Brazilian banks would resist real estate crisis, says Central Bank

Brazilian banks can resist the impact of a dramatic plunge in real estate prices, shows a simulation released on Thursday (Mar. 20) by the Central Bank (“BC”) in the Financial Stability Report.

BC’s Inspection Director Anthero Meirelles says the simulation was conducted based on the fall in real estate prices in the US – a fall that caused an international financial crisis in 2008. But he emphasized that there is no real estate bubble in Brazil, nor is it very likely that abrupt price changes should take place in the country. “There are no elements that might constitute a bubble,” he pointed out. He explained that a bubble exists when asset prices increase for no economic reason. Real estate prices, he added, have recently become higher alongside the growth in income, but figures will be balanced as the demand for houses is met.

BC’s report documents that, although prices at which real estate is normally sold in auctions cover delinquent loans almost in their entirety, the amount recovered by the financial institution accounts for a mere 70% of the price of the property. Therefore, a bank’s delinquency can only be considered if there is a 55% fall in real estate prices. And this would have to be a 45% decrease for a bank’s situation to be deemed not in compliance with capital requirement rules.

The study further indicates that, even in extreme cases of depreciation, the financial system as a whole would not fall into a state of irregularity, and one of the reasons for the resistance showed by banks is that a piece of real estate is usually only partially paid for by the bank. Thus, part of its price is already paid. Moreover, the report points out that Constant Repayment System, or “SAC”, which is the one most frequently adopted, allows a quicker reduction in the amount due than that made possible by other well-known systems, like Price. Another factor is that banks make provisions higher than those required by the norms. BC also believes, therefore, that the capitalization levels of the financial system are high.

Translated by Fabrício Ferreira