Brazil - Banking and securities

A banking reform enacted in December 1964 provided for the establishment of the Central Bank of the Republic of Brazil (changed in 1967 to the Central Bank of Brazil), with powers to regulate the banking system and the stock market. The Central Bank serves as the financial agent of the federal government and functions as a depository for the reserves of private banks. The reform also created the National Monetary Council, which formulates monetary policies for the Central Bank.

The Bank of Brazil primarily finances projects in the agricultural sector. The National Economic and Bank (BNDES) provides long-term financing and administers the privatization program.

There once were about 340 commercial banks in Brazil, with hundreds of branch offices; however, banking reforms reduced that number to 233 in 1998. The largest banks are the federal banks Bank of Brazil, the Federal Savings Bank, and BNDS; private banks Bradesco, Itau, Unibanco, Safra, and Banespa; the Real Bank, and the state bank of Rio Grande do Sul, Banrisul. Since January 1994, banks and other financial institutions must publish constant-currency financial statements. The major banks are considered to be sophisticated and competitive, many operating on-line, and offer a broad range of financial services.

The 1996 rise in international reserves and the fall of the dollar against the Real falsely portrayed an improvement in the financial market. In an attempt to calm the financial markets' worries about exchange rate risk, the government began issuing bonds indexed to the exchange rate. The bonds were supposed to be a guarantee that exchange rate policy was not going to change. The Central Bank curbed the expansion of the monetary base, thus controlling inflation, while the volume of money controlled by banks increased with the initial relaxation of credit. This enlarged monetary base, which included the stock of federal bonds and deposits at the Central Bank, rose at a faster rate than nominal GDP. At the end of 1996, the enlarged monetary base was equivalent to 23% of GDP compared with 18% of GDP at the end of 1995. The expansion of monetary aggregates resulted from the rise in public debt through bond financing of the fiscal deficit. The relaxation of credit policy after the end of 1995 caused borrowers to overdraw, resulting in liquidity problems during 1996 and 1997. This presented a precarious situation for the Brazilian economy, especially when the 1998 financial crisis occurred. The Central Bank decided to let the real float in relation to the US dollar, severely depreciating the value of the real by about 45%; and the bonds that were supposed to have guaranteed a fixed exchange rate were also devalued. These issues led to a number of bank mergers and closures in 1999 and 2000. The 2001 collapse of the Argentine economy forced down the value of Brazil's currency, although it has since recovered somewhat. An energy crisis has also caused some trouble in the Brazilian economy, leading to and overall downturn in 2002. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $35.4 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $149.3 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 17.47%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 21.43%.

Brazil opened its market to foreign portfolio investment in 1991. Brazilian tax laws provide incentives for investment in stocks and bonds. Profit and dividend remittances are subject to a 15% income withholding tax. Up to 24% of individual tax liability may be invested annually in share certificates from authorized financial institutions. Furthermore, individuals may deduct from gross income up to 42% of capital subscription in companies or agencies involved in developing the northeastern or Amazon regions, up to 25% of amounts invested in open capital companies, up to 20% of investments in approved forestation or reforestation projects, up to 13.5% of investments in mutual funds, and up to 4% of savings under the National Housing System. Earnings from all the above investments are also excluded from gross income, up to certain limits. The stock market is a source of financing for all listed companies in Brazil, regardless of ownership. All public issues require the approval of the Securities Commission (CVM). There are nine regional stock exchanges, although over 90% of transactions are carried out in São Paulo and Rio de Janeiro. In 1998, there were 586 companies listed on the Brazilian exchanges. Trading is concentrated in a few stocks. Telebras (the formerly state-owned telecommunications company) accounts for 50% of trade volume. Petrobras, Electrobras, and TELESP; the state-owned petroleum, electric, and Sao Paulo State telecom companies; account for 18% of trade volume altogether. At the end of 2001, total market capitalization of the Sao Paulo Stock Exchange was $186 billion, down 17.6% from the previous year. The IBOVESPA Index dropped 11% in 2001, ending at 13,577.6.