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
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
"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 Setúbal.
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 instruments.
"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 leverage."
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
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 risk.
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
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 2013.
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
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 credit
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
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."