Risk & Return Brasil: Supervisors need to be more curious, says Maia

Authorities should put less faith in numbers and what they are told by banks, says top Brazilian supervisor

Sao Paulo

Bank supervisors across the globe should be more inquisitive and less accepting of what they are told by senior bankers, according to Carlos Donizeti Macedo Maia, head of the department of bank supervision at the Banco Central do Brasil.

"We need to understand better and check more. We need to put less trust in the numbers and what the bankers tell us. We need to check it," said Maia, speaking at the Risk & Return Brasil conference in São Paulo yesterday.

Banco Central do Brasil has looked to change its methods since the financial crisis, developing more intrusive and intensive regulation, Maia said. This means hiring supervisors with knowledge of more complicated areas of finance, such as derivatives. But it is also critical supervisors have the ability to ask the right questions, he added.

"I've hired a lot of PhDs and rocket scientists and that is a good thing. But more than that, I need supervisory staff with a different judgemental procedure. He or she needs to be embedded with an understanding of possibilities ahead and not just a checklist for the moment," he said.

Like other jurisdictions, Brazil has more than one authority covering banking and financial services – something that can make life difficult for supervisors, Maia acknowledged. "My major concern today is how to understand the global risk of one financial institution – not depending on whether the product fits into this market or that market, regulated by this supervisor or that supervisor," he said.

We need to put less trust in the numbers and what the bankers tell us

The Brazilian financial market was largely free from exposure to US subprime mortgages. Nevertheless, the country has seen a spate of corporate losses in recent years as a result of derivatives exposures – particularly those involving target redemption forwards. Unlike Europe or the US, Brazil has long required over-the-counter derivatives trades to be reported to regulators – a point emphasised by Maia. But in light of the recent losses, the country's regulators have looked to make this reporting more rigorous.

"We faced a problem in 2008, because the registry information was very bad. We realised we had a lack of data and information from each operation, and you couldn't see the impact on a consolidated basis," he said.

Having a better overview of the derivatives market is important for supervisors – and the derivatives industry also has a role to play, he said. "We saw wonderful companies losing value from the night to the day. And in this sense, everybody loses. It's not only the responsibility of the derivatives regulators and the central bank to improve the regulatory environment, but also the derivatives industry."

Maia also talked about the move towards two global standards – the new Basel III rules and International Financial Reporting Standards (IFRS). While he admitted the higher capital requirements of Basel III would come at a cost to banks and shareholders, he said the change is appropriate in the name of global financial stability: "Not just local stability, but stability for the entire world."

Brazil would look to implement Basel III according to the agreed timetable laid out by the Basel Committee, he noted. Although there would likely be issues at specific Brazilian firms, Maia said the central bank was "comfortable" with Basel III implementation at a general level.

Brazilian banks are also making the transition to IFRS, and will be required to begin reporting under the regime from the end of 2011. Noting the more principles-based approach taken by the rules, Maia said the central bank is working with the local securities regulator to ensure banks are not trying to game the requirements.

"We are monitoring the results of the banks and their behaviour. We know IFRS is very judgemental and you need to be careful about that in order not to create opportunities for arbitrage. This regulatory arbitrage is something that concerns all regulators around the world, because banks can use certain decisions to shape their balance sheet in a better way for the stakeholders," Maia said.