BC says that breach of confidence in the fiscal regime would have a more severe impact on the financial system – 09/03/2023 – Market

The Comef (Financial Stability Committee) of the Central Bank said this Thursday (9), in the minutes of the last meeting, that simulations of extreme scenarios show that an eventual breach of confidence in the fiscal regime would have the most severe impact on the financial system. national.

The BC collegiate, however, stressed that the results of the stress tests demonstrate that the system is resilient.

“The results of the stress tests demonstrate that the system is resilient. In the evaluated macroeconomic stress scenarios, described in the Financial Stability Report, the system would not present relevant noncompliance”, he said.

“Since the last Comef meeting, the increase in uncertainty has amplified the impact on the system. The most severe impact continues to be observed in the scenario of a breakdown of confidence in the fiscal regime. A sensitivity analysis test found that even if troubled assets doubled in compared to its current levels, the system would not present relevant noncompliance”, he continued.

The Minister of Planning and Budget, Simone Tebet (MDB), met with the Minister of Finance, Fernando Haddad (PT), this Thursday to discuss the design of the new fiscal rule, which will replace the spending ceiling – a mechanism that limits growth of public expenditures to the inflation recorded in the previous year.

Without giving details of the format of the future fiscal framework, Tebet said that the proposal encompasses both the concern with zeroing Brazil’s fiscal deficit, estimated at around R$ 230 billion this year, and with stabilizing the debt/GDP, as well as the president’s demand Luiz Inácio Lula da Silva (PT) for investments.

According to the minister, the model will “please everyone, including the market [financeiro]”. By directly interfering with expectations around the trajectory for public accounts over the next few years, the topic is much awaited by economists in the private sector.

In the Comef minutes, the BC also noted that there was a decline in the system’s profitability due to the provisions of financial institutions exposed to the Americanas case. The retailer entered into judicial recovery with debts that exceed R$ 40 billion, in the wake of the revelation of an accounting breach disclosed on January 11 of this year.

The monetary authority highlighted in the document that a “significant portion” of the provisions –accounting mechanism that keeps resources in cash to cover expenses that have not yet occurred– that appear in the balance sheets of financial institutions for the last quarter of 2022 “results from a specific event related to large company”, without naming Americanas.

“These provisions account for a relevant portion of the decline in the annual profitability of the SFN [Sistema Financeiro Nacional] and have already absorbed most of the materialization of the risk”, stated the collegiate in the document.

The BC also said that it estimated the remaining potential impact of the Americanas case in an extreme scenario, in which there would be contagion over the entire production and supply chain that depends significantly on the retailer.

According to Comef’s evaluation, the impact for the system in this context “is insignificant and there would be no capital non-compliance in any financial institution”.

Still according to the committee, the profitability of the National Financial System remains pressured by “reduction in the credit margin, low growth in service revenues and growth in administrative expenses due to inflation.”

An eventual “domino effect” of the Americanas case sparked the alert of analysts and members of the Luiz Inácio Lula da Silva (PT) government about the impacts on the economy.

Among the points of attention in relation to credit, Comef warned of the deterioration in asset prices in the private bond market due to “one-off events” of large companies.

“As a result of these events, volatility, spreads [diferença entre o custo de captação dos bancos e a taxa final cobrada do cliente] and risk aversion increased. Effects were also seen on some lines in the credit market,” he said.

The committee stated that it has followed the evolution and unfolding of recent events and said it was “ready to act in case of dysfunctionality”.

In the minutes, the BC also stated that the risk appetite of financial institutions in granting credit to families and smaller companies remains high, although it has reduced.

“Although decelerating, the pace of growth remains high in riskier modalities, such as credit card and non-payroll credit, which requires more attention in an environment of greater commitment to income and family indebtedness”, he said.

Data from Serasa Experian shows that the number of defaulting people started to rise in September 2021 and has not stopped. Currently, there are 70 million consumers and 6.4 million companies struggling to pay overdue bills.

As shown to Sheetgranting new loans and financing to companies declined in January, according to data released by the Central Bank at the end of February.

Despite the warnings, the BC instance focused on the prevention of systemic risks considers that financial institutions continue to be able to absorb the materialization of credit risk and that asset prices and credit growth do not represent a concern in the medium term, although there are uncertainties to be monitored.

According to the monetary authority collegiate, the financial system is prepared to face possible problems, with no need for adjustments in the macroprudential policy in the short term.