Funding surpluses must “obligatorily” be allocated to federal public bonds
O CMN (National Monetary Council) decided this Thursday (Dec 21, 2023) that surpluses from FGC (Credit Guarantee Fund) fundraising will be obligatorily allocated to federal public bonds. The measure comes into force on March 1st, but phasing begins on July 1st of next year for companies that are not adapted to the new rules. Here's the complete resolution (PDF – 49 KB).
O Power360 anticipated that the CMN was discussing the possibility of restricting access to credit based on the FGC. He also said that there would be an escalation for the adaptation, which will be carried out until 2028. The measure goes against financial institutions that invest in higher risk assets and have an unbalanced investment portfolio in the view of the Central Bank.
The monetary authority is concerned about the way in which the amount contributed with FGC guarantee was being used by financial institutions for non-banking activities – such as investments.
Climério Pereira, head of the Resolution and Sanctioning Action Department, said that, if on July 1, 2024, any banking institution does not comply with the new rules, they will have until July 2028 to adapt.
Institutions that have greater leverage with resources raised with FGC guarantee are subject to paying an additional contribution to the fund. There is a contribution ordinary under warranty “normal”, but there is a payment additional for those who exceed leverage limits.
The BC said that this additional contribution payment has had “adverse”, which is to increase the cost of funding. “By increasing the cost, it also generates pressure to use resources in higher risk assets. Evidently, risk is part of the financial system, but the pressure for higher risk assets is always a practice that has to be analyzed carefully”said Pereira.
CHANGE IN RULE
The BC official stated that this additional contribution will continue, but when “overcome a 2nd barrier”, which will be 6 times the net equity in leverage and 80% of these guaranteed funding, the institution starts to collect the amount equivalent to this excess in federal public bonds.
The BC assesses that the measure serves to rebalance the companies' portfolio into higher and lower risk assets. In practice, growth in funding and investments by institutions will be done in a more “balanced”, according to Pereira.
The contribution additional of the FGC is already paid when the value exceeds 4 times the net asset value of leverage.”If it exceeds 6 [vezes] and, simultaneously, the concentration goes from 75% to 80% […] the equivalent amount must be invested in public bonds. Only that portion exceeding these limits”declared Pereira.
He declared that the amount does not limit the guarantee, because the bank, while having profit It is increasing wealth, the capacity of the financial institution increases. Furthermore, the allocation of resources will be risk-controlled. “Above that, it is already a disproportionate exposure between the risk and the guarantee”he declared. “It doesn’t harm growth. It continues to have fundraising capacity”he completed.
He said that there is no obligation to invest in securities for the bank, which has 79% funding and leverage above 6 times the net worth.
DISCUSSION WITH SOCIETY
Part of the financial sector saw a lack of dialogue with bank representatives, such as Febraban (Brazilian Federation of Banks) and ABBC (Brazilian Association of Banks). The biggest concern for industry players is restricting access to an important source of capital.
Pereira declared that all regulations are made “following what is happening” in the market.
The adaptation of companies that are not in compliance with the rules will be phased in from July 2024 to July 2028. There will be a formula that will be applied with a drop in 12.5% each semester (in January and July) in the excess amount of funding.
RESOLUTION
The BC said that the measure aims to strengthen the set of measures to stimulate market discipline, such as “promote financial stability by protecting smaller clients who are less able to exercise market discipline in their investment decisions and allocation of their savings”.
The BC stated that the measure does not harm the growth of institutions or competition in the financial sector, as the offer of instruments guaranteed by the FGC “will continue to be able to be expanded, without the need for allocation in federal public securities, by institutions whose performance results in an increase in their PLA (adjusted net equity) – through greater results and capital attraction – and by institutions that expand their capitations in a manner diversified, with other instruments and investments in addition to those covered by the FGC guarantee”.
The resolution also changes the limit for funding through DPGE (Time Deposit with Special Guarantee), which goes from R$2 billion to R$3 billion, with a minimum issuance value of R$1 million, with a minimum term of 6 months and maximum term of 36 months.
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