Brazil’s Central Bank Faces Court Scrutiny Over Bank Liquidation

(Bloomberg) — Brazil’s central bank faces extraordinary scrutiny over its decision to liquidate Banco Master SA; This is a rare example of judicial intervention that risks undermining the legal certainty of regulatory decisions.

The country’s Supreme Court and Court of Auditors are seeking details about the move as the regulator faces a looming deadline to provide information. The liquidation followed months of investigations into Banco Master’s operations and politically connected Chief Executive Daniel Vorcaro, who spent nearly a month in jail before being released on an ankle monitor.

The central bank found evidence of attempted fraud in the proposed sale of Master to Banco de Brasilia SA, an institution owned by the Federal District government. The findings were forwarded to the federal police and federal prosecutor’s office, who requested the arrest of Vorcaro and other executives on November 17.

For the first time, a decision falling within the exclusive jurisdiction of the central bank was reviewed by Brazil’s highest courts; This underscores the difficulties policymakers face in navigating Brasilia’s network of political connections—the area that Vorcaro has long become adept at exploiting.

The central bank did not respond to a request for comment.

Vorcaro faces allegations that he fabricated credit operations that his bank later sold to Banco de Brasilia. His lawyers argue that the portfolios targeted by investigators were never effectively transferred and that Banco de Brasilia instead acquired other portfolios not involved in the investigation.

In early December, Supreme Court Judge Dias Toffoli moved to take control of the investigation after a defense lawyer argued that police actions could affect individuals with parliamentary immunity. Among the documents seized during the search of Vorcaro’s home were documents related to a real estate transaction involving a federal lawmaker. Although unrelated to the Master investigation, Toffoli ruled that the document was sufficient to warrant “preliminary consideration of any legal action by this court rather than by a lower court.”

Toffoli scheduled a face-off hearing between Vorcaro for December 30 on Christmas; former Banco de Brasilia chief Paulo Henrique Costa, who was fired after the investigation became public; and central bank supervisory director Ailton de Aquino.

The trial was scheduled without any request from either the federal police or the prosecutor’s office. The Attorney General’s Office advised against this, arguing that such a procedure should only take place after individuals involved in the investigation have been questioned individually.

Toffoli offered no further explanation for summoning Aquino, whose job at the central bank was to oversee, not decide on, the sale of Master to Banco de Brasilia. Central bank Governor Gabriel Galipolo said he was willing to appear before the Supreme Court to explain the regulator’s actions.

On December 18, he said in the press release: “As President, I am ready to present to the Supreme Court all the data that we provided to the prosecutor’s office and the federal police. We documented everything: every action taken, every meeting, exchange of messages, communication, all of this was duly documented. I am especially ready to provide all kinds of support and assistance to the investigation.”

The same day, Auditor General Jhonatan de Jesus launched a separate investigation into the central bank, citing potential failures in Master’s oversight. According to its decision, the regulator’s actions “may have been marked by omissions and failure to respond in a sufficiently timely manner to signs of financial deterioration of the institution, undermining the effectiveness of the regulatory framework and increasing systemic risk.”

Critics have long argued that the central bank is taking too long to liquidate a lender that is clearly in trouble. As with the Supreme Court investigation, the audit court’s investigation is also sealed.

Once considered a rising star in Brazilian finance, Master attracted billions of reais from retail investors through investment platforms and promoted his bonds as safe because they were backed by Brazil’s deposit insurance system, the Credit Guarantee Fund, or FGC. The fund covers 250,000 Reais per investor and has a cap of 1 million Reais for four years.

A central bank rule change in December 2023 tightened access to the FGC, punching a hole in Master’s business model. The second rule change, approved in August, will require banks to contribute to the fund based on their risk profiles from June 2026.

Master’s liquidation could cost FGC up to 55 billion reais ($10 billion) if other smaller banks collapse, according to a person familiar with the matter. The fund will need to be replenished by Brazil’s largest banks.

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