Frequently Asked Questions Series Lending Interest Rates and Bank Spreads Updated in March 2008, With data through December 2007 Investor Relations Group Lending Interest Rates and Bank Spreads This paper is part of the Banco Central do Brasil’s “Frequently Asked Questions” series. This series, which is produced by the BCB’s Investor Relations Group (Gerin), provides background information and analysis on economic data and issues of interest to investors and the general public. The Banco Central do Brasil is producing this series as part of its ongoing efforts to enhance the transparency of the Brazilian economy and economic policy, and to improve its communication with the private sector. 1. What is the total amount of credit in the Brazilian economy? How it is distributed? 7 2. How has earmarked credit evolved recently? 8 3. How is non-earmarked credit distributed among borrowers? How has this stock of credit evolved recently? 9 4. How has the stock of foreign currency-denominated credit evolved recently? 10 5. What are the major types of non-earmarked credit contracts in Brazil? 11 6. What is the average cost of bank creditin Brazil? What is the average bank spread? 11 7. How have spreads on non-earmarked fixed interest rate credits behaved recently? 12 8. What are the components of bank spreads in Brazil? 13 9. How much do reserve requirements contribute to bank spreads? 14 10. Does the credit contract influence the spread? 15 11. Why is the bank spread between consumer and corporate credit operations so different? 16 12. What role does collateral play in bank spreads? 16 13. What is the average maturity of bank credit in Brazil? 17 14. What has the BCB been doing to reduce lending costs and bank spreads? 18 15. What is the effect of legal insecurity or legal risk on credit and bank spreads? 18 16. What are payroll-deducted loans? How has this credit instruments evolved recently? 19 17. What is a Bank Credit Bill (CCB)? 20 18. What is chattel mortage? What is its purpose? 20 Contents 19. What is micro-credit? 21 20. What is the implication of the new Bankruptcy Law and the changes in the National Tax Code for the credit market? 21 21. What measures have been adopted to increase transparency and enhance competition in the credit market? 22 22. What is Credit Risk Center (SCR)? 23 23. Where can I read more about lending interest rates and bank spreads? 24 24. Where can I find current data? 26 7 Frequently Asked Questions Lending Interest Rates and Bank Spreads 1. What is the total amount of credit in the Brazilian economy? How it is distributed? Total credit in Brazil stood at 34.7% of GDP at the end of 2007. At end-December, financing and transfers from the Brazilian Development Bank (BNDES) made up 17.2% of total credit, while earmarked credit 1 to the housing and agricultural sectors represented 4.6% and 6.8% of total credit, respectively. Lending with non- earmarked funds (i.e. funds not subject to directed-lending requirements) represented 70.7% of total credit at the end of 2007. Graph 1– Total Credit Distribution (December/2007) 1 Brazil’s directed-lending requirements specify that a fixed percentage of deposit liabilities should be granted to the agriculture and housing sectors at government-set interest rates. Source: Banco Central do Brasil Other Earmarked Credit 0.8% BNDES 17.2% Housing Credit 4.6% Agricultural Credit 6.8% Credit to Individuals 34.0% Credit to Corporate 29.3% Non- Earmarked Credit 70.7% Externally Funded Credit 7.4% 8 Frequently Asked Questions 2. How has earmarked credit evolved recently? Earmarked credit can be split into two categories, with different characteristics: - The credit supply to the agricultural sector and the amount of credit granted by the BNDES have been strongly growing in recent years, following the expansion of the farming sector and the investment recovery in the period; - After the strong nominal fall in mid-2001, caused by the recognition of bad loans, credit to the housing sector has been widening as a result of the favorable moment of the Brazilian economy, added to fall of interest rates, the personal income increase and the credit supply growth. Graph 3 – Total Earmarked Credit (R$ billion) Source: Banco Central do Brasil 0 20 40 60 80 100 120 140 160 180 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Housing Agricultural BNDES Others 9 Frequently Asked Questions 3. How is non-earmarked credit distributed among borrowers? How has this stock of credit evolved recently? Out of the total R$659 billion in non-earmarked credit outstanding at the end of 2007, R$316.8 billion (48.1%) were individual loans and R$342.2 billion (51.9%) were corporate loans. Roughly R$68.6 billion of corporate credit was denominated in foreign currency. Despite the fact that the credit to GDP ratio in Brazil is quite low compared to international standards, non-earmarked credit has increased substantially over the past years. From June 2000 to December 2007, the nominal supply of non-earmarked credit increased to R$659 billion (24.5% of the GDP) from R$169.2 billion (14.3% of the GDP). Over this period, nominal credit to individuals was the most dynamic, increasing fourfold. Graph 3 – Non-Earmarked Credit (R$ billion) Source: Banco Central do Brasil 100 200 300 400 500 600 700 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 Individuals Corporates 10 Frequently Asked Questions 4. How has the stock of foreign currency-denominated credit evolved recently? Aggregate foreign currency-denominated credit, which includes advances on export contracts (ACC), export notes, import financing, and foreign currency-denominated loans has behaved differently from the other types of non-earmarked credit. The variation is due not only to exchange rate movements, but also to volatility in perceived country risk. As can be seen in Graph 4, the stock of foreign currency- denominated credit has declined gradually through 2002 as foreign lenders reduced credit lines to Brazilian corporations and banks. Since 2003, however, FX-denominated credits have shown signs of recovery, especially for ACC advances even with the Real appreciation. The recent upward trend is related to demand widening for these financing lines following the expansion of Brazilian external trade. Graph 4 – Foreign Currency-Denominated Credit (US$ billion) Source: Banco Central do Brasil 2 4 6 8 10 12 14 16 18 Jun 00 Dec 00 Jun 01 Dec 01 Jun 02 Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 Jun 05 Dec 05 Jun 06 Dec 06 Jun 07 Dec 07 ACC FX-Denominated Loans Import Financing and Others [...]... can I read more about lending interest rates and bank spreads? Once per year, the BCB publishes (in Portuguese) the “Credit and Banking Economy Report”, which includes the most complete data available on lending costs and bank spreads The report is available at: http://www.bcb.gov.br/?SPREAD The BCB website also has several Working Papers and Technical Notes on credit and bank spreads The links are... volume, new lending, interest rates, bank spreads, average tenors and bank delinquency rates, among others The Press Release is available at http:// www.bcb.gov.br/?OPERATIONS 26 Frequently Asked Questions “Frequently Asked Questions” Series Banco Central do Brasil 1 2 3 4 5 6 Lending Interest Rates and Bank Spreads Price Indices Copom Fiscal Data Regulated Prices Public Debt Management and Open Market... Credits in Brazil are contracted with fixed and floating realdenominated interest rates, and with FX-linked (effectively dollardenominated) interest rates Most credits to individuals, including personal credit, overdraft credit and credit for the purchase of goods, have fixed interest rates There are also several types of corporate credits with fixed interest rates, including hot money, working capital,... institutions and is calculated by CETIP – Custody and Settlement It is expressed as a percentage rate per annum compounded daily based on a 252-day year 11 Frequently Asked Questions represents the difference between the lending and funding interest rates, stood at 22.4% p.a Graph 5 illustrates the evolution of the average bank spread since January 2001 (including fixed, floating and FX-linked interest. .. contribute to bank spreads? Brazil’s reserve requirements contribute significantly to the country’s bank spreads by reducing its ability to increase credit Nonremunerated reserve requirements on demand deposits stood at 45% in December 2007 The Central Bank also requires an 8% remunerated requirement on demand deposits Reserve requirements for time deposits and saving accounts stood at 15% and 20%, respectively,... about bank rates lending rates, access http://www.bcb.gov.br/?txcred (in Portuguese) The BCB has also taken other steps, including: – Mandating that financial institutions show clients their individual accounting information of the last two years; – Requiring banks to provide more transparent information about interest rates charged on overdraft accounts; – Requiring greater transparency in banks’... average interest rate on non-earmarked bank credit stood at 33.8% p.a., while the average bank spread, which 1 The Selic Overnight rate is calculated by taking the weighted average of the interest rate on 1-day inter -bank financing operations, collateralized by federal domestic securities and traded as repo-operations (which implies interest rates with uniform credit risk) 2 The Average One-day Interbank... 07 Total Corporates Individuals Source: Banco Central do Brasil 8 What are the components of bank spreads in Brazil? With the goal of identifying the factors that contribute to bank spreads, the BCB used sample data from banks balance sheets to decompose the average spread into the following factors: administrative expenses, direct and indirect taxes, costs associated with defaults, and banks’ “net margin”... 0 0 4 0 7 0 8 Bankruptcy%20Law%2 0and% 20Tax%20Code.pdf 21 What measures have been adopted to increase transparency and enhance competition in the credit market? Since 1999, in order to increase information availability to borrowers and increase competition among lenders, the BCB has published on its website current information on individual financial institutions’ lending interest rates and fees For... Dec 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 Total Corporates Individuals Source: Banco Central do Brasil 17 Frequently Asked Questions 14 What has the BCB been doing to reduce lending costs and bank spreads? In 1999 the BCB launched a major ongoing initiative aimed at reducing bank spreads Under this program, the BCB has identified and focused its efforts on three key areas: – Promoting increased . about lending interest rates and bank spreads? 24 24. Where can I find current data? 26 7 Frequently Asked Questions Lending Interest Rates and Bank Spreads 1 Questions Series Lending Interest Rates and Bank Spreads Updated in March 2008, With data through December 2007 Investor Relations Group Lending Interest Rates and Bank