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Today we have around 62 million Brazilians in default, the equivalent of Italy. Default is the non-payment of a bill or debt. The defaulting consumer therefore has an outstanding financial obligation. The economic crisis of recent years has considerably increased unemployment, hurting Brazilian families. Almost 13 million people are out of work.

This is a risky context for financial institutions, which have to take into account the high probability of non-payment of the loan or financing. So what do they do? They price the loss, adding to the interest rate the expected loss from default.

This phenomenon occurs because the market only has access to people's unpaid bills. In other words, they only see the register of negative credit, so they can only price default without considering the behavior of paid obligations. Hence the importance of a Positive Register that reaches everyone, enabling consumers to show their payment history to financial institutions. They can demonstrate that they pay their bills on time and that their behavior therefore merits lower loan and financing rates.

Also according to the Central Bank, based on an analysis carried out between 2015 and 2017, 60% of the banking spread is due to defaults and taxes levied on financial intermediation. Various taxes are levied, such as IOF (Tax on Financial Operations), IRPJ (Corporate Income Tax), CSLL (Social Contribution on Net Profit) and PIS/COFINS. In Brazil, according to research by Febraban (the Brazilian Federation of Banks), the impact of the tax burden on the banking spread, which currently stands at 45%, is greater than any country in the world. In the United States, for example, it is 35%. In Russia, Turkey and the United Kingdom, the impact is 20%.

We mustn't forget the compulsory deposit, which also increases the banking spread. Before I talk about it, a quick explanation. When an account holder makes a demand or term deposit or puts money into savings, the bank is obliged to set aside part of this amount in an account with the Central Bank. These funds cannot be used in the day-to-day running of the financial institution. The bank will not make a profit from this money, since it cannot lend it out or use it in any kind of operation.

What are the objectives of compulsory payments? There are basically two. The first is to guarantee the liquidity of the banking system. The compulsory deposit is a safety margin for moments of instability, such as a bank failure, which can cause panic among account holders to withdraw their money. The second is to act as an instrument of monetary policy. The Central Bank increases or decreases the compulsory deposit according to its desire to withdraw or inject money into the Brazilian economy.

In the first half of this year, the Central Bank lowered the compulsory deposit on current accounts from 40% to 25% in an attempt to inject money into the economy. This move makes perfect sense because, as we have seen, we are living through turbulent times in the economy. The aim was to encourage banks to lend more and to lower the interest rates charged to companies and consumers in credit operations. The Central Bank also reduced the compulsory savings rate from 21% to 20%.

Even so, despite these decreases, Brazil has the highest nominal rates of compulsory deposits, according to research presented by Febraban. The volume collected by the Central Bank is 6.4% of banks' total assets, much higher than the median of 1.9% presented by the countries surveyed. In current account deposits, for example, second place is occupied by Turkey, which has less than half of the 25% currently presented by Brazil. In compulsory savings, South Korea ranks second with a much lower percentage than Brazil.

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