Brazil’s central bank provided a lifeline to small-sized lenders facing a funding squeeze amid Europe’s deepening debt crisis by encouraging bigger rivals to purchase some of their assets.
Under new rules announced yesterday by the monetary authority banks will be allowed to use part of their reserve requirements to purchase credit portfolios and longer-term bonds known as letras financeiras from banks whose capital doesn’t exceed 2.2 billion reais ($1.2 billion). If they don’t, they’ll be punished by losing 11 percent interest payments on some of the funds they’re required to deposit at the central bank.
“The measure is positive and helps increase the volume of credit in the Brazilian economy because middle-sized banks have a capacity to generate credit that bigger ones don’t,” said Ricardo Gelbaum, executive financial director for Banco BMG SA, which in June reported 2.1 billion reais of equity.
The shift in reserve rules are the latest attempt by policy makers to prop up smaller banks that have been under scrutiny since Brazil’s deposit fund stepped in to facilitate the 2010 bailout of Banco Panamericano SA. It also comes as President Dilma Rousseff’s administration is trying to expand credit to reignite economic growth that stalled in the third quarter.
Starting Feb. 24, the central bank will no longer pay interest on 27 percent of funds that banks are required to hold at the monetary authority as reserve requirements for time deposits. That threshold will rise to 36 percent starting April 27. Currently reserve requirements on time deposits are paid the country’s benchmark rate, which stands at 11 percent.
Authorities have boosted efforts in the past year to promote consolidation in Brazil’s banking industry as overleveraged, smaller lenders lose access to overseas funding at the same time they’re preparing to adhere to tougher, new accounting standards.
In April, the nation’s guarantee deposit bank, known as the FGC, funded the acquisition of Banco Schahin SA by Banco BMG SA, a lender focused on payroll-deductible loans. In October, the central bank then ordered the liquidation of Banco Morada SA.
“The international crisis, Panamericano and Morada cases have dried up the market for credit portfolios, leaving some of these banks in a difficult situation,” Roberto Padovani, chief economist at brokerage firm Votorantim Corretora SA in Sao Paulo, said in a phone interview.
Aldo Mendes, the central bank director in charge of monetary policy, said there are about 30 billion reais in transactions that can be made as a result of the changes to the reserve requirement rules. By February Brazil will have fully established a clearing house to make it safer to buy and sell these assets, he said.
“There is no concern over the health of banks," Mendes said in a telephone interview from Sao Paulo. “We are trying to rationalize the liquidity in the system.”
This month, Brazil lowered the so-called IOF transaction tax on consumer credit to 2.5 percent from 3 percent in a bid to strengthen domestic demand amid the global economic slump. The central bank has also cut the benchmark Selic rate three times since August and also begun to unwind measures taken last year to prevent a consumer credit bubble.
Latin America’s biggest economy is expected to grow this year less than half the 7.5 percent pace it did in 2010, which was the fastest in two decades.
-- Editors: Joshua Goodman, Andre Soliani