Intervention, liquidation, bailout of CDBs: what could happen to Banco Master

With the rejection of the sale to Banco de Brasília (BRB), Banco Master faces a scenario of limited options that could lead to intervention and subsequent liquidation of the institution. In this scenario, the Credit Guarantee Fund (FGC) is likely to be activated to honor Bank Deposit Certificates (CDBs) issued by Master. If confirmed, it would be the largest bailout in the fund's history.

Following the Central Bank's decision to block the deal between BRB and Master, the two institutions' options would initially be to appeal to the regulatory body itself in an attempt to reconsider the decision or, at least, buy time. In a statement, BRB said it is awaiting access to the file that underpinned the Central Bank's decision "to evaluate the available alternatives."

Mastercard has reportedly not yet backed out of the current agreement, and according to market reports after the announcement, CEO Daniel Vorcaro is reportedly developing a "plan B" to present to the Central Bank as soon as possible. The Federal District government, which controls BRB, could also object, but has not yet commented on the matter.

Another option would be to find a new buyer for the Mastercard, but this option is considered remote given the current delicate situation. According to Finance professor Rafael Schiozer of FGV-EAESP, who specializes in stability, risk management, and crisis studies, in recent months the Central Bank has sought buyers who would meet the agency's pre-designed solutions to maintain financial stability. "It seems no interested parties have emerged," the professor states.

Without candidates to absorb the Master's problems within the four lines of BC's demands, the only alternative would be intervention, in which the current Master managers, which is the "problematic" part of the negotiation, would be removed and an intervener would seek the least damaging solution possible for the system.

The intervenor would be responsible, for example, for activating the FGC to honor the R$51 billion in CDBs issued by Master. This amount corresponds to approximately 42% of the fund's reserves, currently around R$121 billion. In this case, almost half of these would go solely to Master's client investors.

Since its creation in 1995, the FGC has guaranteed deposits for 40 institutions that would later be liquidated by the Central Bank. The largest amounts went to well-known Brazilian banks, such as Bamerindus, with R$19 billion; Panamericano, R$7 billion; and Banco Santos, R$64 million (all figures have been updated). If the FGC is activated for the Master program, the current record, held by Bamerindus, will be more than doubled.

"Liquidation is increasingly becoming the most likely solution," says the FGV-EAESP professor. For him, intervention has been the prelude to liquidation: "Almost always, when the Central Bank intervenes, it's to liquidate later."

After the intervention, the Central Bank could order Master's extrajudicial liquidation, making Vorcaro's bank yet another in the ranks of failed banks in Brazil. The facts suggest that this is the outcome the market has predicted, so far, for the BRB-Master imbroglio.

Sale of Banco Master to BRB: the unexpected rejection

Last Wednesday (3), the Central Bank rejected BRB's proposal to acquire 58% of Banco Master's capital in March of this year. The Central Bank's approval was the final regulatory step required for the transaction to go ahead. Financial and political figures in the country were already certain that the deal would be finalized and were celebrating. There was no shortage of reasons for optimism.

The General Superintendence of the Administrative Council for Economic Defense (CADE) had approved, without restrictions, BRB's purchase of a stake in Master in June, leaving the final decision pending approval from the Central Bank. The report, signed by the agency's general superintendent, Alexandre Barreto, states that "the transaction is not likely to harm the competitive environment."

In August, the Legislative Chamber of the Federal District had voted in favor, and the governor of the Federal District, Ibaneis Rocha (MDB), sanctioned the district law that authorized BRB to acquire 49% of the common shares and 100% of the preferred shares of Master's share capital, under the justification of expanding the bank's operations nationally.

With a clear blue sky on the horizon, Master CEO Daniel Vorcaro boarded a private jet and headed to Saint-Tropez, a trendy beach resort on the French Riviera, where he spent part of the European summer at Casa Amor, a private beach club described on its website as a place that "embodies the bohemian chic art of living."

Why was the sale of Banco Master rejected?

The Central Bank has not yet released an official document explaining the reasons that led it to block BRB's proposed purchase of part of Master. For now, the body's president, Gabriel Galípolo, has said that the vote that supported the decision is confidential "because it contains commercial information."

Industry analysts venture to point to possible causes. Among them is the risk of liability inheritance, which occurs when the "problematic party" in the negotiation ends up "contaminating" the financial health of the other party—in this case, the buyer, BRB—and jeopardizing the viability of the transaction.

According to the initial proposal, BRB would not include Banco Master's problematic liabilities in the deal. However, experts believe the Central Bank considered that this risk would persist, potentially compromising BRB and the system's equilibrium.

This is because Mastercard has R$63 billion in assets, most of which are concentrated in loans that are difficult to quickly convert into cash. Many were acquired with funds raised through the issuance of R$51 billion in CDBs at up to 140% of the CDI, a rate considered out of line with the average practiced by other institutions.

In theory, the sum total is correct, since, after paying off the CDB liabilities, there would still be R$12 billion in cash. However, market analyses indicate that the Master would have immediate liquidity of only R$2 billion, an amount insufficient to meet short-term commitments. In CDBs alone, R$4.8 billion is maturing in the second half of the year.

"The Central Bank's concern is always the financial stability of the system," says Schiozer. "The Central Bank's analysis likely concluded that the BRB would not be able to assume this risk."

Political pressure on the Central Bank

Another reason cited by those closely following the sector is the Central Bank's reluctance to yield to political pressure to ensure BRB's purchase of Master was completed as quickly as possible. Public banks are typically run by managers chosen by politicians. The larger a public bank, the greater the interest of sectors of the political class in its business.

In the view of the governor of the Federal District—who has a direct interest in the deal's completion, given that the district government holds 72% of BRB's capital—the veto stemmed from pressure from political groups opposed to the transaction. "Once again, the Workers' Party (PT) and the Socialist Party (PSB) acted against the Federal District," declared Ibaneis Rocha.

On the eve of the rejection, members of Congress launched a mobilization in the Chamber of Deputies to try to approve PLP 39/2021, a bill that gives representatives the power to impeach the president and directors of the Central Bank. Currently, this power is restricted to the president of the Republic, and even then, only under specific circumstances, such as in the case of criminal conviction, administrative misconduct, or poor performance.

The move was met with immediate backlash. "The project, it seems, is being approved to unblock this Banco Master operation, where there are clearly intentions and interests," declared former Central Bank president Armínio Fraga. "The attempt to reduce the Central Bank's autonomy is an outrage," said former Central Bank director Luiz Fernando Figueiredo.