Central bank takes steps to ease pressure on banks

- Wednesday, September 24, 2008

Central bank takes steps to ease pressure on banks

Brazil's central bank BCB has taken two steps to ease pressure on the country's banks from tightening liquidity, BCB said in a statement.

The bank has postponed the schedule for increasing the reserve requirements on leasing operations, a move announced in January which started at 5% in May.

The next increase to 20% is now set for January 16, 2009, instead of November 14, 2008. The subsequent increase to 25% will be pushed back to March 13, 2009, from January 16.

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Analysts have seen the requirement as potentially restricting lending growth and reducing incentives for leasing companies to issue bonds, putting more pressure on liquidity and funding costs.

"[It] should provide some relief in terms of funding costs for the Brazilian banks, especially for the three large private sector banks, whose cost of CDs rose to close to 105% of CDI earlier this year," Deutsche Bank (NYSE: DB) equity analyst Mario Pierry wrote in a note to clients.

BCB also increased the amount financial institutions can deduct from their central bank reserve requirements on time deposits, savings deposits and demand deposits to 300mn reais (US$163mn) from 100mn reais.

While this move may help, Pierry showed concern that reserve requirements are relatively high by world standards, at 53% for demand deposits, 30% for savings deposits, and 23% for time deposits.

BCB believes the pushback of the leasing reserve requirement will allow an extra 8bn reais to remain in the financial system before the change, while the second move will allow 5.2bn reais to stay in the system over the next week, government news agency Agência Brasil reported.

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