Commercial Banks, Investment Banks, Conglomeration, and the Financial Structure of Firms

Abstract

Commercial banks historically have been the key institutions in the Brazilian financial system. They were affected directly by the following developments in different degrees over the last twenty years: (1) the institution of formal financial indexation to the inflation rate and the subsequent strengthening of the secondary market for ‘pre-fixed indexed’ assets — LTNs, certificates of deposits, bills of exchange, etc. — and ‘post-fixed indexed’ assets — mainly ORTNs — in the so-called ‘open market’; (2) competition from non-bank intermediaries; (3) the ability to contract foreign loans through Central Bank Resolution 63; and (4) the explicit promotion by the Brazilian government of financial conglomeration. It should be noted that the importance of non-bank competition vis-a-vis commercial banks was dampened by the process of conglomeration because commercial banks are usually the central institution in a financial conglomerate. The typical financial conglomerate in Brazil is centred on a commercial bank; other members are an investment bank, a ‘financeira’, a broker and dealer.1