By Taimur Ahmad
In nature, organisms often acquire immunity through contact
with diseases, learning to recognize them, and adapting to
withstand future encounters.
While few today would argue that Latin
America’s banks are immune to external shocks,
their extraordinary resilience in the wake of the 2008 global
crisis left many wondering what went right.
For Roberto Setúbal, chief executive of
Itaú-Unibanco, Brazil’s largest private
bank, the answer is clear: banks in Latin America knew the
shape of a crisis and, after many years of exposure to them,
had built up their defenses accordingly.
"In Brazil, we had a banking crisis in the 1990s. After that
crisis, banks became more conservative," he tells LatinFinance
in an interview. "This is true across Latin America: banks here
took fewer risks, they had a high capital base and this was the
basis of their resilience."
Latin American banks, unlike their US and European
counterparts, had also shunned excessive leverage, he says,
aware of its pitfalls. "Banks were very conservative in
general, not getting into high leverage. This was definitely an
important factor in Latin America’s credit
resilience – its low dependence on external funding
and high reliance on domestic deposits," says
For Latin America’s banks, this was
conservatism born of experience: higher capital ratios, more
liquidity and enhanced efficiency all helped the industry cope
better with the effects of the global crisis on credit. "In
Brazil, we had more capital requirements for many types of
risk, which were not a requirement for banks in the developed
world," he says.
Setúbal, who took over as head of Itaú in
1994, flatly rejects the view that it was Latin
banks’ relative lack of sophistication that
inadvertently spared them from the impact of the global
financial crisis – or that, if the
region’s banks had had the opportunity, they would
have been every bit as brash as their Western counterparts in
dabbling in complex, and potentially unsound, financial
"It’s not really a matter of having these
instruments, structured and leveraged finance, or what have
you," he says. "At the end of the day, regardless of what kind
of instruments you have, it’s all about
The fact is simply that Western banks were overly leveraged,
he says. "At some point, too high leverage leads to volatility
in the market and then banks get in trouble," he says. "Banks
in the developed world took more risk than they should have.
Many of them regret what was done in the past and they would
not do it again today."
In contrast, banks in Latin America simply "did not take
risks as banks in the developed world took."
Of course, it helped that the spillover effects of the
global crisis to the region’s economies was also
limited, thanks in part to the buffers in place at the macro
level. "This was quite important in allowing the banks to go
through this period," Setúbal says.
Yet as the environment for Brazil’s banks
deteriorates following a sharp slowdown Latin
America’s largest economy, questions have emerged
anew over how well the country’s banking sector
will stand up to the undesirable turn.
With Brazil’s economy stalling, demand for
credit is falling. After expanding just 0.9% last year, the
economy is expected to grow by no more than 2.3% in 2013.
The downturn has already taken its toll on the domestic
credit market, with a surge in loan delinquencies over the past
two years. And moves by the central bank to curb inflation by
hiking borrowing costs could yet exacerbate the problem in the
"The Brazilian economy has had a significant slowdown
compared to the last decade. This has created some problems in
terms of the credit markets," Setúbal says, adding that
he regards Brazil’s downturn as part of a broader
phenomenon affecting emerging markets, rather than a
country-specific event. "There is a slowdown in emerging
economies more deeply, and Brazil is part of that. This is a
new thing, a new phenomenon and we have to readapt our
economies [to slower growth]."
Nevertheless, he insists that the Brazilian banking sector
has seen the worst of the downturn and that the level of bad
loans is under control. "The worst of the problem is behind us.
We are moving to a better and more controlled level of
delinquency in general, so this is not a problem anymore."
Financial results bear this out, he says.
Itaú’s delinquency rate declined to 4.2% in
the second quarter of 2013 from 4.5% in the first quarter and
5.2% a year earlier. Moreover, the bank’s profits
of 3.62 billon reais beat analysts’ expectations
for the quarter, following a two-year strategy to reduce
Setúbal, an engineer by training and widely known for
his prudence, says Itaú’s improved
performance does not mean the lender is about to take on more
risk. "Two years ago we announced that we were changing our
risk appetite, that we would move out of higher risk segments
and that the benefits of this strategy would be down the road,"
he says. "We are not really considering at all changing our
risk policy at this point."
Brazil’s lenders also face concerns that
embattled EBX Group, which is struggling to contain its own
financial crisis, will default on bank loans. But
Setúbal says that even a "worst case" outcome –
a default by the troubled group – would not have a
major impact on the country’s banking sector.
"Given the level of exposure of banks in Brazil to EBX Group,
it is not really a problem at all in terms of systemic risk,"
he says. "In the worst case scenario [of a default] we would
not change our guidance in terms of provisions or losses," he
says. The bank expects to provision between 19 billion reais
($9.2 billion) and 22 billion reais for loan losses in
Setúbal nevertheless acknowledges that the dramatic
collapse of the EBX Group has taken its toll on investor
perceptions of Brazil. "Eike Batista was pretty much associated
with an image of a new Brazil as a very high growth country
with a lot of potential where things could happen quite fast.
And the failure of Eike [Batista’s company]
definitely goes against this perception," he said. "This is
definitely not good for Brazil."
New rules, old problems
What is good for Brazil, however, Setúbal says, are
Basel III international regulatory standards set to take effect
in the country on October 1. The new measures, when implemented
across Latin America, will make the industry "more resilient",
he says, although given its underlying strength will require
only a minimal adjustment. "Latin America was already much more
prepared," Setúbal says. "The gap from where we were
just before the crisis to the implementation of Basel III is
much smaller for us than for developed countries."
As a vice-chairman of the Washington-based Institute of
International Finance (IIF), a global banking lobby group,
Setúbal is no stranger to the debate over regulatory
But the view that Latin America’s banking
system is already adequately capitalized and so will have no
problem implementing new capital requirements draws a sharp
contrast with the position of banks in developed countries, who
argue that the Basel III rules are too stringent.
Does he sympathize with his colleagues in New York, London
and elsewhere bemoaning the likely impact of new rules on their
business? Or should they simply learn the lessons of their
Latin counterparts? "There’s always something to
learn, especially in adapting and modernizing, in evolving and
improving regulation," he says. "Regulation is key in order not
to drive players to take more risk."
But he is cautious not to push the point too far,
acknowledging that there remain many unknowns for the global
banking industry. "We still have not seen the results and
impact of all this new regulation and especially on the capital
requirements will have in terms of making the system more
"The level of risk will reduce with the additional level of
capital. So overall, we will have a much more resilient
financial system, there’s no doubt about that.
There is also a side effect. Financial intermediation will be
more costly and this will have some impact also in terms of
Regulation – whether Basel III or efforts to break
up "too big to fail" banks – is always a trade off, he
says. "At the end of the day, you have to ask: how much
insurance do you want and how much are you willing to pay for
it? There’s no free lunch. The price of this will
come through the cost of credit, because it will go higher.
This is what we have to balance."
Yet ultimately, it’s a trade off that
Setúbal has already made. The downside – if it
is one – to such conservatism is that the world of
banking could simply become a duller place. But that prospect
doesn’t bother Setubal in the slightest: "Banking
is a business which is much closer to a marathon than a sprint.
It’s something that you have to look for the long
run," he says. "This is my own experience."