Brazil: Banco BTG Pactual Emergency Liquidity Program, 2015

BTG was primarily funded by short-term borrowings; long-term borrowing and equity funding represented only 23% of the bank’s balance sheet (Bautzer and Parra-Bernal 2015). In response to Esteves’s arrest, unsecured funding dropped 16% in aggregate in the fourth quarter of 2015, as BTG faced withdrawals in every category of unsecured funding (BTG 2016d). Investors withdrew certificates of bank deposits, which BTG relied on to fund its daily operations (Levin, Marcelino, and Lucchesi 2015a). Figure 3 shows BTG’s funding structure and quarter-on-quarter funding shrinkage in the last three months of 2015.

The yields on BTG’s contingent convertible bonds (CoCos) reached record highs as investors feared the bank’s regulatory capital would become insufficient (Virdo 2015). The BCB later said that a BTG collapse could have been a systemic event that could have posed a threat to the stability of the financial system (IMF 2018).

On December 4, nine days after Esteves’s arrest, the FGC, Brazil’s private, self-funded, deposit insurance organization (which every financial institution must join—see Key Design Decision No. 3, Legal Authority), extended a secured BRL 6 billion credit line to BTG (BTG 2015). The FGC extended the line to bolster BTG’s liquidity “within the scope of [the FGC’s] mission to contribute to maintaining the stability of the National Financial System and to act in the prevention of systemic crises” (FGC 2016a, 12). The credit line was guaranteed in part by BTG’s loan portfolio, and personally by the top seven shareholders of BTG (BTG 2016e).

As of December 13, 2015, BTG had drawn BRL 2 billion from the credit line (Levin, Marcelino, and Lucchesi 2015b). As of December 31, 2015, BTG had drawn BRL 5 billion from the line, which was, according to our research, the maximum amount drawn (BTG 2016e). As of October 19, 2016, BTG had repaid all remaining outstanding balances from the credit line (BTG 2016b).

The credit line’s size exceeded internal FGC regulations. To extend the credit line, the FGC had to request a determination from the BCB that the failure of BTG would represent a systemic risk (IMF 2018). According to the IMF, the BCB “confirmed to the FGC Board that the possible collapse of BTG could have been a systemic event that posed a threat to . . . financial stability”; the FGC invoked that exception and approved the emergency loan (IMF 2018, 40). The BCB did not comment publicly on its systemic risk determination in the BTG case. The IMF said that BTG’s liquidity crisis was “of high interest given the significance of the institution,” as BTG was the seventh-largest bank in Brazil, maintained numerous businesses lines, and participated significantly in companies in sectors including healthcare and media (IMF 2018, 40). Despite BTG’s size, it was only about one-sixth the size of the fourth-largest bank. Some bank analysts said they did not see any systemic risks associated with BTG’s position after Esteves’s arrest. One analyst said, “the risk isn’t to BTG’s balance sheet, just to its reputation, but reputation for a bank is everything” (Sreeharsha and Horch 2015). The FGC and BCB thought that lack of liquidity support to BTG at the time could compromise the stability of the broader Brazilian economy.

According to media reports, the arrest of Esteves resulted in a tightening of funding conditions at BTG and large-scale fund withdrawals amounting to nearly 60% of net assets (see Overview). The FGC extended the credit line nine days after Esteves was arrested (BTG 2015; Hayashi 2015; Levin, Marcelino, and Lucchesi 2015b; Zhe 2015).

Reporting indicates that BTG may have considered loan sales to Caixa Econômica Federal, a large state-owned bank, and Banco do Brasil to raise funds. Our research was unable to uncover the extent to which these banks considered such plans (Roeder 2015).

BTG made numerous asset sales for more than BRL 3.5 billion before obtaining the credit line (Levin, Marcelino, and Lucchesi 2015b).

As of December 15, 2015, BTG raised BRL 1.7 billion in time deposits insured as “time deposits with a special guarantee” (depósitos a prazo com garantia especial, or DPGEs) (BTG 2016e). The DPGE was an FGC deposit guarantee of up to BRL 20 million per depositor per bank conglomerate for eligible time deposits with terms between six and 60 months administered by the FGC for a monthly fee. By comparison, the FGC’s coverage of regular (demand) deposits was BRL 70,000. For details on the program, including applicable fees and eligibility requirements, see Nunn (2022).

The BCB changed reserve requirements to exclude government assistance liquidity lines from banks’ liabilities calculations. Although the BCB said that the change was meant to reduce costs for smaller banks generally and did not explicitly mention BTG, a media report said that the BCB had “[thrown BTG] a lifeline” in an article titled “BTG to Get Central Bank Help with Lower Requirements” (BCB 2015; Marcelino 2015b). The article said that the reserve requirement change would “[affect the] credit line from the nation’s deposit guarantee fund” (Marcelino 2015b). A BCB official with familiarity with the regulation speaking anonymously with Bloomberg said that the rule change would “benefit BTG in particular” (Marcelino 2015b).

On January 30, 2017, the BCB passed Resolution No. 4,553, which segments the banking sector by systemic implications; the highest level of such classification is S1, including banks larger than 10% of GDP or whose international activity is relevant. The BCB classifies BTG as S1 (BCB 2020).

Resolution No. 2,197 of the National Monetary Council (Conselho Monetário Nacional, or CMN) of Brazil authorized the creation of the FGC (CMN 1995a). The CMN, an interministerial council composed of the governor of the BCB, the minister of finance, and the minister of planning and budget, is tasked with creating monetary and credit policies, maintaining monetary stability, and promoting development (BCB n.d.). The CMN and BCB are, among other entities, constituent parts of the National Financial System,^FNThe National Financial System is a broad term that encompasses the Brazilian financial landscape and comprises the BCB, the National Monetary Council, state banks, and all other public and private financial institutions (President of Brazil 1964). and the CMN has authority to define roles, delegate authorities, and approve budgets of the BCB (President of Brazil 1964). 

The FGC is a private, nonprofit civil association that is a member of the National Financial System whose mission is to protect depositors and contribute to financial stability by providing deposit guarantees and support operations (including liquidity support operations) to Brazilian financial institutions. Membership in the FGC is a requirement for all Brazilian financial institutions to obtain operating authorization (FGC 2016a). The FGC did not have access to emergency liquidity from the BCB or the ministry of finance (IMF 2018).

The original FGC regulations did not authorize any type of emergency lending operations (CMN 1995b). However, on May 23, 2013, the CMN amended the FGC’s regulations with Resolution No. 4,222 (Amended FGC Regulations), explicitly authorizing liquidity assistance operations with its member institutions:

Art. 4 also integrates the purpose of the FGC, considering the purposes set forth in items II and III of art. 2nd, the contracting of assistance or financial support operations, including liquidity operations with associated institutions, directly or through companies indicated by them, including their controlling shareholders (CMN 2013, chap. I, art. 4; emphasis added)

Per the Amended FGC Regulations, the FGC was authorized to engage in financial support operations only in an amount (a) not exceeding the (projected) FGC-guaranteed credits^FNThe FGC guaranteed a range of financial institution liabilities, including but not limited to demand deposits, time deposits, bills of exchange, real estate letters, repurchase agreements, and mortgage letters (FGC 2016b). of the borrower institution; and (b) not exceeding 25% of the FGC’s total shareholder equity (for a loan to one financial institution) or 50% of the FGC’s total shareholder equity collectively (in other words, total liquidity support operation loans in aggregate could not exceed 50% of the FGC’s equity), except in cases of adverse economic conditions recognized by the BCB under which lending would be necessary for the protection of the financial system, in which case the limitations on lending may be exceeded (CMN 2013). The credit line to BTG represented 12.4% of the FGC’s equity (see Key Design Decision No. 7, Source and Size of Funding) (FGC 2016a). Per the CMN:

In the face of an adverse economic situation, recognized by the Central Bank of Brazil, and in the protection of the stability of the National Financial System, the risk limit provided for in item I of § 2 [the size of the liquidity assistance as a share of the FGC’s equity] may be exceptionally exceeded and the charges referred to in art. 32, item XIII [establishing the form and conditions of emergency support operations], may be set at bases lower than those of the market. (CMN 2013, chap. I, art. 4, sec. 3)

The IMF said that the size of the credit line exceeded the maximum permitted size under the FGC’s internal regulations and that the FGC relied upon the BCB’s systemic risk exception to enlarge the credit line. The IMF said that the BCB confirmed to the FGC board that the failure of BTG could threaten systemic financial stability. However, the size of the credit line did not exceed 25% of the FGC’s shareholder equity, which was BRL 48 billion at the end of 2015. The FGC made only one other loan in 2015 (for BRL 236 million) that, combined with the BTG lending, would not have brought the FGC’s aggregate lending to even 20% of its equity (FGC 2016a; IMF 2018). Neither the FGC’s annual report nor BTG’s annual report specified the projected amount of BTG’s FGC-guaranteed credits. The BCB did not issue an official statement about its systemic risk determination of BTG or the amount of FGC support for which it was eligible, which—according to a Brazilian expert with knowledge of the BTG case who asked to go unnamed—was because of concerns about stigma and contagion. 

The credit line was administered by the FGC (BTG 2015; FGC 2016a). Although the BCB itself did not provide the credit line, it played an “active role” in arranging the FGC’s credit line to BTG (Lucchesi 2015). There were extensive exchanges between the BCB and FGC with respect to the BCB’s approval of the FGC credit line. The FGC provided the emergency liquidity assistance, but both the BCB and FGC were fully informed about BTG’s financial position. The FGC and BTG negotiated the terms of the emergency liquidity assistance between themselves, while the BCB was kept informed about the support operation. The BCB was an active participant in BTG’s change of control and asset sales. One media report said the BCB gave BTG a deadline by which it needed to resolve its problems before the BCB stepped in, although it wasn’t clear what type of intervention the BCB considered (Época Negócios 2015).

BTG used a holding company controlled by its top seven shareholders to obtain the FGC funding (Parra-Bernal 2015).

In 2015, the FGC’s board of directors and supervisory board—which were previously composed of staff from member financial institutions—were composed of independent professionals (FGC 2016a). The board of directors was nominated by the FGC’s general assembly—the FGC’s deliberative body composed of representatives from the FGC’s member institutions, with voting quotas allocated pro rata with financial contributions to the FGC (CMN 2013, arts. 16–17). Board of directors appointments were not necessarily to individuals employed by FGC member institutions—historically, some have come from different fields entirely—and the board operated with considerable independence from the general assembly once elected. Board appointments were subject to approval by the BCB.

Consistent with a Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or CVM) regulation,^FNWhile the relevant CVM regulation (No. 358) did not specify the disclosure of a government lending facility, it broadly mandated the disclosure of any decision by the shareholders or management that could significantly influence the price of securities issued by the (publicly traded) company; the decisions of investors in buying, selling, or holding those securities; or the decision of investors to exercise rights granted to them by holding those securities (CVM 2002). and in order to reassure its creditors of its liquidity position, BTG announced the extension of the credit line via press release on the day it signed the memorandum of understanding with the FGC (BTG 2015). Similarly, BTG announced the repayment of the credit line via press release (BTG 2016b). In January 2016, BTG announced its unaudited fourth-quarter results ahead of schedule (with audited results to be published in February) “for the sake of transparency” so that stakeholders could see BTG’s balance sheet after the events on November and December (Thomson Reuters 2016a, 2). BTG disclosed the credit line in its 2015 annual report (BTG 2016c).

Our research was unable to uncover any press releases from the FGC or BCB related to the credit line. While the FGC and BCB collaborated on the provision of liquidity assistance to BTG, their organization publicly disclosed FGC-BCB communications on the subject. The FGC does not maintain bright-line rules on the public disclosure of its assistance operations but rather chooses its disclosure, if any, on a case-by-case basis. With respect to BTG, the FGC thought it was critical that the disclosure of the liquidity assistance came from BTG itself, so that the news would reassure BTG’s creditors.

However, anonymous sources did speak to the media about the BCB’s “active role” in arranging the FGC credit line. Sources told the press that the BCB worked closely with BTG in its management changes, and that the BCB told BTG to sell assets and reduce trading activity. Officials at BTG and the BCB refused to comment to Bloomberg for the record on the BCB’s role in the crisis (Lucchesi 2015). On September 28, 2015, the BCB said that BTG had “solid financial indicators” and was “acting normally” in the market (Leahy 2015). The BCB did not mention BTG or the FGC credit line in its 2015 annual report (BCB 2016).

The Brazilian president’s office was also following BTG’s crisis but declined to publicly comment on it; however, a member of the Brazilian president’s economic team commented anonymously to Bloomberg that it viewed BTG’s asset sales and steps to improve liquidity as “satisfactory” (Lucchesi 2015).

In an interview in which the FGC discussed BTG, the FGC’s legal director asserted that it was Esteves, not BTG, against whom charges had been brought; that BTG’s market value was falling since BTG would likely have to shrink; and discussed collateral terms (Levin, Marcelino, and Lucchesi 2015a; Marcelino 2015a). The FGC’s legal director also said that the goal of the credit line was to stabilize BTG and that it should “not be seen as a bailout” (InfoMoney 2015).

Neither the FGC, the BCB, nor BTG disclosed the interest rate on the credit line (BTG 2015; Business News Americas (BNamericas) 2016). The BCB declined to say whether it had opened lines of credit to BTG (Levin, Marcelino, and Lucchesi 2015a).

Before obtaining the FGC credit line, BTG’s new acting CEO said that BTG would start a share buyback program because the stock looked “cheap” following a 40% plunge on the news of Esteves’s arrest (Leahy 2015). BTG’s chairman said that in normal times the bank operated with levels of liquidity elevated so high that in BTG’s last financial report, “there were even those who questioned whether it was excessive” (Leahy 2015).

The FGC disclosed the credit line to BTG in its 2015 annual report (FGC 2016a). Our research did not uncover any audit reports or other oversight reports.

The FGC provided the credit line (BTG 2015). The FGC is funded primarily by ex ante member fees but, in the event the FGC is not sufficiently capitalized,^FNAccording to the FGC’s amended regulations, the threshold for being insufficiently capitalized is if the FGC needs additional income to meet its obligations (CMN 2013). it can draw funding from special assessments on members, advances from members, credit from private or public institutions, the issuance of securities, or other funding sources authorized by the BCB (FGC 2016a). The size of the credit line was designed by the FGC to cover creditor withdrawals for roughly six months. 

In its 2015 annual report, the FGC said that it had provided support to BTG but did not specify the specific source of its funding (FGC 2016a). In the event of the systemic risk exception—which the FGC did invoke in this case—the FGC could levy a special assessment fee (contribution) on its members to fund emergency lending (CMN 2013, arts. 2, 32). The FGC ultimately did not levy such a contribution from its members to fund its BTG lending.

The credit line was authorized for up to BRL 6 billion. As of December 31, 2015, BTG had drawn BRL 5 billion (USD 1.3 billion) from the line (BTG 2016e). At that time, the total authorized amount (BRL 6 billion) represented 2.5% of BTG’s total assets,12.4% of the FGC’s equity, and 12.3% of the FGC’s total assets (BTG 2016c; FGC 2016a). Regulatory requirements mandated that the FGC could neither lend to a single institution (in the absence of invoking the regulatory exception for systemic risk) more than 25% of FGC’s equity nor provide financing in excess of that institution’s (projected) guaranteed credits (see Key Design Decision No. 3, Legal Authority).

To effectuate the credit line, the FGC bought a five-year BTG time deposit (bank certificate of deposit) for BRL 5 billion (BTG 2016d). As general policy, the FGC carried out liquidity support operations by purchasing guaranteed bank certificates of deposit from borrowers (FGC 2016a).

The parties did not disclose the interest rate on the credit line (BTG 2015; Business News Americas (BNamericas) 2016). The IMF said that the credit line was extended “at market rates” (IMF 2018, 40). The FGC lent during liquidity support operations at the average Selic rate,^FNThe Selic (Special System for Settlement and Custody) rate is the BCB’s target federal funds rate and the key tool used to implement monetary policy decisions (BCB 2021). which, at the time, was 14.3% (BCB 2021; FGC 2016a). In December 2015, Brazil’s broadest measure of inflation registered 10.7%, implying a real interest rate of 3.6%.

The credit line had a five-year maturity period (Business News Americas (BNamericas) 2016).

Proceeds from BTG’s sale of Swiss bank BSI allowed BTG to prepay the credit line, which it had originally planned to do before its expiration (Business News Americas (BNamericas) 2016). As of October 19, 2016, less than a year into the period, BTG had repaid all outstanding balances from the credit line (BTG 2016a).

By January 2016, redemptions had stopped (BTG 2016c). While BTG suffered funding source withdrawals across all unsecured funding classes, its common equity Tier 1 and additional Tier 1 capital ratios increased quarter-on-quarter in the fourth quarter of 2015 by 140 basis points and 10 basis points, respectively, as a result of a decrease in risk-weighted assets across most risk classes (BTG 2016d). By year-end 2016, while BTG had more than halved its balance sheet, its earnings per share and net income increased significantly year-on-year, both by a factor of more than six (BTG 2017).

The FGC negotiated the collateral terms directly with BTG. The FGC credit line was collateralized by a portion of BTG’s loan portfolio (basically debentures and bank credit certificates, according to the BTG) (BTG 2016e, 3). The credit line was also personally and individually guaranteed by the top seven shareholders of BTG. Altogether, the collateral’s value represented 120% of the credit line. As of December 15, 2015, BTG had drawn a total of BRL 5 billion from the line (BTG 2016e).

Our research did not uncover any stated effects of the credit line on the transmission of monetary policy. The BCB did not mention BTG or the FGC credit line in its 2015 annual report (BCB 2016).

The FGC attached numerous restrictions to the BTG credit line, including: (a) restricted dividend payments, (b) suspension of variable compensation to management and cancellation of increases in fixed compensation, and (c) suspension of loans extended to partnership members (BTG 2016e).

One media report said the BCB gave BTG a deadline by which it needed to resolve its problems before the BCB stepped in (Época Negócios 2015).