Febraban: we can never relax in the fight against inflation – 06/21/2023 – Market

The president of Febraban (Brazilian Federation of Banks), Isaac Sidney, said this Wednesday (21) that the fight against inflation is a preponderant factor to guarantee economic growth.

“Macroeconomic stability, with low, stable inflation, is a fundamental foundation for sustainable economic growth and we can never relax in the fight against inflation”, said the president of Febraban and former director of BC (Central Bank) during an event promoted by the risk agency Fitch Ratings in São Paulo.

This Wednesday, the Copom (Monetary Policy Committee) of the Central Bank once again ignored pressure from the government of Luiz Inácio Lula da Silva (PT) and businessmen to reduce interest rates and kept the basic rate (Selic) at 13.75% per year.

Over the last few months, President Luiz Inácio Lula da Silva (PT) and members of the government have criticized the BC and its president, Roberto Campos Neto, for the decision to keep interest rates high at a time when inflation seems to be starting to lose power.

Also present at the event, Ricardo Franco Moura, head of Dereg (Department of Prudential and Exchange Rate Regulation of the BC), stated that the monetary authority has gone through a weakening process over the last few years that puts the country’s financial stability at risk.

According to Moura, since 2014 no new resources have been made to bring in new employees to strengthen the monetary authority’s staff. In that same period, pointed out the executive, the assets of the financial system in the country grew between 15% and 20%.

“We have an idiosyncratic risk in Brazil, which is a process of weakening the supervisory and regulatory body,” said the head of the BC department, adding that the monetary authority exports talent both to the private sector and to the public sector.

He also said that the career in the monetary authority has a lower remuneration compared to other State bodies.

Cost of financial intermediation represents 80% of bank interest

Sidney also recognized that the banking spread in Brazil (the interest charged by banks to customers) is high, but said that, even more than the Selic, costs related to banking activity are the main cause for high interest rates in the financial sector.

According to data cited by the president of Febrabran, approximately 80% of the bank spread is linked to the cost linked to financial intermediation in the market, while only 20% corresponds to the institutions’ profit.

Of the 80% related to costs resulting from interest, Sidney pointed out that around 30% stem from defaults and liquidity buffers that banks need to keep in their balance sheet to protect themselves against payment delays. Another 28% refer to administrative costs, and 22% are due to taxation and contribution to the FGC (Credit Guarantee Fund).

“The numbers indicate that a structural drop in the cost of credit necessarily involves measures that attack the costs of financial intermediation in the country, be it the cost resulting from default or administrative costs or also taxes”, stated the president of the federation.

Sidney said that the legal framework for guarantees could contribute to reducing banks’ costs, as, according to him, Brazil is one of the countries that least recovers guarantees and secured credits on a global scale, and is also one of the countries that most takes longer and is more expensive to perform these recoveries.

The president of Febraban stated that, in England, the credit recovery rate orbits around US$ 0.85 per guaranteed dollar, and fluctuates around US$ 0.42 in Chile. In Brazil, it is US$ 0.20.

“There are changes in the fiduciary alienation part [no marco de garantias]in vehicle financing, this should all give a little more effectiveness in credit recovery.”

Regarding taxation, Sidney said that Brazil is one of the few countries in the world that has direct and indirect taxation that falls on the financial intermediation income of banks.

“Brazil still has the incidence of indirect costs, PIS/Cofins, IOF, on financial intermediation revenue, and this puts a lot of pressure on the bank spread, and the tax reform is a relevant opportunity in relation to which Congress could use to take away this peculiarity in credit, which is the tax incidence on the banking spread”, said the president of Febraban.

On June 12, the STF (Federal Supreme Court) formed a majority in favor of the government in a billionaire judgment that involves the taxation of financial intermediation in the period from 2000 to 2014.

“Without facing the structural causes, which make the cost of credit high, we will not be able to make a structural reduction in the cost of credit”, stated Sidney.