By Brazil Stock Guide – Brazil’s Credit Guarantee Fund (FGC) approved an emergency plan to restore its liquidity following the estimated R$55 billion gap caused by the liquidation of Banco Master, according to people familiar with the matter.
The strategy is designed to ensure that, by the end of the first quarter, the fund holds liquid resources consistent with the level of risk in Brazil’s financial system. To achieve that goal, banks associated with the FGC agreed to immediately advance the equivalent of five years of future contributions, split into three monthly installments.
The plan also foresees additional frontloaded payments in 2027 and 2028, with each year adding another 12 months of contributions, bringing the total advance to seven years. In parallel, participating institutions will face an extraordinary increase of 30% to 60% in monthly contributions for at least 60 months, said people involved in the discussions, who asked not to be named because the talks are private.
Under current rules, member institutions contribute 0.01% per month of the total amount of guaranteed financial instruments. For Special Time Deposits with Guarantee (DPGE), the rate is higher, at 0.02% for issuances backed by receivables and 0.03% for unsecured balances.
Another proposal under discussion would allow part of the mandatory reserve requirements on demand deposits to be used to support the fund’s liquidity rebuilding. That option would require approval from Brazil’s central bank, which has not yet taken a public position.
In a statement, the FGC said it does not comment on internal alternatives under evaluation and noted only that it is in talks with member institutions and the central bank to recompose liquidity. “Discussions are ongoing and a decision is expected in the short term,” the fund said.
As of last Friday, the FGC had already paid out R$36 billion of the more than R$40 billion expected to be disbursed to creditors of Banco Master. The fund has not yet begun reimbursing investors of Will Bank, which was part of the same conglomerate but had its liquidation ordered only in January. Estimates indicate that R$6.3 billion in guarantees will be required in that case.
The remaining losses linked to Banco Master stem from credit lines extended by the FGC itself to entities within the group.
Pressure for rule changes
Banks see the liquidity rebuild as a necessary step before formally launching discussions on reforms to the FGC’s rules, a debate expected to gain momentum after the first quarter. Market participants argue that the Banco Master case highlighted the need to reinforce the fund’s credibility, which is viewed as essential for the stability of mid-sized lenders.
In the three years preceding the liquidation, the FGC sent the central bank at least 30 warnings about practices considered questionable at Banco Master.
Future discussions are expected to address tighter mechanisms to monitor the quality of member banks’ balance sheets, stricter leverage limits, and measures to prevent the concentration of product distribution on a single or limited number of platforms.
The debate intensified after criticism from banking executives that, in recent years, the fund has been used beyond its original purpose of protecting investors in the event of bank failures.
Last week, Milton Maluhy, chief executive officer of Itaú Unibanco Holding SA (B3: ITUB4, NYSE: ITUB), said some market participants prioritized their own interests over systemic stability. “Some platforms used the FGC as a business leverage model, enabling unsustainable business models,” he said.
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