# **4. Conclusions and Policy Implications**

32. **The paper confirms the need to analyze the Brazilian banking system at a disaggregated level** . The banking system must not be seen as a single homogeneous business, but rather as a set of markets in which competitive conditions can vary substantially. For example, as the study strongly indicates, the retail and corporate market segments are characterized by different size, structure, conduct (pricing), and performance. There are also significant differences within each of these segments (e.g., between deposit and loan product markets), so defining the relevant market and accessing data become important issues for such analyses<sup>38</sup> . In particular, differences across market segments need to be taken into account, since aggregate studies tend to average these out and thus provide a blurred picture. Therefore, the answer to Belaisch’s (May 2003) paper entitled “ _Do Brazilian Banks Compete?_ ” cannot be a simple yes or no; it is rather a question of degree and it depends greatly upon the specific market segment.

33. **One key finding of the paper is that the Retail business line is less sensitive to price competition and exhibits considerably higher returns than Corporate, in spite of being more costly to operate.** Even though the Retail business line is both costlier and riskier than Corporate, it is significantly more profitable – even on a risk-adjusted basis – due to higher loan spreads and fees. Although this result needs to be treated with some caution due to methodological and data constraints in the analysis, it appears robust to plausible sensitivity scenarios. While this finding is not unusual in the international context, Brazil may appear exceptional in the extent of such differences. The analysis also highlights the importance of identifying the different drivers of performance and determinants of levels of effective price competition and contestability<sup>39</sup> . Some of these factors are within the scope of government policy, while others are inherent to the type of client/transaction and are therefore less amenable to change.

34. **There are both system-wide and market segment-specific policy implications that can be drawn from the analysis** . At the banking system level, there is a need to further strengthen the oversight framework and institutional capacity to promote competition in the financial sector, which is currently primarily (at least until the new antitrust law for the banking sector is approved by Congress) in the hands of Bacen<sup>40</sup> . This is particularly important in view of increasing banking system concentration in recent years, which is likely to continue as a result of the on-going global financial crisis. With regards to market segment-specific issues, government policies that encourage price competition among banks – especially in the retail market – can be used to address those

> 38 More disaggregated (but non-public) data for this study would have been welcome and could allow analysis at bank group level – for example, testing whether McKinsey’s (1998) finding that “ _public banks have contributed to the low level of price competition by creating a price ceiling [because of lower productivity] under which private banks can comfortably operate_ ” still holds.

> 39 See Claessens (2008) for an overview of determinants and effects of competition in the financial sector. 40 See World Bank (May 2006) and OECD (October 2006) for more details. The Brazilian competition policy system is comprised of the administrative tribunal ( _Conselho Administrativo de Defesa Economica – CADE_ ) and the Secretariats of Economic Law (Justice Ministry) and for Economic Monitoring (Finance Ministry) that have analytical and investigative functions. A formal agreement on a reformed antitrust regime for the banking industry was reached in 2005 between the competition authorities and Bacen as an interim measure until the law is passed.