Brazil central bank tackles cost of credit with new rules

BRASILIA/SAO PAULO (Reuters) - Brazil’s central bank on Wednesday announced a raft of new banking rules aimed at bringing down some of the world’s highest interest rates by increasing liquidity, reducing funding costs and fostering competition in the financial system.

Addressing a longstanding demand from banks, the central bank eased reserve requirements on savings and checking accounts in a move to free up some 25.7 billion reais ($7.7 billion) for new lending.

The central bank said the changes, taking effect between late April and early May, would return reserve requirements on savings accounts to levels last seen before the 2008 global financial crisis. Reserve requirements on checking accounts will fall to 25 percent, from 40 percent currently.

A concentrated banking sector and a history of rampant inflation and defaults have long pushed up borrowing costs in Brazil, where interest rates average more than 300 percent for unpaid credit card bills.

Analysts said the additional liquidity should bring down some interest rates, but they questioned whether lending would pick up significantly amid a sluggish recovery from Brazil’s harshest recession in decades.

“Demand for credit is still weak, especially on the part of companies, and it would be tough to see a really big change even with an eventual drop in (interest) rates,” said Roberto Padovani, chief economist at Banco Votorantim.

Central Bank Director Otávio Damaso told a news conference that the measures created conditions for banks to reduce interest rates on loans, without mentioning specific targets.

In a note to clients, Credit Suisse analysts estimated that the extra liquidity could increase earnings at Brazil’s largest banks by 0.7 percent to 2.4 percent.

The central bank also defined rules for banks to issue covered bonds, a kind of deposit that could boost mortgage lending by reducing funding costs.

Another front in the central bank’s effort to bring down borrowing costs was boosting competition in Brazil’s increasingly concentrated banking sector.

Officials rolled out a new set of rules allowing smaller financial companies to access services provided by banks, such as automatic debit and transfers between institutions. Financial technology startups, known as fintechs, have pushed for such changes a market dominated by a half dozen banks.

Last week, Brazilian antitrust watchdog Cade said it would investigate anticompetitive practices by the country’s banks following a complaint by Nubank, the biggest fintech in Brazil.

($1 = 3.32 reais)

Reporting by Marcela Ayres and Carolina Mandl; Additional reporting by Aluisio Alves and Paula Laier; Writing by Carolina Mandl; Editing by James Dalgleish and Cynthia Osterman