liquidity regulation in brazil in view of the financial crisis

Liquidity Regulation in Brazilin View of the Financial Crisis

Cristiano de Oliveira Lopes CozerDeputy General Counsel

Main effects of the crisis in BrazilRelevant powers of the Central Bank of Brazil (CBB)Measures taken in view of the crisis

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Agenda

Main effects of the crisis in Brazil

1 – General liquidity shortage2 – Funding difficulties specific to small- and medium-sized banks3 – Brazilian banks trouble in rolling over external debt4 – Brazilian companies difficulties in obtaining foreign trade finance

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Relevant powers of theCentral Bank of Brazil (CBB)

1 – Liquidity assistance (Act 4595 of 31 December 1964)

- CBB may rediscount assets of, and make loans to, banking financial institutions- Rules set forth by the National Monetary Council (NMC) and by the CBB- Legal interpretation: also repos and reverse repos- Maturities up to 360 calendar days (Fiscal Responsibility Act)- Ordinary liquidity window: mostly repos and reverse repos with Brazilian Treasury bonds

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2 – Reserve requirements(Act 4595 of 31 December 1964)

- Up to (a) 100% of demand deposits; (b) 60% of time deposits and other liabilities of financial institutions

- Rules put forth by the CBB itself

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3 – Foreign exchange reserves and foreign exchange market intervention

- Foreign exchange reserves investment strategies crafted by the CBB

- Intervention in foreign exchange market decided by the CBB, according to NMC and CBB rules


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Measures taken in view of the crisis

1. Special Liquidity Assistance

2. US dollar-denominated loans

3. Reserve requirements

4. Deposit Insurance Fund (FGC)

5. Other measures

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1. Special liquidity assistance

Act 11882 of 23 December 2008 (ProvisionalMeasure 442 of 6 October 2008)

- In order to assure adequate levels of liquidity in the financial system, NMC may:

(a) establish special conditions and criteria for the evaluation and acceptance of collateral

(b) rule out, under special conditions and for a certain period, the requirement of presentation of tax compliance certificates as an eligibility condition for CBB liquidity assistance

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Act 11882 of 23 December 2008

- Collateral posted by banks may be complemented by collateral and even personal guarantees by controlling shareholders, companies of the business group, or other financial institutions

- In addition to ordinary reporting duties, quarterly report to National Congress

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Act 12058 of 13 October 2009 (PM 462 of 14 May 2009):

- liquidation or bankruptcy of, or intervention in, a bank do not affect credits of the CBB arising from liquidity assistance, which must be paid upfront by the failed bank


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NMC Resolution 3622 of 9 October 2008:-wider array of assets eligible as collateral, including debentures issued by non-financial institutions- collateral accepted at a discount from their face amounts, according to their credit risks- CBB may impose restrictions on the bank, as a condition of the assistance (e.g., more restrictive operational limits, suspension in payment of dividends, prohibition of acts that result in higher salaries for managers)


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2. USD loans

(Bulk of liquidity: US dollar repos with maturities of one to three months)

Act 11882 of 2008 (PM 442 of 6 October 2008):

- CBB may grant loans in a foreign currency, against collateral in the same currency

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2. USD loansb) NMC Resolution 3622 of 9 October 2008:-loans charged at Libor + interest rate set by CBB Board;- eligible collateral:(a) sovereign bonds issued by the Republic (Global bonds)(b) sovereign bonds issued by countries with long-term credit rating A or higher(c) Brazilian trade finance contracts (credit ratings at least B)(d) other USD assets (credit ratings at least A )(e) BRL-denominated assets combined with derivatives contracts, so that value of collateral equals value of loan at all times

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NMC Resolution 3624 of 16 October 2008

-US dollar denominated loans under the condition that borrower use proceeds in foreign trade finance

NMC Resolution 3672 of 17 December 2008- Intended to meet demand for liquidity in USD by domestic non-financial corporations- Loans granted under the condition that borrower use funds in lending operations to Brazilian corporations with debts abroad (with maturities between 1 October 2008 and 31 December 2009)

2. USD loans

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NMC Resolution 3672 of 17 December 2008

CBB could grant USD loans, up to 31 December 2009, to:

(a) Brazilian banks authorized to operate on the domestic foreign exchange market and their subsidiaries and affiliates abroad

(b) investment grade banks incorporated overseas

2. USD loans

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NMC Resolution 3672 of 17 December 2008

- Besides personal guarantee of borrower, CBB had a security interest on credits arising from loans granted by the bank

- CBB could demand additional guarantees (Brazilian Treasury bonds or other financial assets) up to the limit of 140% of value of loan

2. USD loans

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3. Reserve requirements- CBB Circular 3427 of 19 December 2008:

- higher exemption amounts on reserve requirements on time deposits (2 billion BRL; previously, 300 million BRL)

(reserve ratio = 10% on amount of time deposits; 13.5% after September 2009; 15% after February 2010; 20% from December 2010 onwards)- banks may deduce amounts used to buy asset portfolios of other financial institutions, up to the limit of 60% of reserve requirements

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- Private fund (funded by premiums that banks pay for deposit insurance coverage – no public funds)- Instituted by the NMC; rules and regulations approved by the NMC- New role: not only deposit insurance, but also support to financial stability

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NMC Resolution 3656 of 17 December 2008:- FGC may invest up to 50% of its net worth in:(a) purchase of assets portfolios of financial institutions(b) deposits in, or purchase of notes issued by, financial institutions, against collateral(c) loans under the condition that proceeds are used in specific purposes set by FGC


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NMC Resolution 3692 of 2 March 2009

- time deposits with special guarantee by FGC, up to BRL 20 million / investor

- additional funding for the FGC (higher premiums for insurance coverage)


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Act 11908 of 3 March 2009 (PM 443 of 21 October 2008)

-Authorization for federal government-controlled banks to purchase shares of capital stock of financial institutions incorporated in Brazil, including through subsidiaries

- Authorization for the CBB to contract foreign exchange swaps with other central banks

Other measures

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Thank you

Cristiano de Oliveira Lopes CozerDeputy General Counsel

Central Bank of Brasil - Legal Department+5561 3414-4848 / [email protected]

liquidity regulation in brazil in view of the financial crisis

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