Spread bets

Mar 19th 2009 SÃO PAULO
From The Economist print edition
A different sort of banker-bashing
WITH the economy sliding towards recession, at least Brazil’s Central Bank finds itself able to cut interest rates hard and fast. On March 11th it slashed its benchmark Selic rate by one-and-a-half percentage points, to 11.5%. Further cuts are expected. A welcome novelty: in the past, a fragile currency and roaring inflation prevented such counter-cyclical measures. But the rate cuts are not being passed on fully to borrowers, fanning an argument about the fat spreads charged by Brazil’s banks (ie, the difference between the rates at which they borrow and at which they lend).
According to a calculation by the Institute for Industrial Development (IEDI), a lobby group, Brazil has the highest bank spreads in the world, even if they are a bit lower than they were (see chart). The Brazilian Federation of Banks disputes these figures, claiming that they compare apples with jabuticaba. The banks say that the spreads are inflated by taxes on banking transactions.
The government thinks the banks could do much more to lower the cost of credit. It is considering ordering state-owned banks—there are three giant ones—to take over some small private banks and lend at lower rates. But sceptics note that some of the state banks, which account for around 40% of the system, pocket spreads which are as high as those of their private rivals.
In a study of bank spreads, the Central Bank concludes that in 2007 the biggest single element (37.5% of the total) was profit. But provisions for loan default were almost as large, and will rise as the economy worsens. The banks blame their high level of loan-loss provision on the frailty of Brazilian courts, which are slow and often kind to debtors.
The third-biggest chunk of the spread comprises taxes. The private banks say there is a fourth element: the directed loans the government obliges them to make at subsidised rates to favoured groups (such as farmers and small businesses) require them to charge their other clients more. They also have to deposit half of their reserves at the Central Bank, for a low return.
Brazil’s banks may be expensive, but at least they are safe. None has yet been troubled by the world financial turmoil. That may be because their profits from everyday banking were so high that they had no need to take silly risks. It is also because bank regulation was tightened after several went bust when inflation was tamed in the mid-1990s.
As evidence that the market is open, bankers point to Spain’s Santander, which has a reputation for competing aggressively on consumer loans and mortgages and which is now Brazil’s third-biggest private bank. But Santander’s Brazilian operations are half as profitable again as its worldwide average. HSBC and Citibank have small operations in Brazil, which are doing nicely. One way or another, Brazilian banking seems likely to remain a profitable exception to the disasters elsewhere.