In an unprecedented move, Brazil's central bank is under intense judicial examination for its decision to liquidate Banco Master SA. This rare intervention by the country's highest courts threatens to shake the legal certainty surrounding the regulator's authority.
Unprecedented Legal Challenge
Both Brazil's Supreme Court and the Federal Audit Court have demanded detailed explanations from the central bank regarding the liquidation of Banco Master. The regulator is operating under a strict deadline to furnish this information. This marks the first instance where a decision under the central bank's exclusive jurisdiction has been questioned by the nation's top courts.
The action followed months of probes into the bank's activities and its politically linked Chief Executive Officer, Daniel Vorcaro. Vorcaro was imprisoned for approximately one month before being released under electronic monitoring via an ankle bracelet.
Allegations of Fraud and Political Entanglements
The central bank uncovered evidence pointing to attempted fraud in the proposed sale of Master to Banco de Brasilia SA, a bank owned by the Federal District government. These findings were handed over to federal police and prosecutors, who subsequently requested the arrest of Vorcaro and other executives on November 17.
Critics allege that Banco Master fabricated credit operations that were later sold to Banco de Brasilia. Vorcaro's legal team counters that the portfolios under investigation were never actually transferred, and that the purchased portfolios were different from those being probed.
The case highlights the difficult terrain Brazilian policymakers must navigate, filled with complex political networks—a domain Vorcaro has reportedly mastered. Documents seized from his home included papers related to a real estate deal with a federal lawmaker, which, though unrelated to the Master probe, prompted Supreme Court Justice Dias Toffoli to assume control of the investigation in early December.
High-Stakes Hearings and Mounting Investigations
Justice Toffoli scheduled a dramatic confrontation hearing for December 30, involving Vorcaro; former Banco de Brasilia CEO Paulo Henrique Costa, who was dismissed after the probe went public; and the central bank's supervision director, Ailton de Aquino. Notably, this hearing was arranged without a formal request from police or prosecutors, and the attorney general's office advised against it.
On December 18, Audit Court Minister Jhonatan de Jesus initiated a separate, sealed investigation into the central bank. He cited potential supervisory failures over Master, suggesting the regulator's actions "may have been marked by omissions and insufficiently timely responses" to signs of the bank's decline, thereby increasing systemic risk.
Central Bank President Gabriel Galipolo has stated his readiness to appear before the Supreme Court. "As president, I am available to the Supreme Court to provide all the data... We have documented everything," he asserted in a December 18 press conference.
Fallout for Investors and the Financial System
Banco Master, once celebrated as a rising star in Brazilian finance, drew billions of reais from retail investors by marketing its bonds as safe, backed by Brazil's deposit insurance fund, the FGC (Credit Guarantee Fund).
A central bank rule change in December 2023 severely impacted Master's business model by tightening access to the FGC. The liquidation could potentially cost the FGC up to 55 billion reais (approximately $10 billion) if other smaller banks collapse, a cost that would ultimately fall to Brazil's largest financial institutions to cover.
This extraordinary saga underscores a significant clash between regulatory authority and judicial oversight in one of the world's largest economies, with profound implications for financial stability and investor confidence.
