Defaults the largest driver of Brazil banking spreads -cenbank

BRASILIA, June 12 (Reuters) - Credit defaults have been the main factor keeping Brazilian banks from cutting interest rates to households and companies, the central bank said on Tuesday, even as benchmark rates have fallen to all-time lows.

The average cost of credit fell 1.3 percentage points in 2017 to 21.3 percent, according to a central bank report, compared with a 6.75 percentage point decline in the benchmark Selic interest rate. Spreads fell 3.8 percentage points to 18.9 percentage points.

Defaults, which reached 3.2 percent at the end of 2017 according to a widely used metric, forced banks to keep interest rates high to account for potential losses, the central bank said.

Defaults were behind an average 37.4 percent of banking spreads in 2015-2017, the largest contributor to bumping up credit costs to consumers. Other reasons were administrative expenses, taxes and financial margins, a central bank report showed.

The central bank has been struggling to reduce funding costs to average Brazilians as the economy recovers from the deepest recession in decades.

Banking spreads have remained high in Brazil despite years-long government efforts to reduce them.

In 2016, Brazil ranked among the countries with the most saturated banking sector, the central bank said, along with Australia, Canada, France, Holland and Sweden.

Yet even as banks themselves face little competition between each other, the growth of credit unions and fintech firms could potentially threaten their clout, the central bank said.

The central bank earlier this year introduced new rules for credit startups that allow peer-to-peer lending, following a string of other measures intended to foster competition. (Reporting by Bruno Federowski Editing by Jeffrey Benkoe)