Countries of the World/COUNTRYS.BIN/dp/0050/00503.txt

Text File | 1991-06-24 | 39KB | 610 lines

$Unique_ID{COW00503}
$Pretitle{220}
$Title{Brazil
Chapter 3G.   Banking and Monetary Policy}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{percent
bank
brazil
billion
credit
foreign
exports
inflation
financial
imports}
$Date{1982}
$Log{Port of Santos*0050301.scf
}
Country:     Brazil
Book:        Brazil, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 3G.   Banking and Monetary Policy

     Brazil's financial system expanded and broadened with the rapid growth of
the economy after 1920; through its effective mobilization of domestic and
foreign resources, it contributed to the rapid growth. The economy's
protracted and substantial inflation, however, led some observers to
hypothesize that price instability favored the high rates of economic growth.
Chronic inflation was endemic. Domestic prices rose continuously after 1933.
Since 1950 the annual rate of inflation has ranged between a low of 11 percent
in 1952 and 110 percent in 1980. Inflation was relatively moderate, averaging
17 percent a year until 1958, after which it began to soar, fueled in part by
large public sector deficits arising mainly from transportation subsidies.
Reforms in the period 1964-67 obviously did not correct the problems. Some
economists contended that the changes, which created a highly unusual
financial system, were a fundamental cause of the inflation raging in the
early 1980s.

Banking

     The banking system of the early 1980s dated from the reforms introduced
shortly after the military coup of 1964. In December 1964 the National
Monetary Council (Conselho Monetario Nacional-CMN) was established to
formulate the country's credit, monetary, and foreign exchange policies,
replacing an earlier policy body. The CMN was headed by the minister of
finance, and its members initially were other economic ministers and the heads
of major government banks. By the early 1980s the council had been enlarged to
21 members, including more than one-third from the private sector. The CMN
issued annual monetary budgets setting forth changes in major money variables
expected in the coming year.

     The same law that established the CMN also created the Central Bank of
Brazil, which assumed functions previously spread between the Bank of Brazil
and other government financial agencies. The Central Bank was governed by a
board of directors appointed by CMN. The powers of the Central Bank included
issuance of currency as authorized by CMN; control of money; acceptance of
deposits from banks, both required and voluntary; rediscounting; control of
credit; control of foreign capital; and purchase and sale of securities issued
by itself, the federal government, and federal enterprises. It also supervised
other banks and administered several Special Funds created by the federal
government. The Central Bank was under the Ministry of Finance, and its
president was a member of CMN. Its independence was restricted.

     The Bank of Brazil, created in 1808, was the country's largest bank, and
by some measures it was the largest commercial bank in the world. In the early
1980s the federal government owned 75 percent of its shares; other investors,
including private concerns, owned the remainder. Its shares were actively
traded on the stock exchange. It had an extensive branch network in Brazil and
abroad. The Bank of Brazil functioned partly as a commercial bank, accepting
deposits from and making loans to the public, and as the financial agent of
the national treasury, it received tax receipts. It made payments and
transfers under the federal budget, paid the public debt, enforced minimum
prices for farm products, provided the bulk of rural credit, carried out
foreign exchange and trade controls, served as a check clearinghouse, received
deposits of government agencies, and held voluntary reserves of the commercial
banking system. The bank also administered some of the Special Funds.

     The law establishing the Central Bank did not clearly define the relative
autonomy and limits of action between it and the Bank of Brazil. In addition,
the latter was designated executive agent for the Central Bank. A special
account was established between them that became a means of transferring
Central Bank funds on a large scale to the Bank of Brazil for lending through
government programs. In effect there was a sharing of monetary authority
between the two banks. The Central Bank lacked the independence to control
many variables granted many central banks.

     The source of funds for the Central Bank and the Bank of Brazil was large
and varied. Deposits of other banks, compulsory and voluntary, were kept with
them. Until 1980 proceeds of the sale of new federal debt, which was growing
although the federal budget showed a surplus after 1972, accrued to the two
banks and not to the treasury. In addition, funds were received from the
treasury as transfers and from proceeds and taxes collected for the many
Special Funds created under various government programs. In 1979 there were
more than 200 Special Funds of varying importance. The Bank of Brazil also
held deposits of the public as part of its commercial banking, but the
importance of these deposits declined as a source of funds in the 1970s.

     The National Economic and Social Development Bank (Banco Nacional do
Desenvolvimento Economico e Social-BNDES) was the primary source of long-term
industrial financing. It was created in 1952 (as the BNDE) as an autonomous
federal bank to encourage domestic manufacturing, especially heavy industry
and projects in the North and Northeast. In 1967 it became a mixed corporation
with private investors. Loans and equity investments went to both the public
and the private sectors. In 1978 the bank had four almost completely owned
subsidiaries and worked through 51 other development and investment banks
acting as agents. Sources of funds included certain earmarked tax receipts,
the resources of one of the Special Funds, allocations from the federal
budget, and borrowing through the issuance of bonds, some of which were sold
in foreign countries.

     Between 1964 and 1966 a system to finance housing was established. It
consisted of a bank to act as central bank for the system, the federal
savings bank, five state savings banks, and a number of credit societies
and private savings and loan associations. The system's main source of funds
included the proceeds of an important Special Fund as well as savings deposits
of numerous individuals. In 1978 the number of dwellings financed by the
system totalled 340,000 and accounted for 22 percent of all loans to the
private sector. The system produced net savings that were channeled to the
Central Bank and the Bank of Brazil for lending through the purchase of
government securities.

     There were a large number of additional banks, including a few federal
(largely regional), several state, and many private. State banks engaged
in commercial, investment, and/or development banking. Private financial
institutions were specialized, usually conducting commercial banking,
investment banking (largely working capital), finance companies (for consumer
durables), and insurance companies. A number of foreign banks conducted
commercial operations in the country.

     The number of commercial banks and branches proliferated in the 1950s
and 1960s. Policies in the 1970s favored consolidation, and the number of
commercial banks, both public and private, shrank through mergers and
otherwise. A conglomeration process also occurred in which large financial
companies often included a commercial and an investment bank, a finance
company, an insurance business, a foreign trade company, and institutions
to channel investments into projects where there were incentives, such as
in the Amazon and the Northeast. Ties between financial and industrial
conglomerates developed. The concentration in the 1970s suggested to some
observers a decline in