Brazil's banks - time for distinctions A bank failure can indicate an impending credit crisis. But sometimes, to misquote Freud, a bank failure is only a bank failure. The key is to know how to make the distinction. Last week, the central bank of Brazil announced that it would liquidate the midsized consumer bank Banco Cruzeiro do Sul, along with Banco Prosper, which Cruzeiro had been set to buy. Cruzeiro was placed under administration in June after accounting irregularities and a gaping capital hole were uncovered. The authorities had hoped to avoid liquidation by selling the bank to a larger peer and convincing its creditors to accept haircuts; local reports suggest the bank has $1.5bn in foreign debt maturing last Friday. Neither effort succeeded. Is this a bad omen for Brazil's financial system? There is little doubt that there has been a dramatic slowdown in the Brazilian economy: in 2010 output growth was 7.5 per cent, but last quarter it hit 0.5 per cent. Credit expansion also got out of hand in recent years, as payroll loans - Cruzeiro's speciality - and auto loans proliferated. There are two reasons to doubt that Cruzeiro's downfall and the struggles of other midsize retail banks are a symptom of systemic problems. First, while consumer loan defaults are still growing, the pace of defaults slowed in the first half, according to Serasa Experian. Second, the big banks that form the backbone of the system - Itau, Santander Brasil and Bradesco, most prominently - continue to have capitalisation and profitability metrics that US or European banks would envy. Tier one capital ratios are 12 per cent and higher; returns on equity are in the region of 20 per cent. Asset quality is a legitimate concern, but non-performing loans are creeping up rather than exploding. Those looking for a little canary in the Brazilian coal mine have not found one in Cruzeiro.