Reuters: Regulatory News: UPDATE 1-Brazil allows banks to use tax credits as capital during crises

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UPDATE 1-Brazil allows banks to use tax credits as capital during crises Mar 1st 2013, 17:00 Fri Mar 1, 2013 12:00pm 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 local implementation of Basel III rules, central bank and finance ministry officials said on Friday that the banking system appeared to have plenty of capital for the next two years. The local notes that will be eligible for conversion into stock are the so-called "letras financeiras" that comprise both debt and equity-like features. Banks will be allowed 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 permitting the use of deferred-tax assets as capital 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. GRADUAL RATIO INCREASE Earlier on Friday, the government reported that gross domestic product rose 0.9 percent last year, a disappointing performance following last decade's boom. Rousseff has used state banks to boost credit and lower borrowing costs, seeking to revive an economy that is entering its third year of sub-par growth "The measures announced by the government today regarding the implementation of Basel III are concomitant with the country's new reality to foster investment and credit growth in the long run," Luiz Carlos Trabuco, chief executive of Bradesco, said in a statement. 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. Link this Share this Digg this Email Reprints

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