Monday, June 11, 2007

Central Bank of Brazil: Measures for Commercial Banks

The Brazilian Central Bank changed the requirements for commercial banks to operate in the FX market. In brief, two of the three measures tend to increase the requirements for commercial banks willing to operate in the FX markets.

The first measure reduces (from 60% to 30% of their net worth) the maximum limit for commercial banks to operate with foreign currencies. For example, the measure implies that a commercial bank with net worth of R$100 can be leveraged (exposed) up to R$30. In other words, the Central Bank is mainly going back to the ceiling in practice until December/06.

The second measure increases the capital requirements on FX exposition to 100% from 50% with respect to the net worth. In turn, commercial banks will have to R$100 in order to acquire any exposition in the exchange rate market (purchase or selling of foreign exchange in the forward market).

The third measure changes the way the Central Bank accounts for commercial banks with branches in other countries and their FX operations. Until now, whenever a commercial bank sent funds to one of its branches abroad, the monetary authority did not take into account the eventual losses or gains accrued by the commercial bank. These losses and gains now will be reported by Central Bank accounting with the commercial banks.

The two measures are clearly restricting the FX operations and the amount of FX exposition banks. It is clear that these measures intend to prevent a further appreciation of the BRL. It seems that the monetary authority is signaling that an important pressure comes from the future markets and that these measures may act towards a depreciation of the BRL.

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