Over the past decade, the direction of Brazil’s financial regulation seemed fairly clear: reduce the economy’s dependence on bank lending, deepen capital markets and allow credit to flow through new channels. Receivables funds, known locally as FIDCs, expanded rapidly, fintechs gained ground, securitization proliferated and fund structures became increasingly sophisticated. Much of that transformation was positive. Companies gained new sources of financing, investors gained access to new asset classes, and risk became less concentrated on the balance sheets of a handful of financial institutions. But distributing risk does not necessarily make it smaller. Sometimes it simply makes it harder to see.
Signs of strain are beginning to emerge just as the economy loses momentum. In the Central Bank’s August Financial Stability Survey, financial institutions reported growing concern about delinquencies and economic activity, while household and corporate leverage remained elevated. Confidence in the stability of the financial system is still high, but it slipped again at the margin. The indicators point to nothing close to a systemic crisis. What they do show is a more delicate phase of the credit cycle, with exposures spread across a financial architecture that is considerably more complex than it was a decade ago.
It is when the cycle begins to turn that this architecture starts to matter. As long as credit performs, it matters little how many intermediaries stand between the party that originated a loan and the investor that ultimately bears the loss. When delinquencies rise, valuations come under scrutiny and liquidity dries up, that distance suddenly becomes important. Court claims are perhaps the clearest example. FIDCs have accumulated assets whose value depends on legal probabilities, proceedings that can last for years, decisions that have yet to be made and valuation methodologies that are difficult for outsiders to verify. When those assets move between vehicles, are repeatedly revalued, involve related parties and ultimately sit inside funds that invest in other funds, the line between financial sophistication and opacity becomes dangerously thin. Cases such as Banco Master and Digimais have turned what was once an abstract governance debate into investigations involving valuation, collateral, conflicts of interest and suspected fraud.
That is the context in which the National Monetary Council’s new rules for legal claims should be understood. The CMN did not merely demand more disclosure. It decided that FIDCs will no longer be allowed to make new investments in judicial or arbitration claims until those claims are liquid, certain and legally enforceable. In practice, the regulator concluded that, for this asset class, disclosure and governance were no longer enough. That marks a change in regulatory philosophy. Instead of telling the market, “take the risk and explain it,” the state is beginning to say that some risks simply should not sit inside certain vehicles.
The shift may extend beyond court claims. On another front, the same instinct is appearing in consumer credit. When presenting the September Monetary Policy Report, Central Bank Governor Gabriel Galípolo said the institution intends to introduce macroprudential measures gradually and curb forms of lending it considers predatory, rather than announcing a single sweeping package. The design of the Financial Stability Survey itself shows that the Central Bank is looking beyond losses at individual institutions. It explicitly monitors the channels through which a shock could spread across markets, banks, investment funds and pension funds, including contagion, liquidity freezes, falling asset prices and a loss of confidence among depositors and fund investors.
The regulatory pendulum, then, appears to be starting to swing back — though not necessarily toward a financial system once again dominated by banks. The challenge will be deciding where to rebuild guardrails without destroying the benefits of disintermediation. Greater look-through of fund structures, clearer identification of ultimate beneficial owners, tougher rules on related-party transactions, independent valuation, concentration limits and restrictions on excessively opaque assets are likely to gain ground. For years, Brazil’s challenge was to make credit circulate more freely. Regulators now face a different task: finding out where the risk went — and defusing the bombs before they have to discover them in the middle of a crisis.
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