Brazil proposes central bank bill for financial companies

Brazil’s government sent Congress a bill designed by the central bank to regulate financial firms during a banking crisis that mandates the use of public money for bail-outs, but only as a last resort.

If approved, the bill would create two new mechanisms that would dictate how different financial firms would be treated.

The first - the so-called Stabilization Regime - is aimed at larger banks that pose a risk to the country’s banking system, but will require specific secondary legislation to dictate how firms are chosen.

The second, known as the Compulsory Settlement Regime, would be aimed at smaller entities and focus on removing the company’s senior managers and board. The company and shareholders’ money would be prioritized in the case of any losses.

Failing that, losses would aim to be covered by the industry itself, with contributions from other banks to an emergency fund known as the Credit Guarantee Fund.

Only as a last resort would the government step in and provide a publicly funded bail-out, according to the bill.

Brazil’s Fiscal Responsibility Law currently bars the government from bailing out banks, although specific laws can be passed during times of financial crisis to circumvent the law and provide public assistance.

The latest bill aims to modernize the Brazilian government’s actions during a banking crisis and place greater responsibility on the banks themselves to cover their losses, meaning less of a burden on Brazilian taxpayers, said Climerio Leite Pereira, the head of the central bank’s resolution and sanctions department.

Brazil’s government does not have an alternative proposal for the privatization of power holding company Centrais Eletricas Brasileiras, which appears headed for rejection in the Senate, according to two people with knowledge of the matter.

Last week, Senate President Davi Alcolumbre said the bill proposed by the government for the privatization of Eletrobras, as the company is known, will not be approved by senators due to resistance from the Northeastern and Northern regions. The power holding company controls nearly a third of power generation and around half of all power transmission in Brazil.

The privatization bill was sent by President Jair Bolsonaro’s government to Congress last month. But Alcolumbre said senators from the Northeastern and Northern regions are against the privatization model. Brazil’s government proposes to privatize Eletrobras through a share issuance that would dilute the government’s controlling stake.

The vote on the Eletrobras bill is not yet scheduled.

The proceeds of the share issuance would be used by Eletrobras to pay the federal government to extend the licenses to operate most of its power generation assets.

Government sources said there is no alternative plan and that Bolsonaro’s government will try to convince Congress to approve the current version of the bill.

The privatizstion of Eletrobras has been under discussion since the government of former President Michel Temer, who left office at the end of last year. The impending privatisation has contributed to a 51% rise of its preferred shares over the last 12 months.

Meanwhile, Latin America stocks and currencies were looking to close the final week of the year with gains as cooling trade tensions drove demand in thin Christmas Eve trading.

With markets in Brazil and Argentina closed and a light economic calendar, analysts do not expect any significant moves in emerging market assets, with low trading volumes.

Mexico’s peso edged lower against the dollar as data showed Latin America’s No. 2 economy contracted in October from September in seasonally adjusted terms, marking a poor fourth quarter start after nine months of stagnation. Consumer prices fell short of the Mexican central bank’s 3% inflation target in the first half of December, a report on Monday showed, raising the chances of further monetary easing.

“The Mexican economy is still not taking off ... One of the challenges of the Mexican government will be to reactivate local and foreign investment in infrastructure projects,” Alfonso Esparza, currency analyst at OANDA, said. The Mexican peso has outperformed other currencies in the region this year, with the trade-sensitive currency’s December gains supported by the US House approval of new North American trade deal and an initial US-China trade pact.

Reuters