There was a time when bankers, pimps and prostitutes were forbidden to receive the Holy Communion. Such a radical scouring was consequence of the Church of Holland law which ran between the years 1581 to 1658. In the aristocratic Europe, a society structured around lands and titles, the mere possession of wealth did not confer prestige. It was only after the Renaissance and the success of the Medici family that owners of banking institutions became somewhat respected.
Therefore, since the beginning of the financial activity era the bankers were already seen with restrictions, as interest charges went against the biblical ideologies of the clergy.
In her recent crusade against banks, Brazil President Dilma Rousseff did not go that far though. But in recent tough speeches on the country’s high interest rates, she has touched on a sensitive issue that may increase her popularity without much effort. The profits and the high interest rates charge by banks are seen by most Brazilians as a misappropriation of the country’s wealth.
High rates and the oligopoly system
“It is unacceptable that Brazil, which has such a robust and profitable financial system, continue with one of the highest interest rates in the world. These rates can not remain so high. Brazil’s economy today does not justify it. The banks can not keep charging the same interest rates for businesses and consumers while the Selic base rate is down, the economy is stable and the overwhelming majority of Brazilians honor their commitments with promptness and honesty,” said Dilma on TV last week.
”Obviously, the financial sector can not explain this perverse logic to Brazilians. The Selic rate is low, inflation remains stable, but the rates on overdrafts and credit cards are not coming down,” she continued. “The country needs interest rates compatible with those practiced in the rest of the world, in addition to a lower tax burden.”
Dilma bought a good fight. Her Labor Day speech above was directed to the financial markets.
First of all, she set a goal for her government to reduce the Selic rate to international standards by taking advantage of the current disinflationary trends, as the global crisis unfolds.
The Selic rate dropped to 9% and began conflicting with the savings accounts interest yields. According to government estimates, with 8.5% interest yields per year savings would outweigh all other investments. But last week, the new rules for adjusting the savings accounts yields were announced, which left the door open for further interest rate (selic) cuts by the Copom (Monetary Policy Committee), which should drop the Selic rate further to 8.5% per year.
The goal of the president is to finish her tenure with real interest in the order of 2% and public debt equivalent to 30% of GDP.
The external and internal economic conditions are worse than anyone has imagined. The Reserve Bank of Australia last Tuesday cut interest rates by 50 percentage points, bringing the rate down to 3.75% per year, its largest effort since 2009 to revive the domestic economy.
In Brazil, there are strong indications that the first quarter was bad for economic activity. The analysts that forecast a 1% growth for the quarter have already cut their expectations by half.
The truth is that it does very little good to cut the base Selic rate if banks continue charging the same credit interest to the borrower under the argument of “rising defaults”. Hence, Dilma has turned her guns against bank spreads.
In addition to Dilma’s speeches, the government has used its public banks Caixa Economica and Banco do Brasil to pressure the competition. Both institutions have significantly reduced their interest rates in various credit lines in an effort to “persuade” the private banks to follow the same path, or they could risk losing market share. Such an effort can help, but it’s not sufficient.
In the 90s, the government opened the domestic financial market to international banks in an attempt to create competition, but it was unsuccessful. The few foreign retail banks that arrived in Brazil soon learned the way the market operated and got out.
The five largest banks in the country today – Banco do Brasil, Caixa Economica, Bradesco, Itau and Santander – own together 65% of total financial assets, 67% of bank loans and 76% of deposits.
There is clearly an oligopoly in the industry. Oligopolies are usually not threatened by official speeches. But they would respond to more stringent regulation rules.
On the other hand, banks have sent a list of demands to the government, starting with the high tax burden, the high reserve requirements, and a series of measures that would improve lending guarantees. And yes, default, taxes and reserve requirements are some of the causes for the wide banks spreads charged by them. So now it’s also time to look at the microeconomic issues affecting the industry and respond to their demands if they are reasonable.