the government came up with a series of plans to try to control inflation. The system at the time corrected savers' accounts with a monetary correction and a percentage of interest. However, not all savings accounts closed the month on the same date. When the government issued the freezes, it implied that at the end of that period, the remuneration base would be changed. However, the banks did not alter the remuneration on a saver-by-saver basis, but rather implemented the new reduced returns on all accounts immediately. In this sense, yes, the banks hold a degree of responsibility and fault. This meant that in a period of high inflation with a sudden cut in remuneration, the consumer lost about 20 percent of the value of his or her savings. Today, there are anywhere between 400,000 to 550,000 lawsuits by consumers who had savings at the time and were affected by these measures. Many others may be eligible. According to experts, banks must credit consumers 0.5 percent per month since the date of injury and another 1 percent interest from the point of the ruling. That said, if you look at a period of more than 20 years, even if a consumer had a small amount of savings, the outcome for everyone involved can be significant. The overall economic impact to banks will be huge, almost 10 percent of Brazil's GDP (at least it appears to be in that magnitude). This is too much for the banks to handle, and I would expect that as soon as banks are ultimately ruled responsible, they will make their case against the government and seek compensation there, which will not happen, and will bring new cases and prolong this further. The possibility of banks crediting 341 billion reais to savers' accounts 24 years after the incident looks like a very long shot. At most, the sums will be diluted, and consumers who take proactive action may be eligible for some compensation.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor