The impact of the pandemic on banks, in a severe scenario of defaults by companies and vulnerable workers, fell 50% in the new stress test released today (15) by the Central Bank (BC). According to the Financial Stability Report, the Central Bank would have to invest R $ 35 billion in the simulation that considers a severe shock from the covid-19 over the national financial system, which represents half of the previous test, carried out in May.
Today, the necessary contributions in a situation of severe stress would add up to 3.5% of the total reference equity of the National Financial System (SFN). According to the BC, the new test is more accurate because it considers data observed during the pandemic. In May, the simulation was based on theoretical assumptions about the evolution of cases and economic activity.
In the stress test, the BC simulates how much a situation of severe default and rush to banks impacts the fulfillment of the minimum regulatory limits by financial institutions and how much the monetary authority would need to contribute to the financial system. These limits include maintaining a cash reserve to ensure that banks pay all customers who withdraw cash in times of crisis.
According to the Central Bank, the improvement in incoming flows from various sectors of the economy until August contributed to reducing the impact of the pandemic after the sharp fall registered in April and May.
Despite simulations of severe scenarios, the Central Bank considers that the National Financial System is well capitalized, provisioned (with reserves) and with high liquidity to face the new coronavirus pandemic. In the assessment of the monetary authority, several measures taken in recent months, such as the injection of R $ 1.2 trillion in the economy and the postponement of tax and debt payments, helped to maintain the flow of credit to the real economy and guaranteed the functioning of the market.
“The financial markets functioned properly, and the balance sheet of the banking system grew considerably in the first half of 2020, with a high volume of funding and credit supply to the real economy at the fastest pace in the last five years,” said the report.
The report, however, admitted that there are sources of concern for the financial system. According to the text, the current Selic rate (basic interest of the economy) of 2% per year may increase the price volatility of economic assets, such as government bonds and the dollar. Another risk, which will be monitored by the Central Bank, is the impact of the reduction of emergency aid from R $ 600 to R $ 300 and the end of the grace period for the payment of various types of debt postponed at the beginning of the pandemic.
To reduce these risks, the banking system increased the volume of provisions, reserves used to cover possible defaults. The coverage ratio for problematic assets reached 87.83% in June, practically the same level observed in March (87.89%). The levels are the highest observed since the second half of 2015, when the index exceeded 88% after the withdrawal of the investment grade (seal of good payer) from Brazil by international risk rating agencies.