CEO’s Arrest and a Bank Failure Shake Brazil’s Finance Industry

(Bloomberg) -- On Monday, Daniel Vorcaro announced a last-ditch rescue deal that appeared to save his floundering Brazilian bank. Hours later, he was arrested at a Sao Paulo airport, where authorities say he was trying to flee the country.

Banco Master SA will be liquidated after the latest twist in its saga featured a sweeping corruption probe by Brazilian authorities. Chief Executive Officer Vorcaro and five others were arrested amid allegations that executives fabricated credit instruments and sold them to a lender whose own CEO has now been ousted, according to people familiar with the matter. 

The rapid chain of events marked a dramatic new turn for Master, a firm once touted as a rising star in Brazilian finance. Its collapse, regulators and industry rivals say, underscores the urgent need for stronger oversight and tougher rules across the banking system.

The firm’s liquidation could cost Brazil’s deposit insurance system, known as FGC, as much as 55 billion reais ($10 billion) if other smaller banks are also liquidated, according to a person familiar with the matter. The fund is going to need to be replenished by the nation’s biggest banks, which are its main backers — an outcome that’s worried investors in recent months as Master’s prospects dimmed.

Master and the other liquidated institutions had around 1.6 million creditors that are owed roughly 41 billion reais, FGC said in a statement.

Without a broad retail client base, Master was able to lure billions from retail investors through investment platforms, touting its bonds as a FGC-backed investment. Many fintechs, Master-owned Will Bank among them, used the same channels to get access to retail funding in recent years, as competition in the system intensified and Brazilians started looking for higher-yielding investments.

But a central bank rule change in December 2023 tightened the regulations governing how banks could access the FGC program, punching a hole in Banco Master’s business plan. A second rule change in August will force banks to make contributions to the fund based on their relative risk, starting in June 2026.

Critics in the financial system argued that the rules governing FGCs forced big banks to shoulder an unfair portion of the costs, because contributions were based on the size of each institution’s balance sheet rather than how likely they were to need a bailout.

Now that the fund will need to be replenished, Banco do Brasil SA, Banco Santander Brasil SA and Banco Bradesco SA will be among the most exposed relative to their market capitalizations, and Itau Unibanco Holding SA would face the smallest impact among big banks in the country, Citigroup Inc. analyst Gustavo Schroden said in a note in September. Those banks as well as Banco BTG Pactual SA will see their capital ratios worsen to some extent.

Two Attempts

Master’s liquidation came after two failed attempts to rescue the bank. The first was in late March, when Banco de Brasilia, a midsize lender owned by Brazil’s capital city, announced that it would buy most of Master’s assets. The deal was rejected by the central bank in September amid risks arising from the assets left behind and Master’s connections to firms being investigated for their ties to organized crime, people familiar with the matter said at the time. Master has said the connections are innocuous.

The two banks had a previous relationship: Banco de Brasilia bought some payroll loans from Master in the last year. A person familiar with the matter said those transactions raised concerns at the central bank, which reported it to the Public Prosecutor’s Office and the Council for Financial Activities Control. In February, before the banks announced their deal, the regulator ordered those operations to stop.

But Master made two additional loan sales to Banco de Brasilia months after the central bank order, when the deal to sell itself to Banco de Brasilia had already been rejected by the regulator, according to a person familiar with the matter, before those types of transactions stopped and Banco de Brasilia tried to distance itself from the situation. In the meantime, the investigations went on.

A representative for Master declined to comment and Banco de Brasilia didn’t immediately respond to a request for comment.

Vorcaro for a time was able to continue obtaining liquidity, according to a person familiar with the matter, in some cases selling his personal assets. On Monday, what seemed to be a solution emerged as Master announced a deal to sell itself to a consortium led by Fictor Holding SA, a Brazilian investment company.

Under that deal, Vorcaro would leave the bank as both a shareholder and an executive, and the new owners would inject 3 billion reais in fresh capital to keep it afloat. The deal was terminated with Master’s liquidation, Fictor said in a statement Tuesday.

The liquidator named by the central bank will now be responsible for deciding the fate of Master’s assets. One of them is Will Bank, which hasn’t been liquidated and which was being courted by investors including Mubadala Capital, Bloomberg News reported Monday.

--With assistance from Rachel Gamarski and Cristiane Lucchesi.

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