New CMN rules could boost consolidation for Brazilian cooperative credit system
By Claudio Gallina
RIO DE JANEIRO/SAO PAULO, May 3, 2024 – Fitch Ratings views the enactment of the National Monetary Council [ CMN ] Resolution No. 5,131 [R5131] as a positive regulatory step toward strengthening Brazil’s cooperative credit system. Issued on April 28, 2024, R5131 addresses key aspects of the National Cooperative Credit System as outlined in Complementary Law 196, including matters pivotal to the system’s robustness.
In What Investors Want to Know: Challenges of Brazilian Credit Cooperatives we identified governance risk as one of the primary concerns. We also highlighted the potential risk of cooperative advisors exerting political influence over the strategic decisions of cooperatives. A notable feature of the new regulation under R5131 is the restructuring of the boards of directors. It now allows the inclusion of truly independent members, who have no affiliations with the cooperatives or their members. R5131 stipulates that cooperatives must establish procedures for board member replacement and set clear policies for board renewal, including a maximum tenure of 12 years, unless otherwise specified by their statutes. These measures will strengthen the impartiality and corporate governance of cooperatives.
R5131 also facilitates the sharing of credit operations between cooperatives, promoting collaborative resource management and a more balanced distribution of associated risks. The new measure favors the expansion of the cooperative system among larger customers, especially major companies. The joint formalization of credit operations by the cooperatives involved will promote an evolution in internal controls and the adoption of robust credit practices, significantly contributing to the improvement of participants’ risk management.
The new resolution also empowers confederations to more effectively supervise central and individual cooperatives. It requires alignment of management practices for preventing or rectifying financial instability. Confederations can now intervene in struggling cooperatives, suggest management changes, or, in certain cases, recommend mergers as a solution. Fitch recognises that, so far, regulatory authorities and cooperative systems have effectively encouraged best practices in pursuing market-based solutions for cooperatives experiencing financial difficulties, thereby protecting the interests of stakeholders.
R5131 also reinforces the autonomy of central cooperatives and confederations, as they can now, in a more effective way, prevent threats to the stability of the system. Requests for self-disaffiliation [from the system to which it belongs] may be refused if the requesting cooperative does not meet minimum regulatory requirements, for example. The resolution also establishes the obligation for credit cooperatives to maintain documentation about their policies at the disposal of the Central Bank, reinforcing transparency and corporate responsibility.
Given the unique financial characteristics of each cooperative, a specific assessment of the challenges or advantages imposed by the new rule on each institution is essential. Fitch will continue to monitor the impact of regulatory changes on the cooperatives under its coverage as well as the evolution of the cooperative credit system in Brazil. In the cooperative segment, Fitch evaluates four three-tier systems, one two-tier system, two banks, five central cooperatives and 23 individual cooperatives.
Fitch does not anticipate immediate rating changes for these issuers because of the new regulation. We view this regulatory update as somewhat beneficial for the sector, even if it tends to promote more consolidation. However, positive rating actions are possible if the new regulatory frameworks lead to material, sustained and broad-based enhancements in the cooperatives’ business, risk and/or financial profiles.
Claudio Gallina is Senior Director Fitch Ratings Brasil Ltd.
https://thecooperator.news/cooperatives-present-at-the-launch-of-the-b20-in-brazil/
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