Defaults Rattle Brazil’s Shadow Banks, Spark Regulatory Scrutiny
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Investors keep pouring money into Brazil’s so-called shadow-banking market even as defaults continue to climb.
That, combined with several high-profile fraud cases, has prompted the central bank to say it’s concerned some investors aren’t getting the level of transparency they need to assess the risks. The focus is on FIDCs — funds that invest in pools of loans often originated by fintechs.
FIDCs have been called shadow banks by some market participants because of the major role they play in the lending market despite the fact that they’re subject to less stringent regulatory oversight than traditional banks.
The flood of capital into FIDCs has spurred concerns more than the structure itself. Total FIDCs under management jumped 14% this year through September, to 978.8 billion reais ($178 billion), and have doubled in the past three years, according to Uqbar, a data and research company that specializes in structured finance and securitization.
The central bank said it’s concerned about the need to improve “the quality of the registered information,” according to a May report, and regulators are looking into “the proper measurement of credit risk, and the valuation of illiquid and non-standardized assets.” Authorities followed up by strengthening some of the rules for legal claims and adding more disclosure requirements.
Credit spreads on FIDCs are tightening as investor appetite outpaces the supply of new funds, with Brazil’s historically high interest rates drawing money into fixed-income products. That’s happening even with delinquency rates expected to rise further next year, including among assets held in FIDC portfolios.
“The unemployment rate is expected to rise in 2027, which probably means more defaults on loans and FIDCs,” said Christopher Smith, a credit portfolio manager at Capitania Investimentos SA, which oversees 22 billion reais in assets.
FIDCs are a distinctly Brazilian structure that share some similarities with the US securitization market. The funds have become an increasingly important source of financing for fintechs and smaller companies, while larger corporations use them to provide credit to suppliers, bypassing traditional banks.
According to KPMG and Brazil’s digital credit association, two-thirds of fintechs surveyed cited FIDCs as their primary source of funding in 2026. The funds buy a range of assets, including corporate receivables and credit-card and consumer debt. The number of funds grew almost 8% this year this year through September, reaching 4,197, while default rates climbed to 6.17% from 5.95% in September 2025, according to Uqbar data.
The concerns about risk are even more intense for FIDCs that invest in payroll-linked credit for workers of non-government companies, a type of loan the government has tried to encourage by creating a platform through which smaller companies can connect directly with lenders. Such loans have climbed to about 124 billion reais even though the system has been plagued by technical problems.
In one example, FIDC UP.P Consignado Privado has a delinquency rate of 10.8% in September of the 340 million reais in total credits acquired along its life, said Gabriel Pérgola, CEO and founder of the fintech UP.P Sociedade de Emprestimo Entre Pessoas SA.
“A lot of new players entered the market and some had to relax their investment criteria in pursuit of higher returns,” said Ricardo Binelli, a partner at Solis Investimentos, an asset manager that specializes in the funds and has about 33 billion reais of FIDCs under management. That’s double the amount it had in October 2024.
“FIDCs are complex investment vehicles, and I’m concerned about the lack of experience among many fund administrators,” Binelli said.
FIDCs aren’t required to disclose the names of their portfolios’ main borrowers due to bank secrecy laws, making it difficult to assess risk. Administrators have to release share prices only once a month. The criteria to define how to book provisions for loan losses or to show delinquency levels in the portfolio depends on the fund administrator.
“FIDCs are a legitimate instrument that allow this newer credit ecosystem to leverage itself, grow, and, obviously, reach an audience that was, at some point or in some way, held captive by the banks,” said Alfredo Marrucho, content director at Uqbar. In many cases, though, “it is very difficult to truly detect what is inside an FIDC’s portfolio,” he said.
“That’s why it’s very important for investors to choose the right manager, administrator — someone with experience and a proven track record,” he said.
Brazil’s central bank declined to comment.
FIDC structures are designed to withstand a certain level of defaults, including under stress scenarios, Binelli said. So far, delinquencies are mostly hitting the subordinated tranches in the funds, but that’s still eroding the cushion protecting holders of mezzanine and senior shares, he said.
The funds have been around since 2002, but regulators have recently sought to bolster the industry as part of an effort to reduce the concentration of credit among a handful of large banks. Retail investors gained access to FIDCs in 2023, followed by tax incentives for the vehicles in 2024. Bank treasuries and asset managers have also increased their exposure. At the same time, stricter loan-loss provisioning rules introduced in 2025 prompted lenders to tighten underwriting standards, pushing more borrowers to seek alternative sources of financing.
Capitania initially sought to capitalize on the rapid growth of FIDCs, but ultimately scaled back its exposure to avoid taking on too much risk or settling for thinner spreads, Smith said. Five years ago, the asset manager had 1.8 billion reais invested in FIDCs and was looking to more than double that to 4 billion reais, according to Smith.
Now, Capitania has about 1.6 billion reais invested in the funds, reflecting a more selective approach as competition for assets has intensified. “If you don’t have good assets to buy, you shouldn’t invest more,” Smith said.
For the fintech Agi Inc., FIDCs are “a funding alternative that enables our growth, providing predictability for financial planning,” said Marcello Dubeux, chief financial officer and investor relations director. “We use our own operations — our core business — as collateral and as a safeguard for investors,” he said, adding that the FIDC market allows Agibank, as the fintech is known, to raise billions quickly and with longer repayment terms.
Treasury units and asset-management subsidiaries at Itau Unibanco Holding SA, Santander Brasil SA and Banco Bradesco SA invested in 2.1 billion reais of senior FIDC shares launched recently by Agibank, which invests in loans backed by pension benefits, said Agibank Treasurer Gabriel Zaneti. Those shares are paying 1.05% over the interbank rate DI. In 2025, Agibank created a FIDC of about the same size, with the same AAA rating, paying 1.30% for investors at the senior layers.
The industry’s rapid growth has also exposed its darker corners. Some FIDCs have been linked to alleged money-laundering schemes involving organized crime, while others were used to inflate the reported assets of Banco Master, the lender liquidated by Brazil’s central bank amid fraud allegations. And the specter of other such cases is looming.
In September, regulators took a step to try to cut risks. Brazil’s National Monetary Council tightened rules governing FIDCs, primarily by restricting their purchases of hard-to-price legal claims arising from court proceedings that haven’t yet been adjudicated, a measure that was broadly criticized by market participants. The decision affects roughly 35 billion reais of FIDCs, according to a government official.
Defaults are an inherent part of the risk in FIDCs, said Bruno Gomes, a superintendent at Brazil’s securities regulator, the CVM. In general, “transparency in the FIDC industry is very high,” Gomes said, pointing to monthly and quarterly reports as well as annual financial statements.
He said calculating daily valuations for illiquid assets such as FIDC quotas, as some market participants have suggested, would entail significant operational costs and pose a major challenge. If a credit event occurs between monthly reports, the administrator is required to disclose it to the market.
The supervisory challenge becomes greater, however, “when someone enters the industry with the intent to commit fraud or other crimes, because they will try to conceal what they are doing from everyone,” Gomes said, adding that CVM should have more people and technology to improve its oversight.
--With assistance from Martha Beck.
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