Brazil: Internationalization In The Banking Market And The Brazilian Institutions

Last Updated: 21 August 2012
Article by Fábio Braga

Although the economic uncertainty in the international markets still inspire a careful approach, projects for the internationalization of certain Brazilian banks seem to be going on, as in the case of the recent acquisition by BTG Pactual of the leading broker in transaction volume in the Colombian market, Bolsa y Renta, preceded by the purchase of the Chilean CELFIN, which has operations in the markets of Peru and Colombia, or even the transfer to the Banco do Brasil of the corporate control of the American EuroBank.

Moreover, Banco do Brasil — historically present in various international markets — has been studying to move into the African market, in which the average profitability of banks is high and where, gradually, the number of Brazilian companies has been increasing along with the growing demand for banking services to attend the local population needs.

The internationalization movement in the banking market — involving, to a minor extent Brazilian institutions — is anchored in comparative advantages, as the expansion of the activities of domestic companies abroad evolves, based on a higher degree of specialization of institutions in certain products and banking and financial services. Furthermore, such institutions have the opportunity to encompass a broader spectrum of the consumer market with the geographical expansion of the performance of its services. Additionally, in certain markets, the institutions may profit from the openness of the business environment, in view of less rigid legal, fiscal and regulatory frameworks.

In the case of Brazilian institutions, it is worth mentioning that the operational robustness entailed by the set of prudential norms in place in the local market coupled with a close supervision performed by the Central Bank (upon setting up the expected risk management standards), combined with the excellence in the back-office and IT structures plus the significant ROE, provide the necessary conditions that made possible some of the expansion moves towards the international markets that have been recently seen.

Among the examples in the Brazilian banking market, one can identify some alignment of purposes, that is to say that some Brazilian banks have followed the spread of Brazilian companies activities abroad, with a view to meet such companies' capital needs, as well as in connection with placements in the overseas capital markets.

Additionally, the opportunities offered by the relevant Brazilian companies' activities related to foreign trade are to be highlighted, as with the caes of the pilot BNDES Exim Pre-Shipment ("Piloto BNDES Exim Pré-Embarque") and programs created by Caixa Economica Federal, such as Proger Export and "Giro Caixa PIS Exportação". Operational partnerships established by the Caixa Economica Federal with foreign correspondent banks (i.e., as with BcpBank, in the United States of America, or with Millenium Bcp, in Portugal, and Iwata Shinkin, in Japan) aim at meeting the growing demand by Brazilian immigrants for financial services and products in such markets.

From the regulatory perspective, the Brazilian monetary authority has been attentively following up this movement and, recently, partially updated some relevant aspects of the applicable regulations, with the publication in March 2012 Resolution No. 4.062.

Since 2000, financial institutions authorized by the Central Bank to operate in the local market, which desire to develop activities abroad must abide by the rules of Resolution No. 2.723. Notwithstanding, with the enactment of Resolution No. 4.062, the institutions are required to obtain the prior authorization from the Central Bank of Brazil to assume any direct or indirect ownership interest in legal entities located abroad.

In view of the internationalization movement that some banks began to take, the Brazilian monetary authority has resolved to align the equity participation rules applicable to local institutions with the standards recommended by international authorities. This is an attempt to seek the identification of assets acquired abroad in a deeper level of transparency and, therefore, to allow a more effective risk control necessary to avert systemic adverse effects to the Brazilian financial sytem.

As a matter of fact, the new Resolution ruled that financial institutions must limit their investments only to assets that are compatible or complementary to the activities the institution is authorized to develop, reason why the Central Bank of Brazil must be given detailed information about the activities of the legal entity the Brazilian institution intends to participate in and how such activities will go along with the related financial aims of the Brazilian institution.

As far as we are concerned, the Central Bank control that has come into force with the enactment of Resolution No. 4.062 should in no way affect the evolvement of internationalization strategies that any local financial institution might be considering (yet very meager in the central countries financial markets). On the contrary, it represents the reaffirmation of the prudential policy adopted by the Brazilian monetary authority, which, to a large extent, largely, has safeguarded the Brazilian banks since the outbreak of the 2008 international financial crisis.

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