Defaults Rattle Brazil’s Shadow Banks, Spark Regulatory Scrutiny

Résumé détaillé

Investors keep pouring money into Brazil’s so-called shadow-banking market even as defaults continue to climb.

Investors keep pouring money into Brazil’s so-called shadow-banking market even as defaults continue to climb.

That, combined with several high-profile fraud cases, has prompted the central bank to say it’s concerned some investors aren’t getting the level of transparency they need to assess the risks. The focus is on FIDCs — funds that invest in pools of loans often originated by fintechs.

FIDCs have been called shadow banks by some market participants because of the major role they play in the lending market despite the fact that they’re subject to less stringent regulatory oversight than traditional banks.

The flood of capital into FIDCs has spurred concerns more than the structure itself. Total FIDCs under management jumped 14% this year through September, to 978.8 billion reais ($178 billion), and have doubled in the past three years, according to Uqbar, a data and research company that specializes in structured finance and securitization.

The central bank said it’s concerned about the need to improve “the quality of the registered information,” according to a May report, and regulators are looking into “the proper measurement of credit risk, and the valuation of illiquid and non-standardized assets.” Authorities followed up by strengthening some of the rules for legal claims and adding more disclosure requirements.

Credit spreads on FIDCs are tightening as investor appetite outpaces the supply of new funds, with Brazil’s historically high interest rates drawing money into fixed-income products. That’s happening even with delinquency rates expected to rise further next year, including among assets held in FIDC portfolios.

“The unemployment rate is expected to rise in 2027, which probably means more defaults on loans and FIDCs,” said Christopher Smith, a credit portfolio manager at Capitania Investimentos SA, which oversees 22 billion reais in assets.

FIDCs are a distinctly Brazilian structure that share some similarities with the US securitization market.

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