# 5. Areas of Policy Emphasis for Brazil

Authorities are aware of the need to lower the costs of financial intermediation and have been moving actively. Measures have been adopted to assure the legality for compound interest in operations (previously an interested party in a contract argued against such procedure based on an outdated law which forbade charging compound interest in loans lasting less than one year). The National Congress is examining a measure that creates a Bank Credit Bill, _c6dlua de credito bancario,_ a credit instrument with a smoother and faster track in judicial disputes. Other regulatory reform efforts to reduce the cost of financial intermediation include the extension of _alienaCao fiduciaria_ to housing and mobile goods, and the legal separation of principal and interest.'<sup>5</sup> These are important measures to increase the enforceability of contracts in Brazil by minimizing reliance on courts. Since they are fairly recent reforms, however, the full effects of the legal reforms, their practical enforceability and the degree to which they avoid use of the courts, cannot be assessed yet.

The government has also recently moved in several areas to reduce the direct costs of financial intermediation. It has lowered the costs by reducing tax and reserve requirement (the reserve requirement for demand deposits has been lowered, for example, from 75% to 55%). A further lowering of the level of financial intermediation taxation is planned. A broad reform of Brazilian payments system will increase its reliability and reduce the costs of financial intermediation. And information availability has increased. The Central Bank operated Credit Risk Data Center _(Central de Risco)_ now makes available standardized information on credit operations and financial institutions will report monthly their classification of credit operations above R$ 20,000 (from R$ 50,000 previously). And greater transparency is achieved since the Central Bank started making credit operations rates available on its web site (interest rates published are highest, lowest and average for each type of operation, degree of arrears and average operation term, all discriminated by financial institution).

The early evidence of the degree to which these benefits will be passed on to banks' customers is favorable with lending rates currently near a five-year low. Although the difference between bank lending rates and government borrowing rates has decreased by 10 percentage points, further reform will be necessary to lower the costs of financial intermediation. Importantly, this will have to involve further improvements in the efficiency of the legal system. Reforms could include a limitation on the availability or the levels of appeal, the creation of special courts, increasing the precedent value of higher court decisions and educating judges in economic and financial areas. While these are politically sensitive issues and can only be addressed over the long run, improvements in the enforceability of contracts have high pay-offs for increasing financial intermediation and growth in Brazil and should have high priority.

The judicial changes should be complemented by changes in the creditor rights. While, as in other Latin American countries, bankruptcy reform has been on the agenda in Brazil for much of

> **_15_** _Aliena9ao fiduciaria_ is the transfer of ownership of an asset from the debtor to the creditor, as guarantee. This should facilitate recovery of the asset in the case of default by the debtor. The _cedula de cr6dito bancario_ allows the collection of debt under Commercial Law instead of Civil Law. Commercial Law does not, unlike Civil Law, require proof of existence of the debt, and therefore increases the speed with which a loan can be executed.

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