The extrajudicial liquidation of , decreed this month, illustrates a classic economic problem: moral hazard. The episode triggered the largest reimbursement in its history, with an estimated R$41 billion in guarantees, potentially reaching R$49 billion, and 1.6 million creditors affected. We will all pay part of the loss.
Before the crash, the bank offered higher than average rates on its CDBs, in some cases 180% of the CDI, while competitors offered 100% to 110%, premiums that, in any market, usually signal problems. The marketing came with the “one” call, making the mechanism created to protect savers a central part of the strategy to push credit risk higher.
To understand why this creates moral hazard, it’s worth going back to the basics of insurance. In , the driver knows that an accident could cause large losses, but does not know the probability of this happening, so he pays a small amount to transfer the task of measuring the risk and concentrating the losses to the insurance company, avoiding being exposed alone to a large and uncertain loss.
However, when there is hidden information before the contract, adverse selection arises. The driver knows that he is riskier than average, but the insurance company cannot distinguish this and, by charging an “average” price, ends up attracting the worst risks. When the information is in the actions after the contract, moral risk appears. After all, once insured, the individual may decide to be less careful because they do not bear the cost alone.
If the insured influences the probability of loss and the effort is invisible, offering full coverage distorts incentives, tipping the balance to include deductibles and insurance so that the driver remains interested in avoiding the accident. Too much coverage reduces care, too little coverage leaves people exposed to shocks, in other words, the design needs to find a middle ground between protection and responsibility.
In the banking system, the FGC is the institutional version of this reasoning. It is a private association, financed by the financial institutions themselves, which works as deposit insurance for account holders and small investors: it guarantees investments such as savings, LCI and LCA up to R$ 250 thousand per CPF or CNPJ per institution to protect those who cannot monitor the risk of each bank and, mainly, avoid runs and the domino effect of a crash on the rest of the system.
By reducing the fear of total loss in the event of intervention, the FGC reduces the chance of mass withdrawals due to panic, which can drag solvent institutions along with the problematic ones. But this same safety net, if , distorts incentives: banks feel more comfortable taking risk, knowing that part of the losses will be socialized, and investors start to look almost only at the rate, trusting that, if something goes wrong, the fund will step in. The design of the guarantee tries precisely to walk this narrow line between containing financial contagion and not fueling moral risk.
The Master case brings together both sides of the dilemma. For the retail investor, the FGC became a shield: it was enough not to exceed R$250,000 per CPF for any rate to appear acceptable, reinforced by the marketing itself. For the bank, the combination of a robust guarantee and customer focus on the FGC acronym made it possible to aggressively raise funds well above the market.
When the music stops, . Those within the limit must be compensated, but face bureaucracy and lack of liquidity, while the FGC burns tens of billions in a single case and needs to recover itself with larger contributions from other institutions. Small investors lose peace of mind, some lose money, the fund loses and the system becomes more expensive and suspicious.
Insurance fulfilled the role of avoiding races and contagion, but redistributes over time the cost of decisions based on the search for easy rates and the use of the FGC as a sales argument. In books, moral hazard is when someone relaxes because they know they won’t be left alone with the loss; in Master, the relaxation was on both the investor and the bank, and, when the moral hazard materializes, the bill is shared by everyone who depends on a functional banking system.
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