Yesterday, 10/15, the Central Bank (BC) released the Financial Stability Report (REF) for the first half of 2020. REF is a biannual publication designed to present the panorama of recent developments and the prospects for financial stability in the Brazil.

The Covid-19 pandemic continues to trigger the biggest global economic downturn since the Great Depression. In the domestic environment, the pandemic interrupted the trend of a gradual recovery in the economy, with a significant drop in Gross Domestic Product in the first quarter and an unprecedented decline in the second quarter of 2020.

In this context, the capital market reduced its performance and bank credit gained prominence in financing large companies. Credit to Micro, Small and Medium Enterprises, in turn, advanced in double digits, a fact that has not occurred since 2013.

Unlike the behavior of credit to companies, the pandemic slowed the growth rate of credit to households. Covid-19 has negatively affected consumer confidence and occupation, and households' income commitment has risen even further and approached the maximum level seen in 2015.

Banks' profitability showed a sharp reduction, notably due to the increase in expenses with provisions. It is important to note that the pandemic broke out at a time when bank profitability had already recovered from the effects of the 2015-16 recession, which allowed the absorption of provision expenses at a level similar to that observed during that recession, without disturbing the system. .

The measures taken by the National Monetary Council and the BC were important to preserve the solvency and resilience of the banking system in facing the adverse effects of Covid-19 and to allow the National Financial System (SFN) to go through the acute period of stress, always with low liquidity risk. The level of provisions to cover expected losses on problematic assets is one of the highest since the end of 2014.

The update of the stress test to estimate the effects of the Covid-19 shock on agents of the real economy shows a significant impact, but less than that published in the previous REF. The factor that contributed most to this improvement was the recovery of receipts from various sectors of the economy until August 2020, after the sharp drop in April and May. These results corroborate SFN's ability to absorb shocks from the effects of the pandemic, even under severe assumptions.