National Financial System Overview

Sistema Financeiro Nacional

• The Sistema Financeiro Nacional (SFN) is a set of institutions and entities that facilitate financial intermediation.
• Financial intermediation is the process where financial institutions connect individuals and companies with excess funds (creditors) to those who need funds (borrowers).
• The SFN's key function is to facilitate financial intermediation between creditors and borrowers, enabling financial operations, asset circulation, debt payments, and investments by individuals, companies, and the government.
• The SFN offers various financial services and manages resources.

Intermediação Financeira

• Intermediação Financeira is the primary function of the SFN.
• Financial institutions act as intermediaries between savers (creditors) and borrowers.
• These institutions attract funds from individuals and businesses with excess funds (e.g., savings, investments).
• They then lend these funds to individuals or companies who need financing.
• This process allows savers to earn interest on their savings, while borrowers obtain funds for various purposes.

The Role of Banks in Intermediação Financeira

• Banks are crucial players in the intermediation process.
• They receive deposits (savings) from individuals and companies, offering interest on those deposits.
• Banks use a portion of these funds to lend to borrowers, charging interest rates.
• This process allows banks to earn a profit through the difference between interest charged on loans and paid on deposits (spread bancário).

Spread Bancário

• Spread bancário is the difference between the interest rate a financial institution charges on loans and the rate it pays to depositors.
• This represents the institution's revenue from financial intermediation.
• The spread covers operational costs, including maintaining physical branches and staff salaries, and contributes to the bank's profit.

Advantages of Intermediação Financeira

• Financial institutions provide liquidity, which is the ease and speed with which assets are transformed into cash without losing value.
• This benefit applies to both savers and borrowers.
• Savers can access their funds easily, even if those funds are already lent out by the institution.
• Borrowers receive quick access to funds when they need them.
• Institutions have access to crucial information about customers, including their credit history, income, and financial transactions.
• This allows the institution to assess individual risk and decide whether to lend them money.
• Institutions may use the information to customize interest rates and lending terms based on the borrower's risk profile.

Risk of Credit (Inadimplência)

• The potential for borrowers to default on their loans is a risk associated with lending.
• Financial institutions manage this risk by assessing borrowers' financial history.
• They establish risk profiles for borrowers, allowing them to charge higher interest rates to compensate for potential losses from defaults.

Sistema Financeiro Nacional

• Differences between surplus and deficit agents:
  • Surplus agents have more resources than needed and seek to invest or lend.
  • Deficit agents need more resources than they possess and seek funding or borrowing.
• Financial intermediation:
  • Acts as a link between surplus and deficit agents, facilitating access to financial resources.
  • Example: A bank lends money from a saver to an entrepreneur.
• Risks in financial intermediation:
  • Credit risk: The risk of the deficit agent not repaying what is owed.
  • Liquidity risk: The risk of a financial institution not being able to meet its commitments.
  • Market risk: The risk of losses due to market changes.
• Role of financial institutions in the financial system:
  • Access to information: Financial institutions have access to information about the deficit agent, allowing risk assessment.
  • Regulation and supervision: Financial institutions are regulated and supervised, increasing agent confidence in the system.
  • Interest rate charging: Financial institutions can charge higher interest rates for riskier operations.
  • Service provision and resource management: The financial system provides services beyond financial intermediation, such as bill payments, insurance, investments, etc.
• Functions of the Brazilian financial system:
  • Financial intermediation: Facilitates the meeting between savers and borrowers.
  • Service provision: Offers services like payments, transfers, insurance, investments, etc.
  • Resource management: Allows financial agents to manage their resources efficiently.

Mercado Financeiro: Estrutura e Segmentos

• Financial market segments:
  • Money market: Trading of short-term assets (government securities, deposit certificates).
  • Credit market: Trading of loans, financing, and other credit products.
  • Foreign exchange market: Trading of foreign currencies.
  • Capital market: Trading of stocks, corporate bonds, and other long-term assets.
  • Insurance market: Trading of life, auto, and home insurance.
  • Closed pension market: Pensions offered to specific groups, such as employees of a particular company.
• Structure of the national financial system:
  • Regulatory entities: Define policies and guidelines for the financial system (e.g., Central Bank of Brazil).
  • Supervisory entities: Oversee financial institutions and ensure compliance with regulations (e.g., Securities and Exchange Commission).
  • Operational entities: Undertake financial intermediation and service provision (e.g., banks, brokers, insurers).
• Subsystems of the Brazilian financial system:
  • Normative subsystem: Includes regulatory and supervisory entities, responsible for system regulation and supervision.
  • Intermediation subsystem: Composed of operational entities that intermediate financial resources between savers and borrowers.

Tipos de Regulação Financeira

• Heteroregulation: Financial system regulation by governmental bodies or external entities independent from financial institutions.
  • Example: The Central Bank of Brazil defines rules for bank lending.
• Autoregulation: Financial system regulation by financial institutions themselves, through self-regulatory entities that create and enforce their own rules.
  • Example: The Brazilian Banking Association (ABBC) defines standards for bank conduct.
• Relationship between hetero and autoregulation: Autoregulation cannot supersede heteroregulation; self-regulatory norms must comply with governmental regulations.

### Brazilian Financial System

• Normative, Supervisory, and Operational Entities are responsible for regulating and overseeing financial institutions.
• Normative Entities: Define regulations for institutions operating in the following markets: currency, credit, capital, and foreign exchange.
• National Monetary Council (CMN):
  • Establishes general guidelines for financial market institutions.
  • Lacks executive functions.
• National Council of Private Insurance (CNSP):
  • Regulates private insurance activity.
  • Ensures insurance companies comply with CNSP regulations.
• National Council of Complementary Pension (CNPC):
  • Regulates closed complementary pension operations.
• Supervisory Entities are responsible for verifying compliance with regulations.
• Central Bank of Brazil (BCB):
  • Oversees financial institutions in currency, credit, and foreign exchange markets.
• Securities and Exchange Commission (CVM):
  • Oversees the capital market (stock exchanges, futures exchanges, brokers, distributors, investment fund administrators).
• National Private Insurance Superintendence (SUSEP):
  • Supervises private insurance companies.
• Complementary Social Security Pension Fund (Previc):
  • Oversees closed complementary pension operations.
• Operational Institutions: Responsible for financial intermediation, service delivery, and resource management.
  • Banks: Provide banking services (accounts, loans).
  • Savings and loan associations, credit unions, financial institutions: Similar services as banks.
  • Consortium administrators: Organize and manage consortiums.
• Normative Subsystem: Includes entities responsible for setting regulations.
• Intermediation Subsystem: Includes entities responsible for intermediation, service delivery, and resource management.