* Central bank finishing details of new banking legislation
* Bill aims to avoid massive bailouts of United States and
By Alonso Soto
BRASILIA, May 6 The Brazilian government,
concerned about systemic risk in the rapid growth of banking
assets, will propose legislation to make shareholders,
bondholders and depositors pay for rescuing troubled banks and
shield taxpayers from the cost of bailouts.
Central Bank President Alexandre Tombini told a banking
seminar on Monday that the legislation aims to mitigate "moral
hazard" by forcing banks to assume full responsibility for their
losses in what is known as a "bail-in." It was applied in Cyprus
to stop a run on the banks and Canada is also considering rules
to deal with potential bank failures.
In the case of Brazil, the proposed bill underscores
mounting unease among regulators with the rapid pace of growth
of banking assets in Latin America's largest economy in recent
years. Some banks might be "too big too fail" in Brazil, and the
need to discourage irresponsible behavior could be higher now
than before as state-run lenders expand their balance sheets
three times the pace of their private-sector peers.
The proposed legislation still has to be reviewed by several
cabinet ministries before being sent to Congress.
Tombini said that while Brazil's banks are solid and
currently have the necessary capital to pay for credit-related
losses, the legislation would call for large, uninsured
depositors to help bolster the capital of ailing banks.
"One key goal here is to ensure financial stability and
mitigate any negative externalities stemming from a credit event
on the real economy, making sure the infrastructure of the
financial system continues to function," Tombini said.
In recent months, loan delinquencies in Brazil have fallen
from record highs after year-long approach by private banks such
as Itaú Unibanco Holding SA and Banco Bradesco SA
to avoid riskier loans. On the other hand,
state-owned banks like Banco do Brasil SA and Caixa
Economica Federal have raised lending to help President
Dilma Rousseff's administration improve a slow economic
The discussion about "bail-in" measures comes after
governments in Europe and the United States rescued dozens of
troubled banks with taxpayers' money in the aftermath of the
global financial crisis of 2008. Critics said those banks should
have been held more accountable for their risky business.
The European Union is also discussing proposals for
shareholders and some depositors to take on losses of failed
banks, following decisions in Cyprus for depositors to take
losses in return for an international bailout.
Some economists have said that bail-in schemes could lead
depositors to stay away from the financial system or simply deal
with the safest institutions, shunning small banks and hampering