I was eight years old when my grandmother took me to see “”. I remember loving the film, but one scene in particular disturbed me. In it, the boy who was taken by his father to see the bank where he worked shouts for the return of the two-cent coin he saved to buy corn for the pigeons, and which his father had forced him to save at the bank.
Hearing the shouts of “give me back my money!”, people passing by on the street run anxiously to the cash counters, and the manager orders the heavy doors of the building to be closed, while the public presses to enter.
At night, my father —who worked in a bank— explained the scene to me, with his usual didactic style: “That, my son, is a ‘bank run’. It’s the most serious thing that can happen to a bank. If all depositors want to withdraw their money at the same moment, there won’t be enough resources to satisfy them, as an important part of the deposits has been loaned and is not immediately available.”
That was my first contact with the idea that banks are an activity that depends on trust and is, therefore, subject to risks. In the real world, however, banks are not allowed to close their doors to prevent customer access; The only person who can do this is the regulator — in the Brazilian case, the —, through “bank intervention”.
The childish explanation summarized the permanent dilemma of banking regulation: preserving trust in a system based on reconciling deadlines and values, preventing private errors from resulting in public crises.
Banking interventions, contrary to common sense, are not just symptoms of the failure of financial institutions; They are, mainly, an essential instrument of damage containment and market discipline.
The fundamental questions surrounding a specific intervention must address the moment in which it takes place, its format and its institutional consequences. In order to fulfill this disciplinary role, however, interventions need to be based on clear technical criteria, applied in a predictable manner.
The healthy functioning of a financial institution depends on adequate risk management —liquidity, credit, market and operational—, the ultimate impact of which is manifested in the ability to honor deposit redemptions.
It is therefore up to the regulator to continually monitor the quality of this management and the capital sufficiency of the institutions under its supervision, providing a scale of corrective measures. As time aggravates the effects of excessive risks, timely intervention reduces losses, contains contagion and prevents unviable models from increasing their costs for the system and society.
For it to be effective, however, decision-making power and financial responsibility are required. In this sense, Brazilian legislation provides the regulator with legal resources that allow rapid intervention, with broad accountability of controllers and administrators.
This is an aspect that is little observed: unlike non-financial companies —and even what happens in other countries—, the controllers and statutory directors of financial institutions are liable with all their assets for the asset shortfalls found during liquidation.
The Brazilian model thus seeks to avoid the socialization of losses, interrupting the operation and placing the onus on decision makers. (It should be noted that improvements are necessary to prevent procrastination of settlements from benefiting controllers, due to the allocation of liabilities at preferential rates)
This arrangement gives the interventions an essentially dissuasive character. Therefore, the bet of managers who take excessive risks is not on the efficiency of their operational strategy, but on the inefficiency of law enforcement.
Over the last 40 years, a series of sporadic interventions have served to remind administrators of financial institutions of the importance of consistent risk management. Despite challenges in the most diverse formats, they were all carried out in an orderly manner. There was also, throughout this period, an undeniable evolution of the instruments available to the regulator, especially the creation of the FGC (), which transferred the responsibility for honoring deposits of up to R$250 thousand to the financial system itself.
Paradoxically, as technical instruments became more sophisticated, and the economic costs of settlements were better distributed, the political and personal costs associated with their application increased.
Although no legal action against Central Bank executives has been successful to date, the financial cost and personal strain they cause, in themselves, are enough to weaken the regulatory agent’s willingness. Added to this is the current role of Judiciary control bodies, outside the technical field; “Safeguards” like these, instead of protecting, expose the financial system to greater risks.
It is in this institutional context that the case of . I believe that no one has so clearly exposed the fallacies of that bank’s business model as José Roberto Mendonça de Barros in a recent interview with the newspaper O Estado de S. Paulo, when he stated that “Master was an unviable business at its inception.”
Abusing the FGC guarantee mechanism, since regular companies would not pay the high fees necessary to compensate for the high funding costs.
Given such clear evidence, it seems safe to argue that the intervention at Banco Master was necessary, if not late.
As previously stated, the only reasonable explanation for deliberately risky management is the expectation of impunity. This expectation can be reinforced by shifting the focus from the technical discussion to the accountability of the regulator, as intended by some legal bodies.
The ongoing debate therefore transcends the fate of a specific institution. The present risk is not the fragility of the law, nor the absence of instruments. It is the erosion of the State’s ability to apply them with predictability and authority.
