In many instances Brazilian citizens pay the highest interest rates in the world. According to a January 2005 study by the National Association of Financial, Administrative, and Accounting Executives, Brazilians paid 8.31% in monthly interest (an annualized 160.63%) on checking accounts with borrowing privileges and an average of 6.21% in monthly interest (an annualized 106%) on personal loans in January, 2005.
Legal entities also pay high interest rates in Brazil: 4.18% per month for working capital and 5.75% per month for guaranteed accounts. According to the Federation of Industries of the State of São Paulo (Fiesp), individuals and legal entities together spend US$ 45.4 billion (R$ 118 billion) annually on interest payments in Brazil.
With these rates, Brazil remains one of the countries with the biggest bank spreads in the world. The spread is the difference between what financial institutions pay to obtain resources and what they charge their customers for loans. According to the Central Bank, the average spread in Brazil in 2004 was 28.1%.
In 2003 the country disputed the title of champion of high spreads with Paraguay. According to a study by the Institute of Industrial Development Studies (IEDI), based on data from the International Monetary Fund (IMF), Brazil was in first place, with an annualized spread of 43.7% – the highest in the world among the 102 countries surveyed.
But, by the Central Bank’s calculations, the spread at the time was 31.9%, thus placing Brazil in second place, behind Paraguay (37.6%).
Other Latin American countries also present spreads that are quite high, but still lower than Brazil’s, according to the study. Such is the case with Argentina, with an annualized spread of 15.4%, Bolivia (13.6%), and Venezuela (12%).
The difference is even greater when compared with the spread in developed countries such as the United States (3%), Japan (1.8%), and the area of the Euro (3.1%), according to the IEDI.
Professor Marcos Cintra, vice-president of the Getúlio Vargas Foundation, explains that market power is what determines bank spreads.
“Since the demand is greater than the supply in the Brazilian banking sector, which is centralized and cartelized, the value of the spread shoots way up.”
According to Cintra, competition among banks in Brazil is very weak, because they act as one, are oligopolistic, and thus they have price-fixing power.
“The operation of the Febraban (Brazilian Bank Federation) is very questionable, since executives from each bank meet there to plan market strategies,” he contends.
The chief economist of the Febraban, Roberto Luiz Troster, claims that the operation of the institution is cooperative and does not affect competition among banks. He says that this competition is great.
“A proof that there is great competitiveness in the banking sector is the case of foreign banks, which arrived in Brazil with great expectations and did not obtain great results here,” he argues.
According to Troster, to lower the bank spread in Brazil it is necessary to reduce the compulsory reserve requirement on deposits (the amount the Central Bank collects from banks to decrease market liquidity), taxes, and the resources directed towards rural and building credit.
In addition, “for interest rates to fall, it is necessary to increase the guarantees for the providers of credit,” he affirms.
Translation: David Silberstein