Brazil Ending Small Banks’ Liquidity Program Sooner Than Planned

Brazil’s central bank is bringing forward the termination date on a program of incentives granted to large banks to encourage the transfer of liquidity to smaller institutions through asset purchases.

The measures to date helped inject more than 46 billion reais ($20.6 billion) into smaller banks, bringing their liquidity to “desired levels,” according to a statement posted on the central bank’s website today. The program, announced in December 2011, will finish in March 2014 -- five months earlier than originally intended.

“This suggests that the health of the financial system, especially medium and smaller banks, is good enough for the standards of our central bank, so it’s safe to end this program,” Andre Perfeito, chief economist at Gradual Investimentos, said by telephone from Sao Paulo. “The medium and small-size banks are not in danger in Brazil.”

The shift in reserve rules was an attempt by policy makers to prop up smaller banks squeezed by Europe’s debt crisis after Brazil’s deposit fund stepped in to facilitate the 2010 bailout of Banco Panamericano SA. (BPNM3) President Dilma Rousseff has lowered banks’ reserve requirements in a bid to boost lending while at the same time pressuring the institutions to reduce their spreads.

The rules allowed banks to use part of their reserve requirements to purchase credit portfolios and longer-term bonds from banks whose capital does not exceed 2.2 billion reais. Failing to do so would result in punishment by way of losing interest payments on some of the funds required to be deposited at the central bank.

To contact the reporters on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net; Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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