Brazilian-version of T.A.R.P. on its way…
An article at Valor Economico today announced that the Brazilian government is considering a cleaning operation of public banks by removing toxic assets from their balance sheets, a transfer of the bad loans in the banks’ portfolios to Empresa Gestora de Ativos (Asset Management Company – Emgea). There have been several meetings with the technicians at Emgea, BNDES, Caixa and the Finance Ministry to discuss the issue, which has also been taken to the boards of directors of BNDES and Banco do Nordeste. The discussion is still restricted to the technical areas of the government and the idea has emerged as a viable solution for banks to continue expanding credit at high rates.
This measure would free up resources used as provisions by banks, a sort of re-capitalization of banks. Caixa Economica, for example, has already reached limits of lending to close to those set by the Basel rules and would need a liquidity injection. In the meetings held in earlier, the Treasury was against the strategy of using Emgea. Proponents of the idea, however, are considering a solution also for BNB and BNDES and have not ruled out neither Banco do Brasil.
According to government advisors, the way this “TARP” process would work is that the bad credits would be “sold” to the Brazilian Treasury and passed on to Emgea, which would make the collection of debt, giving some relief to the financial institutions by injecting cash and make them more liquid.
Caixa Economica’s balance sheet in the first quarter shows that it is already very close to the minimum capital required according to the Basel rules. Under these rules, for every $ 100 in loans the Brazilian banks must have $ 11 in assets as a “reserve”. Caixa, at 12.8% capital ratio is close to the minimum of 11%. The Central Bank does not expect the bank to reach the limit, but it is preparing for the worse.