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Fitch: Brazil Deposit Insurance Changes Neutral for Small Banks
December 22, 2017 / 2:27 PM / 25 days ago

Fitch: Brazil Deposit Insurance Changes Neutral for Small Banks

(The following statement was released by the rating agency) NEW YORK/SAO PAULO, December 22 (Fitch) Changes to Brazil's deposit insurance program (Fundo Garantidor de Credito - FGC) should not result in any immediate material change in banks' business models, risk appetite and funding costs or concentrations, says Fitch Ratings. As such, banks' credit profiles should remain unaffected in the short term. The FGC previously provided a guarantee for deposits/investments of up to BRL250,000 per financial group for individual depositors/investors without a total coverage limit per investor. The FGC has changed the deposit guarantee and now limits total coverage to BRL1,000,000 per investor/depositor regardless of the number of accounts held in different financial groups. The Brazilian central bank defined the parameters for the measure, which was recently approved by the Brazilian Monetary Council and is now in force. The measure will apply only to new investments and not for previously held deposits/investments. Limiting FGC coverage should not affect deposits at small and medium-sized banks. The rules in place until Dec. 21 allowed some investment arbitrage, which could particularly benefit small/medium-sized banks as the deposit guarantees were applied to all banks operating in Brazil regardless of its risk or rating. Of the total BRL1.0 trillion guaranteed by FGC, 99.67% were for deposits of less than BRL250,000, which the current measure will not target. Of the remainder, there are several institutional investors including large corporates, pension funds and asset managers, which normally count on specialized teams focused on risk analysis. Fitch estimates that individual high-income investors who could be affected by the measure represent less than 0.1% of the total depositor/investor base and are not significant enough to affect banks' funding costs, even if they demand higher yield for their investments. As a result, limiting total coverage per investor/depositor should not reduce the total amount guaranteed by the FGC. The move is part of a broader effort by regulators to deepen sophisticated investors' understanding of bank risks and to increase the financial education of all market participants. The limitation of the FGC guarantee could also be interpreted as in line with the bail-in proposal for domestic systemically important banks that is a part of the draft Brazilian banking resolution law, which should be approved soon. All financial institutions that raise funding through any type of FGC-guaranteed instrument - the main instruments include time, sight and saving deposits, CDBs, LCAs and LCIs - are required to contribute to the fund. Given the high banking concentration in Brazil (86% of the system's total assets are attributed to the 10 largest banks), FGC contributions are also concentrated. The current guarantee model has proven to be robust even in times of crisis. The guarantee value was increased to its current level of BRL250,000 from BRL70,000 in 2013. Expanding coverage particularly benefited smaller institutions by reducing their refinancing risks through an expanded depositor base. Contact: Claudio Gallina Senior Director Financial Institutions +55 11 4504 2216 Fitch Ratings Brasil Ltda. Alameda Santos, 700 - 7th floor Sao Paulo Pedro Carvalho Analyst Financial Institutions +55 21 4503 2602 Justin Patrie, CFA Senior Analyst Fitch Wire +1 646 582-4964 33 Whitehall Street New York, NY Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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