Bloomberg News

Brazil’s Effort to Aid Small Banks Said to Bolster Foreign Units

January 23, 2012

Jan. 20 (Bloomberg) -- Brazil’s effort to prop up small banks may instead steer financing to international companies’ local subsidiaries, two people familiar with the matter said.

Rules that take effect Feb. 24 let large Brazilian banks use part of their central-bank reserve requirements to buy credit portfolios and bonds from lenders with capital below 2.2 billion reais ($1.1 billion). Of the 30 billion reais in financial-system injections the central bank projects will result, as little as 10 percent may go to local banks, said the people, who asked not to be named because the matter is private.

Brazil’s biggest lenders can continue avoiding credit risks from smaller rivals by using the freed-up funds to buy bonds from international companies’ subsidiaries that also have capital below 2.2 billion reais, the people said.

The new rules are intended to be a lifeline to small banks facing a funding squeeze since Brazil’s deposit fund stepped in to facilitate the 2010 bailout of Banco Panamericano SA. Victims have included Rio de Janeiro-based Banco Morada SA, which the central bank ordered liquidated last year after the company couldn’t comply with capital requirements. At the same time, President Dilma Rousseff is trying to expand credit to reignite economic growth that stalled in the third quarter.

“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 an interview last month.

Goldman Sachs, Mercedes

Companies that met the 2.2 billion-reais capital threshold as of September include Brazilian units of Bank of America Corp. and Goldman Sachs Group Inc. in the U.S.; Germany’s Volkswagen Bank, Mercedes-Benz Bank AG and Deutsche Bank AG, and Paris- based Societe Generale SA.

A central bank spokesman confirmed that the new rules wouldn’t prevent investments in foreign companies’ subsidiaries. He declined to be named in keeping with official policy.

Foreign-bank subsidiaries may see their borrowing costs decline below the country’s benchmark rate of 10.5 percent as a result of the new policy while the intended beneficiaries, Brazil’s small local lenders, remain without enough liquidity, the people said.

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 gradually rise to 36 percent starting April 27. Currently, such reserve requirements pay interest at the country’s benchmark rate.

--Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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