The Central Bank (BC) reduced compulsory deposits and announced a line of loans to financial institutions this morning (23). The decision is part of the set of actions adopted by the BC to minimize the effects of the coronavirus (Covid-19) on the Brazilian economy.
The BC reduced the reserve requirement rate on time deposits from 25% to 17%. According to the BC, the measure is temporary. "The measure has the objective of increasing the liquidity of the National Financial System". The reduction in reserve requirements, resources that banks are obliged to leave deposited with the BC, can lead to the injection of up to R $ 68 billion in the economy, as of the 30th of this month.
"On December 14, if the economy has gone through the Covid-19 pandemic, the compulsory rate on term resources will be restored to the previous level of 25%", says the BC, in a note.
The BC also announced that the National Monetary Council (CMN) authorized it to grant loans to financial institutions guaranteed in debentures acquired between March 23 and April 30, 2020. According to the BC, it is a Special Temporary Liquidity Line (LTEL) .
"The purpose of the line is to provide liquidity to the secondary corporate debt market, which is strongly affected by the recent turmoil in the international and national financial markets, as a result of the effects of the spread of the Coronavirus (COVID-19)".
In addition to the debentures, the BC will maintain, as an additional guarantee, the bank's reserve requirements in the same amount of the transaction.
"With the measure, the BC expects to increase liquidity in the secondary private debt market, minimizing the effects of the crisis on the capital market," he said.
“The adoption of special liquidity lines backed by private debt securities has been an instrument widely used by the main BCs in the world in response to the crisis caused by the spread of the Coronavirus (Covid-19), within their frameworks and competence”, concluded the BC, in a note.
The BC also reported that "the uncertainties caused by the global health crisis on the economy have increased risk aversion and may have a negative effect on the raising of funds by financial institutions". “To reinforce the capacity to respond to the regular functioning of the National Financial System (SFN), the National Monetary Council (CMN) today approved Resolution No. 4,785, which authorizes the taking of Time Deposits with a Special Guarantee from the Credit Guarantee Fund (FGC) ) ”.
“Known in the market as DPGE1, this term deposit method is guaranteed by the FGC up to the limit of R $ 20 million per holder and was an instrument successfully used to provide liquidity to the market at the time of stress caused by the effects of the 2008 global crisis in Brazil".