Brazil allows banks to use tax credits as capital during crises

Fri Mar 1, 2013 11:23am EST

* Central bank sees specific capital needs for some banks

* Deferred tax assets will be allowed to count as capital

* Banks can turn debt into equity in times of stress

BRASILIA/SAO PAULO, March 1 (Reuters) - The government will allow Brazil's banks to convert tax credits into capital and some debt into equity during times of financial stress, in a surprising decision that came as officials laid out guidelines for the introduction of new capital rules.

Under guidelines for the implementation of Basel III rules in Brazil, central bank and finance ministry officials also said on Friday that the banking system appeared to have plenty of capital for now and the next two years.

The local bonds that will be eligible for conversion into stock are the so-called "letras financeiras" that comprise both debt and equity-like features.

The government will allow banks to use tax credits as funds that can be counted as capital if a situation of financial stress leads to losses or bankruptcy. Currently, there are more than 110 billion reais ($55.5 billion) of tax credits on the balance sheets of domestic banks, of which they will be allowed to use no more than 60 billion reais as capital during a crisis.

The decision to allow for a softer implementation of capital rules should benefit state-run banks more than their private-sector peers as the capital waiver on deferred-tax assets will substantially decrease their need for fresh capital.

Shares of state-controlled Banco do Brasil SA, the nation's No. 1 lender, jumped 2 percent, leading Friday gains in the Bovespa stock index.

The proposed plan should allow Banco do Brasil as well as Caixa Econômica Federal, the nation's largest mortgage bank, to boost loan growth at a time when the government of President Dilma Rousseff is struggling to kick-start economic growth and investment. The fiscal cost of giving the go-ahead to include deferred-tax assets in the balance sheet is almost nil.

"In general, these rules make for a more flexible framework for the implementation of Basel III," said Sergio Odilon dos Anjos, the central bank's head of regulation, at a news conference.

Shares of Banco Santander Brasil SA, perceived by many analysts as the most capitalized bank among the top five lenders in Brazil, gained 1 percent. Itaú Unibanco Holding SA and Banco Bradesco SA, the No. 1 and No. 2 private-sector lenders respectively, rose 0.7 percent and 0.4 percent on Friday.

Basel III, part of a global accord to standardize capital adequacy and liquidity risk rules in the banking industry, is scheduled to be introduced between 2013 and 2018. The regulatory framework that comprises Basel III was developed in response to perceived flaws in financial regulation that were revealed during the global financial crisis of 2008.

The central bank, Brazil's financial industry watchdog, will increase in "a gradual manner" the minimum regulatory capital ratio - or the percentage of a bank's capital to its risk-weighted assets - to between 10.5 percent and 13 percent, from 8 percent currently.

Luiz Awazu, the central bank's head of international affairs, whose office is coordinating the implementation of Basel III rules in the country, said Brazil's banking system "will have no need to raise additional capital between 2014 and 2019."

He said that, "on a bank-on-bank basis, no lender needs to raise funds between 2013 and 2015." From 2017, "just a few banks" may need to raise fresh capital, Awazu said, declining to name them.

About 2.9 billion reais of fresh capital would have to be raised by those banks in 2017, 5.1 billion reais in 2018 and 6.7 billion in 2019, he said.

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