By Marcelo Ballve.

Daniele. Silverado. Tahiti. These are some of the beguiling names for asset-backed securities issued in Brazil and known there as FIDCs. The few exotic monikers notwithstanding, some of the FIDC issuers have turned out to be pretty unsavory. It may be case of a few bad apples rather than a can of worms, but Brazil’s FIDC market, which is only a decade old, has emerged as a common thread in the crisis now roiling Brazil’s smaller banks.

In fact, six small and mid-sized Brazilian banks that have been in the financial press lately, and for all the wrong reasons, have played a disproportionately large role in the FIDC market.

According to my own analysis of five years of data available at Brazilian securities regulator CVM, a handful of troubled small and medium-sized Brazilian banks accounted for 39% of FIDC volume last year (2.8 billion of the 7.1 billion total value of FIDC issues in reais). And, in general these same half-dozen banks I selected as “troubled” accounted for between 8%-39% annually of loan-backed ABS issued since 2006.

That’s a big chunk of a securitization market for banks that are puny compared to the big three or four Brazilian banks, which also are active in bundling loans into FIDCs. My chart below breaks it down by bank (according to the value of FIDCs issues backed by these banks’ loans).

An important note. I created a sample of “troubled” banks based on my own rather subjective criteria. Banco Industrial e Comercial (Bic), unlike the other banks in the sample, has not been the object of a merger, a government or private sector takeover, or thrown a funding line/capital injection. However, it is among the worst-performing mid-sized Brazilian banks in the São Paulo stock exchange this year, and so I included it. Think of my sample as a troubled bank spectrum, with still-viable Bic on one end, and Schahin or Matone on the other.

My sample does not include Banco Panamericano, which was taken over by BTG Pactual in 2010 amid fraud allegations and a multibillion-dollar hole in its books. Panamericano was a player in FIDCs too, but earlier on, and I did not want to back-date too much.

Anyway, these are the six banks I tracked:

Cruzeiro do SulTaken over in June by Brazilian authorities, who cited a $1.3 billion capital shortfall and suspicions of serious fraud and fictional assets.

Banco Matone: Taken over by Banco JBS.

Banco VotorantimReceived a $1 billion capital injection this month from new owners, including government-owned giant Banco do Brasil, to cover losses from vehicle loans.

Banco BMG: Just today, announced a new lending JV and $9 billion funding line linking its consumer lending operations to those of Brazil’s biggest private sector bank, Itaú Unibanco.

Banco Schahin: Taken over by BMG last year, with government financing to sweeten the deal.

It’s important to mention here: there’s nothing wrong with an active asset-backed securities market in principle. An ABS market is one hallmark of a deep financial system. Its a place where banks can unburden balance sheets, and investors can invest in pre-fab credit portfolios. Troubles arise when an ABS market becomes a dumping ground for bad assets (as occurred in the United States with subprime mortgages) or a cash source for overstretched small and medium-sized banks that create hamster wheel-like funding arrangements in part via ABS, as appears to be the case in Brazil. They pump out loans, bundle and sell them, use the cash (and/or accounting magic) to make more loans, etc.

If small and medium-sized banks are too dependent on this funding source or are thinly funded generally, perversity ensues– bad or fraudulent loans getting hastily packaged into bad FIDCs, or FIDCs being used to pad books. That’s what appears to have happened at government-intervened lender Banco Cruzeiro do Sul.

P.S: In connection with all this, it may be worth noting that the FIDC market in Brazil has slowed down significantly, according to BloombergReuters wrote up the same story. Analysts point to the troubles at Cruzeiro, and impending rule changes to increase transparency by the CVM. But another reason may be the disappearance, takeover, or belt-tightening at small banks that were once active in issuing so many FIDCs.


Marcelo Ballve is a reporter who for over ten years specialized in Latin America. During that time, he worked in about a dozen countries, and wrote about politics, arts and culture, and business. He was a Jorge Paulo Lemann Fellow at Columbia University’s School of International and Public Affairs (SIPA) and the Fundação Getulio Vargas School of Management in São Paulo.

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