Rate reduction in Brazil predicted to increase competition among banks

An aggressive reduction of Brazil's benchmark Selic interest rate is expected to increase competition among local banks in coming years.

The central bank has cut the Selic rate in recent months as inflation remained below the authority's target. So far this year, it cut Selic by 625 basis points to 7.5%.

The rate is expected to be reduced to 7% in the policy committee's next meeting on December 6 and remain at that level through 2018, according to economists.

"A scenario with lower inflation and a lower interest rate, leads to a more competitive environment. Smaller banks may need to restructure their way to raise capital, because when you operate in an environment with a single digit rate, any difference is relevant. So, small players need to find ways to remain competitive," Alvir Hoffman, vice president of Brazil's banking federation Febraban told BNamericas.

Hoffman attended the 51st Felaban annual assembly in Miami, from November 11-14.

The executive expects a better scenario for major banks, as the economy is improving after severe recessions in 2015 and 2016, when the economy contracted 3.5% and 3.6%, respectively.

"Brazil's economic recession is finishing this year and banks will see a relief in provisions charges and as a result an improvement in profitability," he said.

This year the economy is expected to expand by 0.7% and the next by 2.5%, economists predict.

Independence of the Central Bank

Hoffman, a former supervising director at the central bank, said that the formal declaration of central bank independence is important, but not urgent.

The subject emerged during past presidential campaigns in the wake of discussions to reduce risks of political influence on monetary decisions.

"I see a difficult scenario for the subject of independence to be evaluated during the 2018 presidential election process, but it is not fundamental. The important thing is the government leaves the central bank acting independently, as happens in practice currently," Hoffman said.

Compliance efforts

Questioned if Brazilian banks are expanding their compliance areas amid a series of anticorruption probes, the executive underscored that current anti-money laundering mechanisms in the financial system helped authorities to detect and combat corruption schemes.

"Febraban is in constant talks with prosecutors and federal police to improve all processes of control and to speed up the exchange of information between all sides," added Hoffman.