Fostering competition in the Brazilian Financial Sector Cleofas Salviano Junior Central Bank of Brazil April 2008 Cemla-Banco de México Seminar Financial Inclusion and Modernization in LA
Agenda Overview of competition in Brazilian banking Results of empirical research Regulatory approach
Number of financial institutions - september 2007 134 multiple banks 20 commercial banks 17 investment banks 289 broker/dealers 53 finance companies 1465 credit unions 234 other financial institutions
Number of Banks 1994-2005 280 240 200 160 120 80 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 * Includes different banks of same banking group
Bank industry concentration index in 2005 Selected countries 100 90 80 70 60 50 40 30 20 10 0 Assets of 3 biggest banks/ Total bank assets Israel Grécia Cingapura Estônia Rep. Tcheca Croácia África do Sul Eslováquia Eslovênia Hungria Lituânia Polônia Nova Zelândia China Turquia Hong Kong Egito Indonésia Filipinas Irlanda Malásia Coréia do Sul Tailândia Rússia Brasil Ucrânia Suíça Índia % Source: World Bank - A New Database on Financial Development and Structure
Bank industry concentration index in 2005 Latin America and Caribbean 100 90 80 70 60 50 40 30 20 10 0 Assets of 3 biggest banks/ Total bank assets Trin. e Tobago Jamaica Uruguai Bermudas Cuba México Bahamas Nicarágua Ant. Holand. Peru Rep. Dominic. El Salvador Costa Rica Panamá Chile Bolívia Guiana Guatemala Equador Honduras Colômbia Paraguai Brasil Venezuela Argentina % Source: World Bank - A New Database on Financial Development and Structure
Herfindahl index for bank industry Brazil 1994/2006 0,12 Concentration index 0,10 0,08 0,06 0,04 0,02 Concentration index - assets Concentration index deposits 0,00 94 95 Source: BCB 96 97 98 99 00 01 02 03 04 05 06
Spreads on non-directed loans 2003-2008 17 60 16 15 Companies 54 48 p.p. 14 42 p.p. 13 Natural persons 36 12 jan 03 jan 04 jan 05 jan 06 jan 07 30 Feb 08 Source: BCB
Tests of market power Traditional IO: without assimetry of information. Nakane (2002) Belaisch (2003) Petterini & Jorge Neto (2003) Nakane, Alencar & Kanczuk (2006)
Tests of market power Conclusions: Cartel-colusion always rejected Perfect competition almost always rejected Market structure is imperfect but there is a high degree of competition
Market failures So market power is irrelevant in the bank sector? How to account for high spreads? Special features of financial sector: Assimetric information/ Informational Rents; Service bundling; Switching costs; Moral hazard and adverse selection.
Consequences for regulation Evidence suggests high spreads are not caused by colusive behavior, but rather to high switching costs and adverse selection Therefore, measures like portability and credit bureaux might be important
1 Credit information system (SCR) Created in 1997 Explosures to each client above R$ 5,000 have to be informed All financial institutions (except the very small ones) should send information Access of banks to information on a particular client must be authorized by the client Client has direct access to her own information
2 - Portability Portability of personal file information (Res. 2.835, of 30/5/2001) Loan portability (Res. 3.401, of 6/9/2006)
3 - Increasing transparency Banks required to disclose monthly interest rates and all other costs in loan contracts (Circular 2.936, of 14/10/1999) Banks required to disclose total effective cost of loans (Res. 3.517, of 6/12/2007) Central Bank site on the internet: Rates, bank fees, ranking of complaints Regulation of bank fees (Res. 3.518, of 6/12/2007) Bank fees: standardized table of basic services for natural persons (Circ. 3.371, of 6/12/2007)
4 - Stimulating competitors Reduced restrictions to creation and operation of credit unions (Res. 3.442, de 28/2/2007) Entry of foreign banks IPOs of middle sized banks
4 - Geographic dimension of competition Bank correspondents (Res. 3.110, of 31/7/2003) 96.000 points of sale, compared to 17.000 branches Allows bank system to reach all municipalities
5 - Increasing asset liquidity Loan sales and securitization: Res. 2.836/2001: Loan sales Res. 2907/2001: Loan investment funds (FDICs) Law 10.931/2004: Loan bonds (CCB)
6 - Licencing procedures for mergers and acquisitions Definition of relevant markets Impact on concentration indexes Contestability Economies of scale and scope
Conclusions Research is still needed Complex problem Multiple approach Room for improvement Especially important for SMEs and the underbanked
Muchas gracias Cleofas Salviano Junior cleofas@bcb.gov.br Senior advisor Financial System Regulation Department Central Bank of Brazil