Brazil: The Banking System In Brazil - A Brief Description


The present Brazilian banking structure was designed by Law No. 4595, of December 31, 1994 (the "Banking Reform Law"), which entirely formed the domestic financial system according to the specialization of the financial institutions, and consists of the National Monetary Council ("CMN"), the Central Bank of Brazil ("Bacen"), Banco do Brasil S.A. ("BB"), the National Economic and Social Development Bank ("BNDES"), the Federal Savings and Loan Association ("CEF") and all other public and private financial institutions authorized by Bacen.

The CMN is the senior agency of the Brazilian Financial System and is responsible for monetary policies directed toward economic and social development. Bacen is an autonomous governmental entity responsible for the execution of monetary policies, exchange controls, regulation of banks and financial institutions and control of foreign investments. BB is a mixed-capital corporation and, as a commercial bank controlled by the federal government, is the principal bank agent for the Union. It is involved in public and private financing and has a major role in executing federal government-subsidized lending programs. BNDES is a public financial institution which acts as the main instrument for implementing the federal government's investment policy, granting loans, many of which are at subsidized interest rates, and supervising government financing plans. Presently, it also carries out the Brazilian privatization program. CEF is the principal agent of the National Housing System, receiving deposits and granting mortgage loans. It also administers the Employees Guarantee Fund (FGTS), the Social Integration Program (PIS/PASEP) and the national lotteries.


Financial institutions are public or private corporations whose principal or secondary business is the collection, brokerage or investment of financial resources belonging to themselves or third parties, in domestic or foreign currency, and the custody of assets belonging to third parties. This definition is contained in Article 17 of the Banking Reform Law. Individuals who undertake any such business, either regularly or sporadically, are regarded as financial institutions for the purposes of this legislation.

The state or interstate development banks are regional financial institutions controlled by the respective state governments, which grant medium or long-term loans for fixed or working capital, according to the economic and social needs of the regions where they operate. The principal activities of these entities are the on lending of loans and providing of loans for the financing of rural and industrial development schemes.

Federal and state saving banks are financial institutions which undertake almost the same types of business as the commercial banks. They accept savings from individuals, by means of deposits in current accounts for a fixed term or in savings accounts (cadernetas de poupanca) and make loans, thereby playing an important role in the National Housing System. They also provide various services of the public interest, such as the receipt of federal taxes and charges, and payments of wages to civil servants.

Except as outlined below, private financial institutions must be incorporated as sociedades anonimas ("Corporations"), having all their shares in registered form, and include the following entities:

(i) Commercial Banks (bancos comerciais) - They engage in both wholesale and retail banking and are the main source of short and medium-term financing. In addition to making loans, they provide a wide range of financial services, such as accepting deposits, paying checks, issuing letters of credit, dealing in foreign exchange, cash management services, electronic transfers of funds, investment banking services and investment management.

(ii) Investment Banks (bancos de investimento) - They are specialized in medium and long-term finance for the supply of capital and investment of third party funds. With the assistance of an investment bank, a foreign investor may be able to obtain long-term financing through the sale of the stock or debt obligations in the public market or through private placement. Their activities include: the on lending of foreign loans; the making of loans for providing fixed or working capital (including finance for the production and export of goods); the purchase of securities (shares, founders' shares, debentures and their respective coupons and subscription bonuses, certificates of deposit of securities and commercial paper) and other documents of title for investment or subsequent sale on the stock market; the distribution or placing of new issues of securities; the underwriting of share issue; the administration of mutual investment funds; the receipt of deposits; and, when authorized, foreign exchange dealings. They may also have a specialized leasing department to effect a lease-back transactions, which are conducted directly with the vendors of the goods or with corporations which the vendors are connected with.

(iii) Credit, Finance and Investment Companies (financeiras) - They are specialized in credit opening operations by acceptance of bills of exchange to finance purchases of goods and services by consumers or by final users and may also trade in other commercial instruments, such as promissory notes and duplicates. They include subsidiaries of large manufacturing or retail companies. Due to the greater risks and a higher cost of funds, financeiras charge higher rates than commercial banks.

(iv) Securities Dealership (distribuidoras) - They may be incorporated either as a limited liability company (sociedade por quotas de responsabilidade limitada - "Ltda") or as a Corporation and their object is the subscription of securities for resale or distribution on the market and may engage in the following transactions: the sale, at sight or at term, of securities or commercial instruments on their own account or for third parties, the subscription, on their own account or jointly with other authorized companies for the securities or other commercial instruments for resale; the making of agreements with the issuing company, jointly or separately, for the maintenance of the price of securities on the market during the placing of an issue; acting as intermediary in the placing of issues on the market; and the formation and management, as leader or participant, of consortia for underwriting issues of securities.

(v) Brokerage Companies (corretoras) - They may be incorporated either as a Ltda. or as a Corporation and have the exclusive right to deal on the stock exchange, in authorized securities and other commercial instruments, and may also purchase, sell and distribute securities and instruments on their own account or for third parties. They may form and manage, either as leader or as a participant, consortia for underwriting issues of securities; purchase and subsequently sell securities and commercial documents and distribute and place them on the capital market, as well as act as intermediaries in the auctions held in connection with the debt/equity conversion and the privatization program.

(vi) Multi-Service Banks (bancos multiplos) - These entities, through special departments (portfolios), may carry out the activities of two or more different financial institutions, among the following: commercial bank, investment bank, credit, finance and investment company and real state credit company.

(vii) Leasing Companies (sociedades de arrendamento mercantil) - They may only engage in leasing operations and are prohibited from making any other type of business.

(viii) Savings and Loan Associations (associacaes de poupanca emprestimo) - They must be incorporated as civil companies and are restricted in their operations. They accept deposits from individuals and provide financing to companies and individuals secured by real estate. Their principal function is to administer funds for direct financing of building projects and for the concentration of capital and monetary resources in other official credit agencies by encouraging savings.

(ix) Real Estate Credit Companies (sociedades de credito imobilidrio) - Their function is to provide funds for housing construction companies that sell houses by instalments, and for the purchase and construction of houses. In order to carry out their responsibilities, real estate credit companies may obtain funds by issuing property bonds, receiving deposits and others for a minimum term of one year and by obtaining credit in Brazil or abroad for housing schemes and refinancing granted by the CMN.

With respect to regional banking, unlike other jurisdictions, Brazilian legislation does not limit the operations of the financial institutions to specific regions, although in practice some banks decide to concentrate its activities in certain regions of the country.


The future structure of the Brazilian financial system depends on a Complementary Law to be enacted pursuant to the requirements of article 192 of the Federal Constitution, promulgated on October 5, 1988 (the "Federal Constitution").

Currently, financial institutions are basically governed by the Banking Reform Law. In addition, these entities are regulated chiefly by resolutions, circulars, circular-letters, letter-instructions and notices issued by Bacen. All rules applicable to the financial institutions have been consolidated by Bacen into a booklet called Manual of Rules and Instructions (Manual de Normas e Instrucoes - MNI).

The legislation entrusts Bacen with the role of implementing the currency and credit policies laid down by the CMN and with the task of controlling and supervising all public and private financial institutions, as well as to authorize their functioning. The activities of these entities are controlled by Bacen, which approves their corporate documents, amendments to their by-laws, minimum capital requirements, increases of capital, method of paying-up capital, the setting-up or transfer of its principal place of business or any branch (whether in Brazil or abroad), etc. and supervises their operations, transformations, consolidations, and mergers.

Bacen also monitors firms which are directly or indirectly engaged in transactions in the financial and capital markets, including leasing companies, and is responsible for controlling foreign capital invested in Brazil and the country's foreign indebtedness by regulating the conversion and registration of foreign debts into investments in Brazil. Bacen may take whatever measures are required to maintain the normal functioning of the exchange market, the stability of exchange rates and the balance of payments, and may accordingly purchase gold and foreign currency and enter into loans abroad.


Several foreign banks hold minority ownership positions in local banks. A few foreign banks of significance have subsidiaries or branches in Brazil. In addition, many of them have representative offices.

A. Acquisition of Controlling Interest in a National Bank: Pursuant to Articles 50 and 51 of Law No. 4.131, of September 3, 1962 (the "Foreign Capital Law"), foreign participation in Brazilian financial institutions is limited to 30 percent of the voting capital and 50 percent of the total capital. Financial institutions that already had foreign participation were allowed to maintain their status quo.

According to Article 192, III of the Federal Constitution, foreign equity investments in financial institutions will be regulated by a complementary law, which must still be enacted by the National Congress. Article 52 of the Temporary Constitutional Provisions Act established that:

"Article 52 - Until the conditions referred to in article 192, III, are established, it shall be forbidden:

I the installation, in the Country, of new branches of financial institutions domiciled abroad;

II increase of percentile participation of individuals and legal entities resident and domiciled abroad in the capital of financial institutions with headquarters in Brazil.

Sole Paragraph - The prohibition referred to in this article does not apply to the authorizations resulting from international agreements, from reciprocity and from interest of the Brazilian government."

Through Message No. 311, of August 23, 1995, published in the Official Gazette of the Union dated August 25, 1995, the President of the Federative Republic of Brazil, upon proposal of the Ministry of Finance based on the sole paragraph of article 52 of the Temporary Constitutional Provisions Act, resolved to recognize as matters of interest of the Brazilian government, the participation or the increase of the percentile participation in the capital of financial institutions with head office in Brazil, by individuals or legal entities resident or domiciled abroad.

The request for authorization must be presented to Bacen by each Brazilian financial institution interested in receiving foreign capital equity investments, on a case by case basis. Bacen will then submit such request to the appreciation of the National Monetary Council, as a condition precedent to the final decision of the President of the Republic.

B. Establishing a Subsidiary:

The establishment of any financial institution in Brazil, including a local subsidiary of a foreign financial institution, must also be licensed by Bacen. The setting-up of new subsidiaries depends on a complementary law to be enacted by the National Congress pursuant to Article 192, III, of the Federal Constitution.

C. Establishing Branches and Representative Offices:

The opening of a branch of a foreign financial institution in Brazil must be licensed by Bacen and required further authorization by government decree. While the already mentioned complementary law has not been enacted, this authorization will only be obtained under very special circumstances, according to the interests of the Brazilian Government or resulting from an international or a reciprocity agreement entered into between Brazil and the country where the foreign financial institution is headquartered.

Likewise, the opening of representative offices of foreign banks in Brazil is also subject to the prior approval of Bacen. This approval was formerly only granted to individuals, although Bacen has authorized certain companies organized in Brazil for this purpose to operate as legal representatives of foreign financial institutions.

The business undertaken by the representative of a foreign bank in Brazil is severally restricted. At no time may the representative act as a bank or undertake any banking business. He may, however, promote the services and facilities which the foreign bank has to offer and thereby solicit clients for the bank. The representative may also obtain and supply the bank with information regarding a variety of matters, and act as a point of contact between the principal place of business and its clients. If the representative exceeds the limits, his approval may be canceled by Bacen.


The CMN issues accounting and statistical rules to be observed by financial institutions in accordance with the guidelines set by the Executive Branch and further Bacen ensures that these rules are complied with and supervises the financial institutions. The procedure necessary for theses entities to submit to Bacen their balance sheets, trial balance sheets and, then appropriate, accounting books and to furnish other documents to Bacen is constantly being reviewed.

There are certain obligations which must be complied with by all financial institutions to enable Bacen to exercise control. They must remit periodically to Bacen certain documents, in particular interim balance sheets prepared monthly and semi-annually, as of June 30 and December 31 of each year, in compliance with the standard accounting rules established by Bacen for each type of financial institution. The auditing of these entities is also subject to the provisions contained in the above-mentioned MNI.


As a general rule, all financial institutions operating in Brazil must keep secret their transactions and services rendered. The matter is regulated by Article 38 of the Banking Reform Law.

According to the provisions of Article 38, financial institutions shall maintain secrecy as to their operations and services rendered. The furnishing by Bacen or by financial institutions of information demanded by the courts, and the disclosure in court of books and documents shall always be made in secret, and only the parties concerned may have access to such information, which may not be used for purposes other than that for which it was required.

Revenue officers of the Ministry of Finance and of the States may only proceed to examine documents, books and registers of deposit accounts when proceedings have been started, and the same are considered essential by the competent authority. Likewise, the supply of information by financial institutions to the tax authorities shall be confidential and the use thereof shall be restricted.

Any breach of the duty of secrecy imposed under this article constitutes crime and renders any who are found guilty liable to imprisonment for a term of between one and four years, the Penal Code and the Code of Criminal Procedure being applicable where appropriate, without prejudice to other sanctions.

Recently, an exception to the general rule of Bank Secrecy was submitted to the National Congress through a Bill proposing the creation of a provisional contribution on financial operations (Contribuicao Provisoria sobre Movimentacao Financeira - "CPMF") which, if finally approved by the Senate, will incur most of the financial transactions at a rate of 0.2% (the "Bill").

According to the Bill, for purposes of fiscalization of the CPMF withholdings, financial institutions operating in Brazil shall state to the competent Secretariat of the Ministry of Finance, all information required for identifying taxpayers and the corresponding financial transactions. However, the Bill does not allow the use of such information by the Ministry of Finance for fiscalization and collection of other taxes, imposts and charges of any nature whatsoever.

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

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