Brazil Cuts Reserve Requirements as Rousseff Urges Banks to Lend

Brazil’s central bank reduced reserve requirements to free up 30 billion reais ($14.9 billion) in credit as President Dilma Rousseff pushes banks to lower borrowing costs in the world’s second-biggest emerging market.

The measure came a week after Rousseff criticized Brazilian banks for overcharging for loans. Over the past year, the central bank has cut its benchmark rate by 500 basis points, more than all Group of 20 nations, though borrowing costs are still among the highest in the world. The average interest rate charged for personal loans stood at 36 percent in July.

“It was necessary for the reserve requirements to accompany structural changes” in the Brazilian economy, Aldo Mendes, the central bank director in charge of monetary policy, said in a phone interview after the measure was announced Sept. 14. “If the supply of credit increases, everything indicates that interest rates will fall.”

As part of the new rules, the monetary authority eliminated the so-called additional reserve requirement rate for cash deposits, which had been at 6 percent, and also reduced one for time deposits to 11 percent from 12 percent starting Oct. 29.

Banks can meet half of the reserve requirements on time deposits by acquiring loan portfolios and local bonds issued by competitors, a move that will improve financing conditions for smaller financial institutions, said Vladimir Caramaschi, chief strategist of Credit Agricole (ACA) Brasil SA. The central bank said that reserve requirements deposited by local banks at the monetary authority will fall to 350 billion reais from a current 380 billion reais over the coming months.

‘Civilized’ Earnings

Rousseff said Sept. 6 that while she’s satisfied with policy makers having taken the benchmark rate to an “unprecedented” 2 percent in real terms, banks can do more to reduce borrowing costs. Since last August the central bank led by Alexandre Tombini has reduced the Selic rate to a record low 7.5 percent.

“I confess that I’m not satisfied,” Rousseff said in a nationally televised address to commemorate Brazil’s Independence Day. “Because banks, financial institutions and especially credit cards can reduce still further the interest rates they charge final consumers, lowering to civilized levels their earnings.”

Mendes said that it’s a medium-term aim of the central bank to align Brazil’s reserve requirements with those seen abroad. Still, he said reserve levels of around 1 percent to 2 percent of gross domestic product in the U.S. and Europe would be too low for Brazil’s financial system in times of stress. With the new measure, reserve requirements will fall to about 8.5 percent of GDP from 9 percent, he said.

Last week the bank announced it would liquidate Banco Cruzeiro do Sul after officials appointed to run the Sao Paulo- based company found a “serious violation” and unfunded liabilities that made it impossible to resume normal operations. Regulators also liquidated Banco Prosper SA, the lender Cruzeiro do Sul said it would acquire in December.

To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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