Brazil central bank opens money spigot to support financial markets

Brazil central bank opens money spigot to support financial markets

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Brazil’s Central Bank and national development bank BNDES on Monday launched measures to increase financial market liquidity and support businesses and employees impacted by the global spread of the novel coronavirus COVID-19.  

Banco Central do Brasil announced on Monday a package a worth BRL1.2 trillion (
$234.2 billion) aimed at ensuring financial stability and the smooth functioning of the Brazilian markets. The package contained close to a dozen measures either approved or being studied to increase the liquidity available to banks and free up available capital for loans. (see below for a summary)

The bank’s president, Roberto Campos Neto, said during a conference call with reporters on Monday it is ready to do whatever it takes to ensure the stability the financial system and support the economy. 

“This is the biggest liquidity injection ever announced by the central bank,” he said.

Among the measures introduced by the Central Bank were expanded mechanisms to allow lenders to repackage their loan portfolios into long-term deposits in return for new liquidity from the Central Bank. Other steps included a reduction in the long-term reserve requirements that is estimated will free up BRL68 billion in new lending and the re-activation of a deposit scheme guaranteeing loans from small and mid-sized lenders up to BRL2 billion that was last used during the 2009 crisis. 

The reactions of governments, under the current environment of uncertainty, have indicated a scenario of high gravity, with financial turbulences that equal or surpass in magnitude those observed in the 2008 crisis,” Campos Neto wrote in a slide presentation accompanying the conference call.

On Sunday, Brazil’s national development bank BNDES also announced a BRL 55 billion package of measures to help 
companies facing cash flow difficulties. The amount  is equivalent to the total amount of disbursements made by the bank in 2019, BNDES said in a press release. 

The measures adopted by the BNDES aim to support workers directly with the possibility of new [Severage Pay Fund] withdrawals and indirectly, by helping to maintain more than 2 million jobs with increased financial capacity and preservation of 150,000 companies,” the release stated.

Steps taken by BNDES will include the 
transfer of an additional BRL20 billion to the Severage Pay Fund (FGTS), introduction of a standstill period of up to six months for repayments by companies for direct and indirect loans from BNDES, and the expansion of credit for micro-, small- and medium-sized companies worth BRL5 billion.

BNDES President Gustavo Montezano said further measures would be announced in the coming weeks when the bank has operational security to launch new products”, according to the press release.

The World Health Organization (WHO) declared the outbreak a pandemic on March 11, with the number of confirmed cases globally now standing a 372,757 in 194 countries and 16,231 deaths as of Tuesday. Brazil, the largest economy in Latin America, has the most reported cases in the region, according to the Johns Hopkins University Coronavirus Resource Center, with 1,980 confirmed cases and 34 reported deaths tied to COVID-19.


What are the Central Bank’s new measures?

The Central Bank stated the aim of the measures is to prevent dysfunctionality in the market and maintain investor confidence by keeping the banking system liquid and stable. 

Among the new measures are guarantees and special conditions offered to banks to allow them to roll over their debt and continue offering credit, and the provision of additional liquidity to maintain economic growth and keep inflation under control.

Here is a full breakdown of the measures being introduced by the Central Bank:

1) Activation of deposit protection scheme

The Central Bank activated a deposit protection mechanism used in the 2009 crisis. Lending by financial institutions up to BRL2 billion will be guaranteed by the Credit Guarantee Fund (FGC). The FGC limits potential losses in the event of a crisis and could allow banks to increase their lending by around BRL200 billion. 

Additional Release of Compulsory Deposits

This measure lowers to 17% from 25% the percentage of deposits banks need to hold. The reduction in the level of 
compulsory deposits is expected to free up an additional BRL68 billion in liquidity.

3) Flexibility in Agribusiness Letter of Credit rules

The Central Bank is loosening restrictions on Agribusiness Letter of Credit (LCA) instruments to help increase liquidity and credit. LCAs are fixed-income securities that provide credit to agribusinesses. The measure is expected to provide an addition BRL6.3 billion in agribusiness credit and increase by BRL2.2 billion liquidity to the banks.

4) Loans backed by debentures

This measure allows the Central Bank to guarantee loans with the debt securities of private companies at a time when investors are avoiding debentures. The aim is to increase liquidity, encourage the secondary market and could release an additional BRL91 billion in funds.

5) Increase the repurchase limit of Financial Letters (Letras Financeiras)

Financial Letters are fixed income securities issued by financial institutions and normally held in funds. The measure increases to 20% from 5% the percentage of these instruments banks can repurchase during periods when demand slackens. The measure is expected to release an additional BRL30 billion into the economy.

Non-deduction of tax from exchange rate overhedge of investments abroad

The measure stipulates that tax will not be deducted from exchange rate overhedges of investments in equity holdings abroad. Over-hedging is a risk management strategy where an offsetting position exceeds the original position or risk. The measure is designed to give banks security to maintain and expand their business plans credit grants. The Central Bank expects the measure to increase capital slack by BRL46 billion and expand credit by approximately BRL520 billion.

7) Donation of resources in exchange for bonds

The Central Bank will donate resources to the market for up to one year in exchange for bonds. The measure will boost liquidity and helps the market to price the assets during a period of high volatility. 

8) Reduction of spread

The Central Bank will reduce the spread 
of liquidity leveling from 65 bps to 10 bps. The measure temporarily reduces the cost for banks to borrow from other institutions to internally balance their liquidity and helps mitigate the impact of operational risk derived from the crisis.

The Central Bank is also currently studying three other measures to mitigate the impact of the crisis on the economy:

A) Loans backed by financial bills

This would allow banks to issue a financial security based on a loan portfolio. The Central Bank could then use the financial bill as collateral to lend funds to financial institutions. The measure could release an around BRL 670 million.

B) Reserve requirements

The Central Bank said was considering further lowering the reserve requirements for banks, but did not provide further details.

C) Targeting measures at SMEs

The Central Bank said it is also looking at ways to ensure that additional credit generated through these measures are directed to 
small and medium-sized enterprises (SMEs).