The Brazilian overnight loan market between banks is shrinking as the biggest lenders have pulled back, affecting the rate tied to $865 billion of securities and mutual funds, said two people with direct knowledge of the matter.
Large banks are instead following central bank directives to purchase longer-term securities from smaller lenders, said one of the people, who asked not to be identified because the decisions aren’t public. The average number of daily transactions in the interbank market fell to 16.8 last month from as many as 47.2 in January 2011, according to securities depository Cetip SA Mercados Organizados (CTIP3), while volume dropped to 1.85 billion reais ($916.3 million) from 10.2 billion reais.
Smaller lenders are flush with cash from the purchases and that, along with the absence of bigger rivals, has caused the overnight loan rate, known as DI, to decouple from the central bank’s benchmark, the people said. The DI was 7.24 percent yesterday, or a quarter-percentage point below the 7.5 percent target rate. The differential is about double the average over the past decade and compares with gaps of less than 0.1 percentage point in the U.S., Colombia and Chile.
“This market has been continually squeezing as currently no bank wakes up needing to borrow in the overnight market,” said Alfredo Moraes, chief executive officer of Sao Paulo-based Banco Intercap SA, which uses DI rates for 90 percent of its overnight transactions.
DI is one of the most important rates in Brazil’s economy, with 89 percent of 1.68 trillion reais of outstanding corporate debt linked to the index last month, according to Anbima, the nation’s capital markets association. Funds with total assets of 250 billion reais are tied to DI.
Brazil’s legacy of hyperinflation, including a 6,000 percent increase in prices in 1990, has spawned an aversion to long-term risk in the bond market, where fixed-rate securities represent just 1.6 percent of outstanding corporate debt. Most DI contracts are for one day, compared with the London interbank offered rate, or Libor, which is a benchmark for borrowing costs for as much as one year.
The biggest Brazilian banks prefer to lend to each other in the repurchase agreement, or repo, market, where loans are backed by Treasury bonds. The overnight repo market between banks increased 30 percent to 658 billion reais outstanding in February from a year earlier, according to data from the central bank.
The central bank also declined to comment, saying in an e- mailed statement that it played no role in the DI market. It said Cetip alone is responsible for calculating and releasing the rate, and congratulated the company on recent improvements to the way it arrives at the figure.
Cetip said this week it will create a so-called fallback mechanism to be applied when the market’s volume is too low. Triggered on days when the number of transactions used to calculate DI drops below 10, the fallback will use historic data to calculate an overnight rate that is less decoupled from the central bank benchmark, according to an April 15 statement on Cetip’s website. The mechanism will be introduced April 22.
In December 2011, Brazil’s central bank provided a lifeline to small lenders facing a funding squeeze by encouraging bigger rivals to purchase some of their assets. Under the new rules, firms can use part of their reserve requirements to buy credit portfolios and longer-term bonds from lenders whose capital doesn’t exceed 2.2 billion reais. Failure to do so will result in them losing interest payments on about 30 billion reais of the funds they’re required to deposit at the central bank.
Beginning in February 2012, the central bank no longer paid interest on 27 percent of the funds that banks are required to hold at the monetary authority as reserve requirements for time deposits. That threshold rose to 36 percent in August.
Before the measure, reserve requirements on time deposits were paid the central bank benchmark rate, known as Selic. The relief program ends June 2014.
The new rule also prohibits bigger banks that make loans to the smallest lenders then obtaining financing back from them on the overnight markets.
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