CEO’s Arrest and a Bank Failure Shake Brazil’s Finance Industry

(Bloomberg) — Daniel Vorcaro on Monday announced a last-ditch rescue deal that looks set to save a failing Brazilian bank. He was arrested hours later at Sao Paulo airport, where authorities said he was trying to flee the country.

Banco Master SA is to be liquidated following the latest development in the Brazilian authorities’ saga involving a sweeping corruption investigation. Chief Executive Vorcaro and five others were arrested amid allegations that executives created credit instruments and sold them to a lender whose own CEO was ousted, according to people familiar with the matter.

The rapid chain of events marked a dramatic new turn for the Master, once considered a rising star in Brazilian finance. Regulators and industry rivals say the bank’s collapse underscores the urgent need for stronger supervision and tighter rules across the banking system.

Liquidating the firm could cost Brazil’s deposit insurance system, known as the FGC, up to 55 billion reais ($10 billion) if other smaller banks are also liquidated, according to a person familiar with the matter. The fund will need to be replenished by the country’s largest banks, which are its main backers; It’s an outcome that has worried investors in recent months as Master’s expectations have diminished.

About 1.6 million creditors of Master and other liquidated institutions owe about 41 billion reais, the FGC said in a statement.

Without a large retail customer base, Master was able to attract billions of dollars from retail investors through investment platforms by marketing its bonds as an FGC-backed investment. Many fintechs, including Master-owned Will Bank, have used the same channels to access retail financing in recent years as competition in the system intensified and Brazilians began looking for higher-yielding investments.

But a central bank rule change in December 2023 punched a hole in Banco Master’s business plan by tightening regulations on how banks can access the FGC programme. The second rule change in August will force banks to contribute to the fund according to their relative risk from June 2026.

Critics in the financial system have argued that the rules governing FGCs force large banks to bear an unfair share of the costs because contributions are based on each institution’s balance sheet size rather than their likelihood of needing a bailout.

Citigroup Inc. Now that the fund will need to be replenished, Banco do Brasil SA, Banco Santander Brasil SA and Banco Bradesco SA will be most exposed based on their market capitalization, and Itau Unibanco Holding SA will face the smallest impact among the country’s major banks, analyst Gustavo Schroden said in a note in September. These banks, as well as Banco BTG Pactual SA, will also see their capital ratios deteriorate to some extent.

Master’s liquidation followed two failed attempts to save the bank. The first of these occurred in late March, when Banco de Brasilia, a medium-sized lender owned by Brazil’s capital, announced it would purchase most of Master’s assets. The deal was rejected by the central bank in September because of risks from assets left behind and Master’s connections to firms being investigated for ties to organized crime, people familiar with the matter said at the time. The master said the connections were harmless.

The two banks had a previous relationship: Banco de Brasilia purchased a payroll loan from Master last year. These transactions raised concerns at the central bank, which reported the situation to the Public Prosecutor’s Office and the Financial Activities Control Council, a person familiar with the matter said. In February, before the banks announced their deals, the regulator ordered those operations to cease.

But within months of the central bank’s order, Master made two more loan sales to Banco de Brasilia; Before such transactions were halted and Banco de Brasilia tried to distance itself from the situation, a deal to sell itself to Banco de Brasilia had already been rejected by the regulator, according to a person familiar with the matter. Meanwhile, investigations were continuing.

A representative for Master declined to comment and Banco de Brasilia did not immediately respond to a request for comment.

In some cases, Vorcaro was able to continue to obtain liquidity for a period of time by selling personal assets, according to a person familiar with the matter. What appeared to be a solution emerged on Monday, when Master announced a deal to sell itself to a consortium led by Fictor Holding SA, a Brazilian investment company.

Under this agreement, Vorcaro will leave the bank as both a shareholder and director, and the new owners will inject 3 billion reais of new capital to keep the bank afloat. Fictor said in a statement on Tuesday that the deal had been finalized with the liquidation of Master.

The liquidator appointed by the central bank will now be responsible for deciding the fate of the Master’s assets. One of them is Will Bank, which has not yet been liquidated and has attracted interest from investors including Mubadala Capital, Bloomberg News reported Monday.

–With help from Rachel Gamarski and Cristiane Lucchesi.

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