Henrique Meirelles: Regulation and international standards in Brazil, the
US, the EU and Switzerland
Speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil, at the First
International Conference on Law & Economics, IBMEC São Paulo, in cooperation with the
Foundation for Law and Economics at the University St Gallen, Switzerland, held in São
Paulo, 2 April 2009.
* * *
The world is experiencing the most severe economic and financial crisis in 80 years. What
started as a deleveraging process in the US banking system has extended to a strong
downturn not only in advanced economies, but also in the emerging world.
It is emblematic that we are here today in São Paulo discussing regulation at a time the issue
is also being discussed at the meeting of heads of states of the G-20 in London. Much of the
focus of the meeting relates to the redesign of the international financial system and its
regulation, including possibly the outline of a sort of international financial regulator.
The current financial turmoil is ultimately a result of the failure of regulators, supervisors and
policymakers in the advanced economies to prevent excessive risk-taking and leverage and
to account for the interplay between regulated and non-regulated markets, partly due to their
fragmented regulatory frameworks, partly due to legal restrictions on information and data
sharing. Lax regulatory standards, coupled with poor risk management practices, deleterious
incentives for risk-taking and deficient corporate governance structures in financial
institutions are costing the global economy a high price.
Throughout the years, Brazil has adopted more cautious and broader regulatory standards
than the international norm. Just to mention a few examples of what I am referring to, there
are twenty-one different types of financial institutions under the regulation and supervision of
the Central Bank, from universal banks to credit unions, all sharing common prudential and
leverage rules. Furthermore, not only capital requirements are higher in Brazil than the Basel
recommendation but also all capital requirements and controls are applied on a consolidated
basis that includes non-financial subsidiaries in a banking group, so that most institutions are
consolidated for supervision purposes. Finally, accounting standards adopted in Brazil
require that all operations be kept on balance, with the respective risk requirements and
provisions.
Risk management and internal controls regulations, as well as prudential loan loss
provisioning requirements and large exposure limits have been in force for many years in
Brazil. Additionally, having learned from past experience of international integration and fast
contagion, the Central Bank makes careful evaluation of financial innovations and their
impact on financial stability, so that the development of new products should be compatible
with adequate prudential regulation. For instance, access to credit derivatives is limited and
all over-the-counter derivatives that have a supervised entity as counterparty have to be
registered and monitored.
The continuous review and update of the prudential regulatory framework is a priority for us.
An example of a recent early prudential action occurred in June 2007, well before the recent
financial turmoil aggravated: the Central Bank established a foreign exposure capital
requirement for cross-border positions within international banking groups.
In a nutshell, the Brazilian approach insulated its financial institutions from the sort of
problems that is affecting counterparties abroad. In fact, it is no coincidence that our financial
system has shown resilience and has been largely unaffected during the current financial
turmoil.
The overall assessment on the Brazilian regulation framework, which was sometimes
criticized on the grounds of excessive carefulness, is currently praised in international
forums. For instance, the fact that Brazilian regulators have access to information from the
clearing systems of all operations in the financial market is a factor of admiration and
reference worldwide.
Before closing, let me mention that I strongly welcome the recent enlargement towards
emerging economies - including of course Brazil - of the Financial Stability Forum (FSF) and
of the Basel Committee on Banking Supervision (BCBS). Emerging economies rapidly
increasing weight in the global economy and global finances makes them an integral part of
any viable solution to the current problems, as we are witnessing today in regard to their role
in the G-20. The enlargement of forums in the area of regulation and financial sector
supervision give more legitimacy to the discussion being held, with a view to design a new
and more robust regulatory framework. I believe we need to have this new framework in
place by 2010, as the current crisis is left behind, hopefully, and growth and stability are
restored.
As part of the work program already laid down in the G-20, critical points in the reform
include the need to make regulatory capital more neutral over-the-cycle, by integrating the
macro prudential framework into the required capital of individual institutions; the need to
reach, with prudential regulation and supervision, all quarters of the financial industry; and
the need to enhance transparency of financial instruments and markets.
Thank you very much.