Tuesday, March 28 , 2017
About FGC
About Our History

FGC Yesterday and Today: 1995 - 2006

(October, 2006)
Ana Carla Abraão Costa
Technical Coordinator
Tendências Consultoria Integrada
On November 11, 2006, The Fundo Garantidor de Créditos – FGC completed eleven years of activities. Thus, we think it is appropriate to record a brief description of our performance, of the main events which took place during that period, as well as the economic environment involving our work.
1. Introduction
On August 31, 1995 the CMN, by means of Resolution 2,197, authorized the “constitution of a private non-profit entity, for the purpose of administering the protection mechanism for credit holders against financial institutions”. Three months afterwards, on November 16, 1995 Resolution 2,211, with the new wording prescribed by Resolution 3,024, set forth the details of the Statutes and Regulations of the Brazilian System of Deposit Guarantee. The Fundo Garantidor de Créditos – FGC was thus formally instituted.
Before this date, the only deposit insurance contracts were those related to savings accounts guaranteed up to the limit of R$5,000.00 (five thousand reais), through the Real Estate Bill Guarantee Fund (FGDLI). The remaining obligations had no formal guarantee and thus depended upon the methods of banking failure resolution adopted by the Central Bank of Brazil, to be reimbursed to credit holders in the event of liquidations of interventions. With the institution of the FGC, deposit insurance range and value were expanded and a more complete system was introduced with the advantage of being funded exclusively with resources the own system.
The FGC was born with well-defined characteristics and today displays the same structure it formally possessed in November 1995, viz:
  • Explicit protection;
  • Compulsory membership;
  • Limited coverage;
  • Ex-ante private funding;
  • Private management.
  • However, the justification for the establishment of a deposit insurance system at that moment was based on the urgent need for the strengthening of the banking system safety network, both with the search for minimizing economic and social costs that would result an eventual bank run, but also with the potential threat to the gains achieved in the aftermath of the recent economic stability. Retrospectively, it becomes quite visible that the FGC has being fulfilling its role impeccably, representing an institutional advance for Brazil in terms of the banking system stability and protection.
    Deposit insurance systems to work well depend upon an important variable, which represents the economic structure in which they are inserted. Brazilian macroeconomic and microeconomic framework not only in its constitution but also in its continued performance is significant for the determination of an effective deposit guarantee system. Thus, it becomes necessary that the financial resources structure has sufficient flexibility for updating and adapting to the changes required by the economic environment.
    2. The Brazilian Banking System and the Macroeconomic Environment
    The year of 1994 is an important benchmark in the Brazilian economic history. Following decades of persisting inflation and a cluster of derailed economic stabilization plans, the “Real” plan is implemented and manages to stabilize the level of prices. This change of environment meant a significant shrinking of the banking sector which accounted, already in the year of 1995, for 6.79% of the GDP versus a peak of 15.61% in 1993, as indicated in Figure 1 below.
    Therefore, the stabilization of price levels in the middle of the 1990 decade meant the need for an unprecedented adjustment in the banking sector, both due to the new economic environment that was created but also due to the need to heal inefficiencies encountered in the Brazilian banking system, that existed as a function of the significant gains derived inflationary transfers. The cost of this adjustment was already clear at the end of 1994, with the liquidation of seven small banks, in addition to the failure of a large national retail bank.
    The understanding of the macroeconomic environment prevailing at the time of the FGC’s creation and its evolution in the course of the last decade, together with the analysis of the Brazilian banking sector changes, are important for evaluating the FGC’s performance along that period.
    A first analysis should focus on the evolution of the basic interest rate of the Brazilian economy. In mid 1994, the annualized overnight Selic rate reached the level of 56%, and, in spite of experiencing a period of decline, this rate begins the year of 1995 at a level above 46% p.a. with a rising trend. It was exactly at that time that the contribution rate destined to the FGC was assessed at 0.30% p.a. on the guaranteed outstanding deposit balances. Already in mid 1995, interest rates began to show a declining trend, which was interrupted – and even reversed – on account of the Asian and Russian crises in 1997 and 1998 respectively, and the Brazilian exchange crisis of 1999 (see Graphic 1 below). The reduction of interest rates volatility occurred after the adoption of the floating exchange regime and the inflation target system, followed by positive consequences for the economy as a whole, and especially for the banking sector. The fact is that we arrived almost at the end of 2006, with an overnight Selic rate defined by the COPOM (Monetary Policy Committee) in its October meeting of this year at 14.25% p.a.
    Quantitative and qualitative changes were not smaller in the banking sector when we analyze the time period in question. Not only in the number of banks, but mainly in relation to the structure of the system, differences are rather striking. Once the crisis period was over, after liquidations, interventions, closures, fusion and acquisitions, the Brazilian banking system displayed a new profile. A period of sanitation, followed by the sector’s internationalization and the reduction of public participation, brought about a more efficient and solid system concentrated in a smaller number of banks.
    In the year that the FGC was instituted, the Brazilian banking system consisted of 246 banking institutions among commercial, multiple and savings banks. A great portion of those originated commercial banks and brokerage houses that became banks after the banking reform of 1988 that encouraged the institution of multiple banks in Brazil. that year onwards, the total number of institutions in operation has been decreasing and reached a total of 162 banks in June, 2006 (see Table 1 below). During this shrinking process the number of banks operating in the Country was reduced by one-third, in the period of 1996/2006 only, a total of 25 institutions were liquidated by the Central Bank, all having their deposits honored by the FGC.
    The direct performance of the FGC, therefore, began exactly when the Brazilian banking sector crisis reached larger proportions and required the government to make stronger preemptive interventions. During the year of 1995, the financial sector protection safety network began its restructuring and strengthening, offering special liquidity lines, such as the PROER; and the Central Bank expanded its powers in the evaluation and transfer of equity control of those banks facing failure problems and in the improvement of the structure of banking supervision and regulation.
    During the year of 1996, five liquidations were decreed by the Central Bank, representing a total of R$259.244 million in deposits honored by the FGC. In the following year, the situation deteriorated even further with the failure of another large private national bank, the Bamerindus, which required the FGC to pay out over R$3 billion and demanded a financial effort that, although extremely burdensome at the time, has now been completely resolved. The years of 1997 and 1998 still required significant payouts on the part of the FGC but in a declining scale: R$151.568 million and R$57.812 million respectively. that point on, isolated and minor failures in terms of requirements became the rule, without the occurrence of big surprises, and without major difficulties in terms of resources on the part of the FGC, which in the years of 2003 and 2004, rendered guarantees for a total amount below R$7 million and R$20 million respectively. These amounts refer to the liquidation of one bank in 2003 and another bank in 2004 (see Figure 2 below). During 2005 and 2006 there has been no banking liquidation, and therefore, there has been no payout for deposit insurance on the part of the FGC. All amount figures mentioned above are recorded on a historical current basis.
    On the other hand, the capitalization level of the Brazilian banking sector, shows a positive picture: According to the Central Bank, the Consolidated Basel Index of the National Financial System (SFN) – that measures the level of capital weighted by asset risks – reached 18.1% in December, 2005. This percent is over 7.1% more than the minimum limit of 11% required by the regulation and reflects a sound position that differs completely the post-Real years, and therefore, the period of the FGC’s establishment, when several institutions were not regulated. This offers the immediate effect of producing a larger capacity to resist stressing scenarios, both in relation to credit risks as well as in relation to market risks, making this situation equally different the one that characterized the beginning of the FGC’s operations.
    Those were years of difficulties for the Brazilian economy in general and for the banking sector in particular. A new reality was outlined and there was no simple settlement for this new situation. The stability of price levels, the appreciation of the national currency, the re-monetization of the economy and the fast credit expansion; together with nominal and real high interest rates and high indices of default; were factors that defined a complex scenario and produced a costly resolution process but which culminated with a scenario of stability, displaying a banking system healed and sound, initial difficulties were overcome along the years.
    Thus, therefore, many of the factors that determined the initial design of the FGC – and by all means contributed to its exemplary performance during its eleven years of operations – were modified in the course of that period, forcing the FGC to watch them attentively, seeking to adapt itself to the required advances in order to maintain its scheme as a deposit insurance system recognized throughout the world.
    3. The FGC – Yesterday and Today
    In all those eleven years the FGC displayed only marginal changes in its organizational and operational structure. On the other hand, its economic and financial standing shows a completely different picture.
    In operational terms the FGC was instituted as a classic pay-office scheme, having as its only duty the payout of insured deposits in the event of liquidation or failure of a financial member-institution. Now, after all those years, the FGC continues with this same function, but incorporated other broader activities of banking failure resolution. Three successful experiences are mentioned herein: the transformation of an extra judicial liquidation into an ordinary liquidation; a prior notice liquidation agreement; a banking failure resolution with compensation to creditors; in addition to several other actions underway which indicate the FGC’s active participation in resolution projects that can be translated into significant progress in terms of minimizing losses for the FGC and providing more efficient solutions under the economic and social viewpoint.
    As to the FGC’s financial standing, the picture differs altogether that which characterized its creation in 1995. During the first year of operation, net receipts collected by the FGC reached R$468.65.65 million versus disbursements for deposit insurance payouts over R$259 million. In the following year, when the financial equilibrium became threatened with the failure of several banks, amongst them the Bamerindus, which represented a total disbursement of over R$3 billion, net receipts collected were less than R$600 million. The equalization of this disequilibrium was carried out in a quiet and transparent manner; and today, the FGC’s reality is altogether different: while there were no disbursements in 2005 and 2006, the receipt representing the monthly average contribution reached R$133.5 million, in the first half of 2006. In addition to monthly contributions, the FGC also collects tariffs which are charged for the inclusion and exclusion services of name entries in the National Closed Accounts Register, due to the return of bad checks, in the monthly average amount of R$9.2 million. These two receipts added together reached the monthly average amount of R$142.7 million in the first half of fiscal year 2006, not considering financial receipts. As of the same date total cash availability recorded the amount of R$10.7 billion.
    4. Access to Financial Resources
    The Table below shows the FGC’s financial position on June 30, 2006.
      (R$ Million)

    Total assets 12,239.175
    Total net worth 11,258.044
    First half of 2006 surplus 1,555.995

    Thus, it becomes quite clear that the FGC today is an altogether different institution, in terms of sustainability, responsible for running a deposit insurance system. With adequate resources, administrative efficiency, objective performance and cost effectiveness, the FGC stands out internationally as a model to be followed by countries that are considering the adoption of a deposit insurance structure.
    It is true that there is the need for continuous advances in order to adapt itself to the Brazilian economic situation and also to the banking system. This is a permanent concern of the FGC’s administration in the preservation of its functions, always in harmony with the monetary authorities’ guidelines, related to the performance of the national financial system safety network.
    5. Final Remarks
    With the development of the Country and the significant changes in the Brazilian economy – especially in the banking sector – during the last previous years, a few changes were needed in order to accommodate the FGC funding requirements to the new reality of the Country, thus, minimizing the costs that this funding represented for the system.
    The Brazilian banking system has been sanitized and the crisis of the second-half of the 1990 decade has been driven away. Banking regulation and supervision in Brazil have been improving and advancing to a level which is internationally recognized. This new standing renders the monthly flat rate of 0.025% (which corresponds to an annual flat rate of 0.30%) very expensive for the banking system and a source of disruption in the financial intermediation process. This percentage, which was justified during the banking crisis years and also by the FGC funding needs, needed to be revised, with the purpose of minimizing the disruptions that a system for the protection of deposit holders may cause to the banking system as a whole.
    The Board of Directors’ perception of the need to revise the current charges that the FGC imposes on the National Financial System, and in the last instance, on the borrowers of resources, led the FGC to request the Central Bank of Brazil a reduction of the monthly contribution percentage figure charged by the system. This request was granted by the National Monetary Council - CMN during its meeting held on September 5, 2006, reducing the contribution by one half and raising the deposit insurance coverage to R$70,000.00 (seventy thousand reais).
    Thus, the FGC is contributing to the government efforts and to its member-institutions to slash the current interest rates on loans to final borrowers, and simultaneously, ensuring that adequate mechanisms of funding and equity are secured during this new phase.
    The table below shows comparative statistics of the evolution of products and credits subject to the FGC’s guarantee.
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    Desenvolvido por GWMNET