June 5, 2012 / 8:07 PM / 5 years ago

UPDATE 2-Brazil small banks strong, capital adequate -Tombini

* Tombini says system solid despite bank takeover

* Does not rule out sale of Cruzeiro do Sul to a rival

* Default rates to fall in second half of the year (Adds Tombini’s comments, background)

By Tiago Pariz

BRASILIA, June 5 (Reuters) - Small and mid-size banks in Brazil are solid and have adequate capital levels, central bank chief Alexandre Tombini said on Tu esday, a day after the authority seized a mid-sized lender over irregularities.

The central bank on Monday took over control of Banco Cruzeiro do Sul and placed it under the administration of banking deposit fund FGC for 180 days.

The latest intervention was seen by some analysts as a sign that years of rapid growth have resulted in deteriorating funding and liquidity, as well as a relaxation of credit risk and accounting controls among some smaller lenders.

“The small and mid-size banks system, despite the recent episode (Cruzeiro do Sul intervention)... is sound,” Tombini told lawmakers at a congressional hearing in Brasilia.

He added that the sale of Cruzeiro do Sul to a rival has not been ruled out.

The U.S.-trained economist reiterated that he expects banks’ default rates to start to fall in the second half of the year as the economy picks up speed.

The Brazilian government has been trying to stimulate domestic consumption to make up for weaker external markets and to ensure Latin America’s largest economy grows at a faster rate than the 2.7 percent recorded last year.

But rising bank default rates have become an obstacle for the expansion of credit in Brazil, one of the means through which the government hopes to spur spending. In the first quarter, Brazil’s economy grew only 0.2 percent compared with the final three months of 2011.

The central bank cut its benchmark interest rate to a record low of 8.50 percent last week in a bid to revive the economy.

Adding to the perception that additional interest rate cuts will follow, Tombini said Brazil’s IPCA consumer inflation index will decline in May, after a 0.64 percent reading in April.

He added that the recent weakening of the real , which has lost about 16 percent since late February, remains in line with a global appreciation of the dollar against major currencies. (Additional reporting by Alonso Soto; Writing by Alonso Soto and Walter Brandimarte; Editing by Chizu Nomiyama and Dan Grebler)

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