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In their own words. (Roberto Setubal)

Jul 1, 1998

       
Roberto Setubal, Banco Itau
Roberto Egydio Setubal is the 43-year-old president of Brazil's Banco Itaú, the second largest private bank in Brazil. He has been at Itau since 1984, and prior to that spent two years at Citibank. Below, he gives his views on why the Real Plan turned out to be more successful than previous plans, and how lower inflation has affected the banking system.
On Brazil's attempts to beat inflation...
We have had a lot of plans in Brazil, but basically the Cruzado Plan in 1986, the Collor Plan in 1990 and the Real Plan in 1994 have been the most important ones. The Cruzado Plan was very important because it was the first attempt to control inflation through a plan with that objective. It did not succeed because it was aimed at affecting prices and didn't take into account other macroeconomic variables such as interest rates, government spending, and the exchange rate. So the whole plan was very weak when you consider it from a macroeconomic standpoint. And so, eight or nine months after the price controls started, we had a big resurgence in inflation-the economy was overheating and price controls were no longer effective.Then we had a couple of plans that failed basically for the same reasons-for just addressing price controls and inflation inertia and not addressing the macroeconomics. The Collor Plan worked for some time because it addressed the liquidity of the economy, and since there was no liquidity at all, prices came down. The economic team also tried to address government spending, but they were not able to control the whole macroeconomic scenario, and inflation came back.And then we came to the Real Plan, which took into account all the bad experiences and problems we had in the other plans, and the government created a plan which was heavily discussed before it was implemented, so everyone knew exactly what was going to happen. There were no surprises, and this was very positive. The government addressed macroeconomic variables like interest rates, liquidity, the exchange rate and government spending, so they were able to put everything together and control prices.The most important difference was that the political will to take the hard measures was there in 1994, but wasn't there in previous plans, especially the Cruzado Plan. We had no political will to control spending and to have high interest rates. All of those variables were there in 1994 because everyone had learned at that point that there was no miracle cure.
On the change in Brazilian commercial banking...
The biggest difference is that float income, which in the inflationary periods was a huge source of revenue for the commercial banks, is no longer there. Many banks were not prepared for that environment, and did not have the right strategy to adapt themselves to the new environment. Others, such as the big banks, which today are leading the market, were quite prepared. They had very clear strategies to overcome this very difficult and challenging period. They were able to succeed by making huge changes in the way they operated, because they had a clear understanding of what they had to do, and most important they had taken the right measures prior to 1994. The first time we saw that one day we would have to face an environment of low inflation was back in 1986 when the Cruzado Plan was implemented. Although it failed, we felt that one day the government would be successful, and we would have to be prepared for that moment. So a lot of cost savings were carried out during those years, alot of controls and a lot of automation were implemented in the bank so that we could be prepared for that moment.
On Pedro Malan and the Real Plan...
I remember having meetings with Pedro Malan, who was president of the central bank at the time, just before the Real Plan was implemented. We had a lot of meetings before the plan to help them implement, from the banking side, the plans for changing the currency, etc. He was very worried about the banking system, and he was alerting the banks to make sure they would have the right strategies in the new environment. He was really very concerned in his comments. So it was very clear to me and other bankers what would happen when the plan was implemented.The monetary authorities were really very worried about the banking system, and they took measures during those years to make sure the banking system was getting stronger and that the bad banks would have their problems solved by being capitalized, privatized, or having their assets and liabilities transferred to other private banks. They also opened up the market to foreign banks. This was really very difficult politically to implement, but it was very important, because when we had the crisis in Asia and the government had to increase interest rates in Brazil from 21% to 44% in October last year, they could do that because they had a solid and strong financial system in which the major banks were doing well, were strong, well capitalized and liquid.


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