A wave of defaults and fraud among Brazil’s “shadow banks” has reportedly caught the attention of regulators.
That’s according to a report Tuesday (Nov. 10) from Bloomberg News, which says Brazil’s central bank is worried that some investors aren’t getting the transparency required to gauge the risks of these institutions.
The focus here is on FIDCs, or funds that invest in pools of loans in many cases originated by FinTech companies, the report said. FIDCs have gotten the “shadow bank” label because they play a key role in the lending space but are subject to less oversight than traditional banks.
Regulators are concerned more about the flood of capital into these funds than their actual structure, Bloomberg added. Total FIDCs under management rose 14% this year through September to $178 billion and have doubled in the last three years.
In a report published in May, the central bank said it was concerned about the need to boost “the quality of the registered information.” Regulators are examining “the proper measurement of credit risk, and the valuation of illiquid and non-standardized assets.”
Authorities followed up by strengthening some of the rules for legal claims and adding more disclosure requirements.
As PYMNTS wrote last year, shadow banking is a broadly-defined category that includes nonbank lenders and products such as hedge funds, money market and private equity vehicles, and even government-sponsored entities. Banks have been moving into private credit, as well, as they lend to private credit companies or directly to the nonbank financial firms, with that capital then flowing through to corporate borrowers.
“The logic follows that a shock to those borrowers (say, from tariffs, or waning end market demand, or their own financial straits) would lead to turbulence in paying the interest on, and paying down the debt that’s been extended to them, which in turn hits the cash flow and liquidity of the nonbanks that have acted as lenders, which leads to deleveraging … and perhaps larger risks to the financial system,” that report said.
A report late last year from the Financial Stability Board (FSB) showed the non-bank sector growing at a rate faster than that of traditional lenders.
In 2024, non-bank financial institutions (NBFIs) grew by 9.4%, while the banking sector grew by 4.7%, the report said. The NBFI space accounted for 51% ($256.8 trillion) of total global financial assets, compared to $191 trillion for banks.
Still, the banking and NBFI worlds are increasingly interconnected, the report said, “broadening the channels through which shocks can propagate across sectors and jurisdictions.”
