Brazil Aid to Midsize Banks Seen Surging to $2.4 Billion

The Brazilian bond program that provides a lifeline to mid-size banks will climb to 5 billion reais ($2.4 billion) in coming months, a more than 10-fold increase, the head of the fund that administers it said.

About 470 million reais of debt was sold since the program began in August 2012, said Celso Antunes, chief executive officer of the deposit-insurance fund that guarantees the bonds, in his first interview since being promoted to that job in April. The total will surge in coming weeks as more types of collateral become available, Antunes said.

Issuance has been slow because the privately run fund, known as FGC, has required strict proof of collateral and only allowed bonds backed by loans paid off with payroll deductions, Antunes said. That’s set to change once FGC has access to the nation’s social-security database next month or in July, and can use pension-deductible loans as collateral, he said.

“When we obtain access to the social-security database and allow these bonds to be issued, we will hit 5 billion very quickly,” Antunes said in an interview in Sao Paulo, where FGC is based.

The fund has been wary of approving new deals after the central bank was forced to liquidate or bail out seven mid-size banks since 2010 in the wake of the financial crisis.

Regulators liquidated Sao Paulo-based Banco Cruzeiro do Sul in September after finding “serious” financial violations. Banco Panamericano SA required a bailout amid an investigation into accounting irregularities. The deposit-insurance fund provided a 3.35 billion-real loan to help finance Grupo BTG Pactual’s purchase of a controlling stake in Panamericano in 2011.

Fraud Search

Antunes became chief operating officer of Panamericano in 2010 and took the same job at Cruzeiro do Sul in 2012, as part of FGC’s intervention and probe into possible fraud and hidden losses on the banks’ balance sheets.

“After all that happened, we are being very cautious and only taking as collateral the loans that we can confirm really exist,” Antunes said. “Human creativity is infinite and we need to be very careful.”

FGC is also studying how to include company loans as collateral for bond sales.

The fund is phasing out a separate bond program begun in 2009 aimed at strengthening mid-size banks during the global financial crisis. Those bonds, known as DPGEs, carry guarantees from FGC for as much as 20 million reais per investor and don’t have collateral support.

Insurance Premium

Through 2011, banks with less than 2.2 billion reais in equity could sell DPGEs totaling as much as two times their capital, paying 1 percent as an insurance premium to FGC. The issuance limit declined 20 percent in January 2012 and another 20 percent in January 2013. New issuance will be prohibited by January 2016.

About 24 billion reais of DPGEs remain outstanding, Antunes said. FGC has assets of 32 billion reais, after paying 1.4 billion reais to depositors of Banco BVA SA, which has been under central bank control since October, and 2 billion reais for the Cruzeiro do Sul liquidation.

FGC also booked as a loss the 3.35 billion-real loan it provided as part of the bailout of Banco Panamericano in 2010.

The new bonds, called DPGE2, pay a smaller insurance premium of 0.3 percent to FGC because collateral adds a layer of security for the fund.

‘Crisis Instruments’

“The bond’s guaranteed by FGC, even with collateral, are crisis instruments and must end,” Antunes said, adding that the phase-out must be gradual because mid-size lenders still face funding challenges. Banco ABC Brasil sold bonds overseas in March denominated in the Brazilian currency, in the first public offering abroad by a mid-size bank in six months.

Brazil’s decision to increase deposit guarantees to 250,000 reais per bank from 70,000 reais in April will help mid-sized lenders raise funds, according to Antunes.

“With a bigger stake of the deposits guaranteed, the mid-sized lender will have appetite to reach a broader base of investors, reducing their funding risk and the financial system risk as a whole,” he said.

Antunes said 99.7 percent of depositors will be covered with the 250,000 reais limit, which more closely mirrors international standards. In the U.S., deposits are guaranteed by the Federal Deposit Insurance Corp. for as much as $250,000.

Created in 1995 and financed by the biggest lenders in Brazil, FGC has taken on new responsibilities since the 2008 crisis. It used to only pay creditors of bankrupt banks. Now it acts in preventative ways, providing financing and guarantees and trying to avert bank failures. It also helps the central bank in the consolidation of the financial system. Lenders’ contributions total 0.15 percent of the reserve requirement deposited at the central bank annually.

In April 2011, FGC helped finance the acquisition of Banco Schahin SA by Banco BMG SA, a lender focused on payroll-deductible loans. FGC also helped with the purchase of Banco Matone SA by J&F Participacoes SA, the holding company for beef exporter JBS SA. The merger between JBS and Matone created Banco Original.

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