Brazil’s new rules on consumer credit, a damp squib?

Brazil’s central bank has become such an expert at crafting macro-prudential measures and capital controls that these days even some market analysts are struggling to understand them.

When called on Monday about the latest measure – regarding credit card loans – an economist in São Paulo admitted he was a bit stumped by it.

The measure seems to have been an attempt to fine-tune existing measures covering payroll credit – loans secured against people’s salaries.

Reuters explains it as follows:

Brazil’s central bank on Monday tightened rules on credit card loans backed by wages and pensions which households are increasingly using as a source of long-term borrowing.

Commercial banks will have to commit twice the capital they used to when extending payroll- and pension-deductible credit card loans for terms beyond 36 months, the central bank said in a statement.

The so-called risk weight factor, or the amount of capital that banks must set aside for such loans, will remain at 75 percent for maturities of up to 36 months.

Payroll-deductible loans have grown faster than other forms of loans since their creation in 2003 because they offer less default risks for lenders. But policymakers fear that rapid growth in that segment may hurt households, which are now spending a record 24 percent of their disposable income on debt-servicing.

“This is simply a prudential measure, of which we would like to see others being implemented to strengthen the financial system against gyrations in the credit cycle,” Paulo Leme, Goldman’s managing director for emerging markets research, wrote in a note to clients.

Barclays Capital said the measure was not aimed at curbing traditional credit card loans.

The central bank was simply extending the capital requirements covering payroll loans with a term of more than 36 months to the same kind of loans when they are made through credit cards.

“All told, this is a very product-specific measure, and basically addresses a gap from the previous regulation, so we wouldn’t expect market sentiment to change,” said Barclays.

The requirement is probably at best a distraction from the real game – this week’s expected 25 basis point in the Selic interest rate, the central bank’s lending benchmark.

If it happens, it will be the fifth interest rate increase this year and will take rates to 12.50 per cent – maintaining Brazil’s position as having the highest real interest rates of any large economy.

For consumers, who already pay rates of up to 200 per cent on normal credit card loans, that is something probably more worthy of attention than the central bank’s tinkering around the edges with its array of macro-prudential measures.