Financial stability regulation in Brazil (1998-2008)

Abstract

A useful starting point for this discussion may be the acknowledgment of some key features of the Brazilian Financial System (BFS):i. The BFS is a bank-based system, led by financial conglomerates organized around large public and private banks;ii. Large banks are organized as universal banks (called multiple banks) but there are two other important segments in the banking system: stand-alone investment banks and medium/small banks. Investment banks deal with securities markets, asset management, derivatives, M&A, and other more sophisticated instruments and businesses. Small and medium banks cater to regional demands and to specialized segments of the credit market, dealing particularly with consumer credit;iii. Contrary to other experiences with high inflation, the BSF actually thrived during the about 25 years in which the Brazilian economy exhibited sustained rapid rates of price increases, since the late 1960s to the mid-1990s. The survival, and more than that, actually strong performance of the banking segment of the financial system in the period is due to a combination of factors: widespread indexation, which prevented dollarization and the flight toward dollar-denominated financial assets that could not be created or managed by domestic financial institutions; permanent availability of high-yield financial assets, in the form of public debt securities to sustain profitability for the financial industry and to remunerate investors; the innovative drive of banking firms, particularly in relation to payments systems, which strengthened the use of demand deposits by clients worried with the effect of high inflation on the real value of "in-transit" deposits; legal restrictions on the domestic expansion of foreign banks;iv. the ample availability of public debt securities, protected against practi-