Brazil: Time Deposits with Special Guarantee

Uncertainty from the Global Financial Crisis spread to the Brazilian financial system in 2008, triggering a flight to quality toward assets with explicit or implicit government guarantees. In the Brazilian context, this meant depositors pulled funds from small and medium-size banks and parked them in larger banks that investors believed the government was more likely to backstop. The National Monetary Council (CMN) created the Time Deposits with Special Guarantee program (DPGE) in March 2009 to bolster liquidity in small and medium-size banks. The CMN put the country's existing deposit insurer, the Credit Guarantee Fund (FGC), in charge of administering the DPGE. The program, which was voluntary, guaranteed time deposits with terms between six and 60 months. It targeted institutional investors, guaranteeing eligible accounts of up to 20 million Brazilian reals (USD 9 million) per depositor per bank conglomerate, and banks paid a monthly fee to participate. At its peak in 2012, the DPGE covered BRL 28 billion in deposits. Between 2011 and 2016, it paid out a total of BRL 4.1 billion to insured depositors at six failing banks. The DPGE was a relatively small burden for the FGC, representing less than 5% of its total insured deposits throughout the program's duration. In 2010, the CMN set the original DPGE to phase out by 2016 and replaced it with a modified, permanent version in 2012 that required banks to pledge collateral in return for lower fees. In response to the COVID-19 pandemic, the CMN in 2020 created a New DPGE (NDPGE) that resembled the initial guarantee but had a higher limit for individual depositors. The original DPGE succeeded in temporarily boosting liquidity in small and medium-size Brazilian banks. Some analysts criticized policymakers when they decided to transform the DPGE into a permanent program.