Brazil: Time Deposits with Special Guarantee

The US-dollar liquidity crunch and flight to quality that marked the Global Financial Crisis (GFC) led investors, primarily institutional investors, to pull deposits from Brazil’s smaller institutions and park them in the country’s large banks (Mesquita and Torós 2010; FGC 2009). These smaller banks, at the time, were funding themselves primarily through time deposits from a limited number of institutional investors, such as insurance companies and pension funds (Mesquita and Torós 2010).

In response to the deposit outflows, Brazilian policymakers in March 2009 created a new time-deposit guarantee scheme to provide smaller banks with an alternative funding source and tasked the country’s existing deposit insurer, the Credit Guarantee Fund (FGC), with implementing it (CMN 2009; FGC 2009; Mesquita and Torós 2010; Vieira, Ribas, and Goncalves 2012). Officials called it the “time deposits with special guarantee” (Depósitos a Prazo com Garantia Especial, hereinafter DPGE).

FGC’s high-guarantee coverage of DPGE time deposits of up to BRL 20 million per depositor was targeted at the skittish institutional investors upon which smaller banks tended to rely. The FGC’s ordinary depositor guarantee was BRL 70,000 at the time (Vieira, Ribas, and Goncalves 2012).

In response to tightening borrowing conditions stemming from the GFC, the Banco Central do Brazil (BCB) and the National Monetary Council (CMN) created a suite of policies meant to augment liquidity in the Brazilian economy (Mesquita and Torós 2010; Deos and Mendonça 2017). The BCB made various bank-reserve-requirement changes, including postponing planned reserve-requirement hikes for leasing transactions, lowering reserve requirements for certain deposit accounts, and increasing the overall reserve limit, which, if surpassed, obligated banks to deposit extra funds into their accounts with the BCB (BCB 2008a; BCB 2008b; BCB 2009a). Policymakers also loosened discount-window rules, allowing access to a broader spectrum of counterparties, expanding the range of eligible collateral, and lengthening the terms of the loans the BCB provided (Deos and Mendonça 2017; BCB 2009a; Mesquita and Torós 2010).

Prior to creating the DPGE in March 2009, the CMN in December 2008 expanded the FGC’s role to include emergency liquidity assistance and structural support for financial institutions (CMN 2008; CMN 2009).

The CMN is the primary financial and economic policymaking body in Brazil (BCB 2021c).^FThe CMN is currently run by the minister of finance/economy, the special secretary of treasury and budget of the ministry of economy, and the BCB governor (BCB 2021d; BCB 2021b). In 2009, the CMN was composed of different members and included the minister of planning instead of the special secretary of treasury and budget of the ministry of economy. The technical commission for currency and credit advises the CMN, providing technical evaluation and advice (BCB 2021d). It sets the country’s monetary, exchange-rate, and credit policies through the BCB and the Securities and Exchange Commission (BCB 2021c). The CMN used its powers outlined in Law No. 4,595, dated December 31, 1964, to create the DPGE (Law 4,595 1964; CMN 2009). Ensuring the liquidity and solvency of Brazilian financial institutions is one of the CMN’s mandates, according to Article 3, Section 6 (Law 4,595 1964). Article 4, Section 8 of the law gives the CMN the power to regulate the constitution, inspection, and operation of the entities subject to its supervision, including the FGC, which the CMN tasked with administering the DPGE (CMN 1995; CMN 2009).

The CMN established the FGC in the mid-1990s as a private nonprofit organization (FGC 2021; BCB 2021a). At the time of the GFC, it guaranteed a variety of bank accounts up to BRL 70,000 per depositor per financial conglomerate; since 2013, it has guaranteed up to BRL 250,000, with an overall ceiling of BRL 1 million per depositor.^FIf the BCB triggers the liquidation or intervention of a financial institution that prompts FGC payouts, the FGC guarantees individuals an additional BRL 1 million for four years (BCB 2021a). The FGC is funded by the country’s deposit-taking financial institutions, for which FGC membership is mandatory. The FGC also provides so-called open-bank assistance, such as providing operating liquidity, funding restructuring, or lending to shareholders or potential shareholders of troubled banks (IMF 2018).

The CMN also drew on sections of Resolution 3,251, dated December 16, 2004, to determine the mechanics of the DPGE, including the fee calculation, the payment process, and the qualifying events that would trigger a guarantee payout (CMN 2009; CMN 2004).

The FGC administered the DPGE (CMN 2009). If an institution exceeded the limit of DPGE deposits, the BCB could demand a variety of risk-mitigation measures, including prohibiting the bank from pursuing new lines of business and requiring additional fees. The resolution’s language gives the BCB the authority to take these measures but does not require the central bank to do so. The CMN also gave the BCB the ability to use additional measures to ensure the “smooth operation” of the DPGE (CMN 2009). The exact nature of those additional measures is unclear from the publicly available documentation.

The BCB and the CMN regulated the FGC and its operations (BCB 2021a). For example, the BCB set fee-calculation methods for the FGC, and any fee changes the FGC wanted to make required BCB examination and CMN approval (CMN 2013).

Brazilian law required the FGC to publish balance sheet and income statements for the year (CMN 2013). Policymakers required independent auditors to review the FGC releases.

During the GFC, uncertainty spread to the Brazilian financial system and triggering a flight to quality toward assets with explicit or implicit government guarantees (Mesquita and Torós 2010; Deos and Mendonça 2017). In the Brazilian context, this meant institutional investors pulled funds from small and medium-size banks, funneling them to larger banks; policymakers positioned the DPGE as a response to this trend (Mesquita and Torós 2010; Deos and Mendonça 2017; BCB 2009b). The FGC echoed these sentiments in the annual report published during the first year of the DPGE’s operation, stating the guarantee “enabled institutional investors to resume investing in medium and small sized institutions” (FGC 2009).

In 2008, the FGC’s role expanded to include two types of programs: liquidity assistance and structural support for financial institutions (FGC 2016). The FGC in its 2010 annual report described its growing role in the Brazilian financial system beyond insuring deposits. It said the FGC had begun to actively collaborate with the BCB to ensure financial stability and encourage liquidity.

The DPGE guaranteed up to BRL 20 million of an individual depositor’s qualifying time deposits per bank or per bank conglomerate (CMN 2009). The value of time deposits was recalculated each month based on the Selic rate, the BCB’s monetary-policy interest rate, equivalent to the US Federal Reserve’s Federal Funds Rate (CMN 2009; BCB 2021e).

The program guaranteed, at its peak in 2012, approximately BRL 28 billion. This represented less than 5% of the FGC’s total insured-deposit base throughout the duration of the program (see Figure 2). In 2013, the CMN raised the FGC’s deposit-insurance cap from BRL 70,000 per depositor to BRL 250,000 (FGC 2013).

During the DPGE’s first iteration, deposit guarantees for individual banks were limited to the higher value of either of the following (with an overall upper limit of BRL 5 billion) (CMN 2009; CMN 2010):

• twice the value of a bank’s regulatory capital (PR), tier one, calculated on December 31, 2008, or
• the sum of time deposits recorded in the institution on June 30, 2008.

Brazilian law explicitly prohibits public and private actors from using public funds to rescue banks unless they were granted permission via legislation. As a private entity, the DPGE could support banks, but it could not seek public funds for the purpose, and so it raised all its financing from insured institutions (BCB 2021a; Law 101 2000). As described in Key Design Decision No. 11 (“Fees”), the FGC charged institutions monthly fees based on the amount of DPGE time deposits issued (CMN 2009). The FGC was also granted subrogation rights against institutions, for which the FGC paid depositors (FGC 2016). Though the FGC could order its members to pay extra contributions, they were limited to either 50% of monthly contributions or payment in advance of up to 60 monthly contributions (IMF 2018). The FGC could also borrow from other banks or issue negotiable credit instruments.

The fees institutions paid for the DPGE were ultimately insufficient to cover DPGE payouts, as noted in Key Design Decision No. 11. But monthly contributions from the FGC’s ordinary guarantee program, plus financial income, substantially exceeded depositor payouts during the postcrisis period (FGC 2013).

The FGC’s ex ante resources appeared relatively strong before the GFC. After the crisis, it set targets of cash and cash equivalents of 2% of total deposits at insured institutions. By that measure, its deposit cover was more than 2% in 2009 and 2010; fell below 1% in 2012 and 2013, after GFC-era depositor payouts (see Figure 4); and had climbed back to 1.8% by 2016.^FThe FGC used a conservative method to measure deposit coverage. Typically, deposit insurers compare fund assets to the portion of deposits that are insured. By that measure, the FGC’s deposit cover never fell below 3.5% between 2009 and 2016, according to the author’s calculations based on FGC annual reports. However, since 2008, the FGC has used the same funds to handle emergency lending and open-bank assistance. Under the CMN’s rules, the FGC may use up to 50% of its equity to provide open-bank assistance to a single bank but has no access to emergency backup funding from the government. As such, the IMF said in 2018 that the FGC’s funding position was “precarious,” even though “the overall fund is adequate by international standards” (IMF 2018).

CMN policymakers made eligible commercial banks, development banks, investments banks, credit, financing-and-investment societies, savings banks, and “multiple banks,” which are entities that are authorized to perform various financial functions, including commercial banking and investment banking (CMN 2009; Robitaille 2011).

Policymakers made DPGE participation optional (CMN 2009). Banks could issue DPGE time deposits and non-DPGE time deposits.

Time deposits are fixed-term investment tools through which an individual agrees to lend money to a bank and receives interest proportionate to the waiting period for repayment. DPGE-eligible instruments had terms between six and 60 months (CMN 2009). The DPGE primarily targeted institutional investors with the FGC's larger-guarantee coverage of up to BRL 20 million per depositor, compared to BRL 70,000 for regular deposits (Vieira, Ribas, and Goncalves 2012).

The FGC charged institutions 0.0833% per month on time deposits within the institutional upper limit of BRL 5 billion (CMN 2009). The FGC charged institutions a higher fee, 0.8333% per month, if they exceeded this upper limit. In 2009, the FGC levied a 0.0125% monthly fee on regular (non-DPGE) guaranteed balances (FGC 2009). Thus, DPGE utilization entailed higher funding costs, and earnings pressure, for the banks that depended on the program (BCB 2010).

The FGC used an institution’s monthly average of the daily balances of guaranteed accounts to calculate its DPGE fee, a figure it shared with the banks by the 25th of each month (CMN 2009; CMN 2004). The banks had to pay this fee to the FGC by the first business day of the month following the amount’s verification. If an institution was late in making a payment, the FGC would tack on a fine of 2% of the amount originally due, as well as an adjustment based on the Selic rate.

The FGC collected BRL 1.4 billion in fees between 2009 and 2016 (see Figure 3).

The FGC exercised the guarantee when banks were extrajudicially liquidated, went bankrupt, were subject to an intervention decree, were declared insolvent by the BCB, or met the requirements of other special situations previously agreed upon by the BCB and FGC (CMN 2009; CMN 2004). In practice, all of the banks whose depositors received DPGE payouts were eventually liquidated (FGC 2012; FGC 2013; IMF 2018).

When the FGC pays depositors guaranteed funds, the FGC is granted subrogation rights with the aim of recovering part of whole of the amount disbursed to depositors (CMN 2009; CMN 2004; Law 10,406 2002; FGC 2016).

The IMF criticized the FGC’s generally slow depositor payouts (IMF 2018).

Other details about the process for exercising guarantees are unclear from the available documentation.

Policymakers required participating institutions to keep records of the guaranteed funds separate from the records of other accounts (CMN 2009). The FGC prohibited banks from renegotiating the yields of guaranteed time deposits.

The CMN gave the BCB the authority to place a variety of demands on a bank that exceeded the BRL 5 billion time deposit limit, including (CMN 2009):

• paying a much higher fee of 0.8333% per month;
• contributing funds to cover additional risks;
• adopting more restrictive operational limits;
• restricting operations or operational procedures, including additional collection of deposits from the public;
• increasing liquidity levels; and
• stopping the creation of new lines of business.

The frequency at which banks exceeded the limit and the extent to which the BCB utilized this heightened authority are unclear from the available documentation.

When the CMN created the DPGE in 2009, it did not publicly announce a definitive end date (CMN 2009). In December 2010, after the Brazilian economy had largely recovered from the GFC, the CMN decided to phase out new issuance of “old” DPGE deposits by January 1, 2016 (CMN 2010).

The CMN in 2012 created a permanent version commonly called the DPGE II (CMN 2012; FGC 2016).^FBecause policymakers did not fully phase out DPGE I issuance until 2016, there were multiple years in which banks could issue either DPGE I or DPGE II deposits based on the given phase-out schedule. Under the DPGE II, banks pledge assets to the FGC as collateral for its guarantee—collateral the FGC can accept or reject—and the FGC charges a lower fee, 0.02497% per month on qualifying deposits, that reflects the lower risk it takes thanks to the collateral (CMN 2012). DPGE II–qualifying time deposits must have a term of 12 to 36 months, compared to the original six-to-60-month term.

Policymakers created the DPGE II to try to distribute liquidity equitably to smaller banks and to provide those institutions with a source of longer-term funding similar to that available through the original DPGE (BCB 2012). Analysts had raised concerns about such banks’ need for long-term funding alternatives (Vieira, Ribas, and Goncalves 2012).

In response to the COVID-19 pandemic, the CMN and BCB created a New DPGE, the NDPGE, that resembles the initial guarantee. The NDPGE did not require pledged assets and had a higher limit for individual depositors: BRL 40 million (FGC 2020; CMN 2020a; CMN 2020b; CMN 2020c; CMN 2013).