While Europe continues to be held in the midst of a financial crisis, developing countries, particularly Brazil, are leading the way both in terms of growth and financial regulatory reform.

Brazil has already posted a 9 per cent growth in GDP in the first quarter of 2010, and while analysts have predicted a slowdown in growth rates, its economy is in much better shape than many developed countries around the world.

There are a number of reasons that have allowed Brazil to weather the global financial storm.

Plentiful natural resources have allowed for self-sufficiency, while a developing relationship with other BRIC countries - Russia, India and China - has extended trade routes.

Threadneedle Latin America fund manager Julian Thompson believes that a conservative attitude from the Brazilian Central Bank has meant that strict governance was forced upon banks.

Thompson says: “The country has an old-fashioned style banking system, whereby the Central Bank regulates banks and is less focused on consumer regulations than focused on risk, and is particularly focused on the banking sheet risks that banks run.

“The minimum of Tier 1 equity required is 11 per cent of capitalisation, which contrasts with the 2 per cent that RBS was running at one point. The less use of Tier 2 hybrid type equities was extremely important. The average banking capitalisation is higher than 11 per cent, which is really a bare minimum, but if you get down to around 13 or 14 per cent then the Central Bank starts knocking on your door and saying ‘what are your plans?’.”

Thompson also believes that the issue of transparency is well handled in terms of derivatives, which he says are “very well regulated”.

He says: “Any over the counter transaction has to be recorded on an exchange or a depository, so that if one bank makes an OTC transaction with another bank, it still has to be registered.

“This gives the Central Bank a lot of visibility. I believe that, particularly with relevance to the developing world, but also with relevance to the developed world, they’re setting the standards of financial regulation.”

Invesco associate portfolio manager Jack Deino agrees and says that Brazil is “way ahead” of most emerging markets.

“The Brazilian Central Bank has been very strict in enforcing minimum capitalisation rules, and they really keep the banks on their toes.

“I feel more comfortable with the numbers I’m getting, as far as capitalisation is concerned, with regard to enforcing the correct classification of loans and loan losses. I’d rather have a bank which has a core capital of 11 per cent in Brazil, rather than a bank in Nigeria or Russia that has a much higher core capital, because the numbers that you get and the standards that enforce them are much more dependable.”

Brazilian banks have also been keen to employ innovative banking initiatives towards a growing consumer base. Thompson argues that inventive payroll loans have aided this low risk culture developing in Brazilian banking.

Thompson says: “Rates are coming down for the consumers. There are some new forms of lending coming in from some payroll loans, which by are definition lower risk. The deal is really with the employer, you go to the employer as a bank and say we can provide payroll loans for all your employees, then you deduct the interest from the loan directly from their salary before the employee gets it, and therefore the interest on that loan is much lower but so too is the risk.”

These strict rules on capitalisation are mirrored in the corporate governance standards for the Brazilian stock exchange, the Novo Mercado.

Brazilian-based consultancy firm Better Governance outlines the main advantages of the Brazilian system. Founding partner Sandra Guerra says: “There are three levels of the Novo Mercado, with each level requiring higher standards of governance.

“Each tier requires higher levels of transparency, with the top two tiers having to adhere to an arbitration panel over disputes. The last tier requires there to be a ‘one share-one vote’ rule.”

This principle means that all shareholders have equal voting rights, removing the “golden shares” issue. As a result, minority shareholders have a higher collective authority.

Guerra says: “There are elements that require 20 per cent of the board to be independent board members. Companies also have to report to a standards auditor, publish quarterly reports, and apply tag-along rights [a mandatory bid rule providing minority shareholders with the right to sell their shares in the same conditions of controlling shareholders in case of control transfers].
“In the third tier, companies are obliged to give 100 per cent of tag-along rights of provisions in the change of control.”

Guerra points to the strength of the Brazilian regulators in applying these rules after the merger between Arcelor and magnate Mittal Steel Company. She says: “It was a controlled acquisition, but Mr Mittal himself came to Brazil to talk to the regulators and to the President of the Republic of Brazil, and tried to say it was a merger. The Brazilian regulator ruled and in the exchange everyone said no no no this is not a merger this is an acquisition, so you have to apply tag-along rights to all your shareholders.”

Guerra says that businesses are being consulted over potential changes to the Novo Mercado, to potentially tighten up some aspects. Two-thirds of the businesses must agree to the changes for them to come into effect.

JP Morgan client portfolio manager for emerging markets Claire Simmonds believes that the Novo Mercado has been a huge incentive for enabling funding from foreign investment.

Simmonds says: “Even five years ago, companies like insurers and mortgage holders weren’t listed companies. The most important thing that the Novo Mercado has is these single share classes, so you don’t get this division between preference voting shares and non-voting shares. It has seen a lot of positive development.”

Some commentators have been fearful that the election to be held in October this year, where President Lula will stand down after an eight-year tenure, could unsettle a successful system. However, Guerra believes that this will not damage the stable environmental that has been established.

She says: “This time, for the election, I’ve spoken to everyone and everyone has the same perceptions, that we are pretty safe. It doesn’t matter who will win, in terms of opposition or the candidate of the current president. It is known by the market that in terms of economics, things will remain the same. Because it is a very successful past, there is no concern internally or externally.”