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One of the functions of the financial system is to mediate between savers and borrowers. The functioning of this system depends on mutual trust. When depositing money with a financial institution, savers need to believe that they will be able to get their money back within the agreed timeframe. At the other end, lending these funds to third parties is also based on trust in the creditworthiness of the borrowers.

A breakdown in confidence in the functioning of the system can affect the raising of funds and, consequently, restrict the supply of credit, impacting on the real side of the economy. This is where the importance of monitoring the stability of the financial system comes from.

The financial system is made up of three elements: Financial Institutions, Financial Market and Financial Infrastructure.

The national and international financial system has shown resilience during the great challenge of the pandemic. Credit grew strongly during this period, while defaults remained at low levels. The pertinent actions of governments and monetary authorities were decisive for this result. Having overcome the pandemic, what can we say about the health of the system in recent months?

In order to approach the current scenario, it's worth putting the economic situation into context. International Monetary Fund (IMF) projections point to a slowdown in global growth in 2023, i.e. lower growth than that seen in 2022. The estimated growth for this year is 2.9%, compared to 3.4% the previous year. Inflation, meanwhile, is starting to fall, although it is still at a high level. The fall in inflation makes room for interest rates to start falling.

Complementing this basic scenario is a new element in the IMF's considerationsRecently, the closure of regional banks in the US and the difficulties of a systemically important global bank have added to uncertainties about global financial conditions. The trillion-dollar question is whether the events are isolated events or represent a greater risk to the global financial system. Months after the events, it appears that the actions of local monetary authorities have calmed the markets, but the episodes remain a point of attention.

In Brazil, throughout the first quarter, debates surrounding the conduct of monetary policy raised inflation projections, prolonging the prospect of a reduction in interest rates and raising fears of a credit crunch. This scenario seems more distant. The progress made on a new fiscal rule and the relief provided by the latest inflation data are beginning to move expectations about interest rate cuts to a nearer horizon. Over the last few weeks, the stock market's positive reaction reflects this new moment, which is more favorable to risk assets.

With regard to the stability of the national financial system, data from the Central Bank's latest Financial Stability Report show that institutions ended 2022 with satisfactory levels of liquidity, both to cover regulatory requirements and to deal with stress scenarios.

In terms of credit, the report points out that there has been an increase in the rigor of credit analysis. As a result of the more rigorous analysis, the growth in problem assets has slowed down. This result illustrates the contribution of credit bureaus to the stability of the system, by providing the information necessary for proper credit analysis and predictive decision-making.

The report also highlights something already mentioned in this space: the high level of household debt. Data from the Central Bank shows a drop in the ratio between total debt and accumulated income over the last 12 months (48.5%). Even with the drop, the figure remains close to the all-time high.

All in all, the outlook is less cloudy than it was at the start of the year, although the risk factors still deserve attention. In the Brazilian credit market, the limit imposed by the high level of indebtedness still requires stricter analysis criteria, especially in the forms of credit that represent greater risk, such as personal loans and revolving credit.

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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor