How Will Lawsuits Targeting Banks Affect Brazil’s Economy?

Q & A commentary by Fausto Sanchez and Elizabeth Cantu, associate attorneys at Diaz Reus & Targ LLP.  First published in Inter-American Dialogue’s Latin America Advisor | Financial Services, Nov. 11, 2013

Q: In February 2014, Brazil’s Supreme Court plans to rule on lawsuits brought by bank depositors affected by banks’ adherence to government policies to fight hyperinflation two decades ago. The suits could cost the banks, which include market leaders Itau Unibanco and state-held Banco do Brasil, a total of $65 billion—more than a quarter of the banking system’s equity. What is at statke in the case for Brazil’s banking sector and the country’s economy? Which way is the court likely to rule? What precedent could a ruling in this matter set for future cases related to other sectors or industries?

A: «In February, the Brazilian Court is scheduled to rule on a landmark case, the outcome of which could significantly affect the  country’s economy. Depositors have sued multiple Brazilian banks, both private and government controlled, to recover losses incurred through the implementation of government policies between 1986 and 1994. The Bresser, Verão and Collor plans, adopted under the presidencies of José Sarney and Fernando Collor, were designed to tame hyperinflation. These mandates required banks to take drastic measures, including freezing assets and bank accounts of depositors. The constitutionality of each plan has been attacked, and early indications of a projected outcome seem to be split. Analysts indicate the Supreme Court is likely to uphold lower court rulings regarding the Collor plans, which favored the banks. The suits against the Bresser and Verão plans, however, may result in judgments for the plaintiffs. If the Supreme Court rules in favor of the depositors, it could set a precedent that allows businesses to be held liable for steps they take to adhere to a governmental policy. A ruling in favor of the plaintiffs on all of the plans could cost the banks up to 150 billion reais ($65 billion). Such a judgment could send the Brazilian economy into a tailspin, as banks would likely raise the cost of credit significantly. With so much at stake, many expect the Brazilian Supreme Court to avoid the economic catastrophe and rule in favor of the banks.»