Brazil's tight bank rules a blessing in disguise

BRASILIA (Reuters) - Brazil's stringent banking sector rules, once seen as burdensome, are suddenly being viewed as admirable as the Group of 20 nations look to fortify financial institutions against future crises.

Among the main aims of the meeting of G20 leaders in Pittsburgh on September 24-25 is to follow through on their call to toughen oversight of key financial firms, after the global financial crisis showed the danger of lax regulation.

Brazil's system, which braved the crisis without the major bankruptcies and bank nationalizations that have reshaped capitalism in the rich world, is likely to be seen as a promising model by the group of developed and emerging powers.

Brazil's strong public bank presence provided a liquidity buffer at a time when private banks were reluctant to lend. The relative underdevelopment of the Latin American country's credit and mortgage markets also meant financial institutions were less exposed to the shadowy financial products that pushed the global banking system to the brink.

But analysts say Brazil's strict capital requirements and broad central bank oversight were especially important in helping to shield the banking system.

"Brazilian banks are coming out well because of the strong regulation in the financial system, which avoided a liquidity crisis in local markets and solvency problems," said Ceres Lisboa, a senior banking analyst at credit ratings agency Moody's Investors Service in Sao Paulo.

"Brazil today can serve as an example of bank regulation."

TOUGH RULES

Brazil's tight bank rules date back to the second half of the 1990s after a series of crises led the country to adopt a more rigorous version of international norms.

During the credit meltdown last year, the tighter standards meant that Brazilian banks benefited from higher capital requirements.

The Basel II accords, a benchmark for international banking norms, recommend that banks finance a minimum of 8.0 percent of their assets judged to be at risk with equity capital or subordinated debt. For Brazil's financial institutions, that minimum is a more demanding 11 percent and in practice some have even higher capital buffers.

Brazil also has a narrower definition of what constitutes capital. U.S. and European banks got into trouble because they were able to use hybrid securities and subordinated debt -- whose value came under severe pressure during the crisis -- to meet as much as half of their capital requirements.

The relatively conservative composition of Brazilian banks' portfolios meant such forms of capital were rare to begin with. Even if banks wanted to include hybrid instruments in their capital, they need authorization from Brazil's central bank.

Unlike the U.S. Federal Reserve, whose regulatory authority was limited to depository institutions, Brazil's central bank already had the authority to monitor the wheelings and dealings of risk-taking investment firms. That includes the type of off-balance sheet vehicles used by many U.S. and European brokerages to keep loss-making assets out of their books.

"The fact that Brazil is very regulated in its banking system helped in this moment of crisis but a main factor is that the central bank has a very broad vision of the banking system," said Milena Zaniboni, an analyst at credit ratings agency Standard & Poor's in Sao Paulo.

Brazil's high reserve requirements on bank deposits, often criticized for stalling credit expansion and growth, were also key in helping the credit markets during the crisis. The central bank could ensure liquidity by easing them, while monetary authorities in other places had to inject huge amounts to keep the system afloat.

PICK AND MIX

Brazil was by no means bullet-proof. The economy fell into recession in the first-quarter of this year and major companies like food processor Sadia SDIA4.SA suffered sharp losses with wrong bets on currency derivatives.

Analysts say regulators at the G20 meeting will have to pick and mix from regulation in various countries to improve global standards. The group has yet to flesh out details such as just how high the bar will be raised for banks' capital requirements.

Now that the importance of emerging economies has been enhanced by the crisis and some have gained a seat at the influential Financial Stability Board, countries like Brazil can help reshape the rules.

Some worry that if developed countries drag their feet on bank regulation changes, the post-crisis momentum will be lost and the system will stay vulnerable to further downturns.

"Regulation made a big difference (in Brazil)," said Gustavo Loyola, a former president of Brazil's central bank and now a partner at economic consultancy Tendencias in Sao Paulo.

"Now is the moment for these more developed markets that thought themselves slightly immune to this type of crisis to have some humility and adopt the parameters that Brazil adopted."

(Editing by Stuart Grudgings)