Fitch: Resolution Law May Reduce Brazil Banks' Sovereign Support
(The following statement was released by the rating agency) NEW YORK/SAO PAULO, December 11 (Fitch) The Brazilian government is likely to approve a new bank resolution law in the coming months that could affect sovereign support-driven bank Issuer Default Ratings, Fitch Ratings says. The new resolution regime is expected to exert downward pressure on Brazil's systemically important banks' (DSIB) Support Rating Floors, which currently range from 'BB-' to 'BB+'. Senior debt ratings would also be revised should the new law establish that this class of debt ranks below unsecured deposits in the bank creditor hierarchy. A key aspect of the law will be the bail-in mechanism, which will define the hierarchy of loss absorption by each type of creditor in the event of resolution. We believe it will be broadly similar to those adopted in North America and Europe. Fitch expects the following loss absorption creditor hierarchy to be established in the case of a bank's resolution, in the following order: (i) shareholders and creditors without any type of guarantee mechanism; (ii) qualified senior investors and general depositors (ranking to be determined); (iii) a bank resolution fund (the final form of which is to be determined); and (iv) the government, which will decide whether it is necessary to inject public resources into the bank. It is not clear whether the law will create differentiation in the treatment between senior-unsecured debt and other classes of unsecured debt (such as time deposits, savings accounts, CDBs, LCAs, LCIs, etc.). Nevertheless, the Brazilian deposit insurance fund (Fundo Garantidor de Credito) will continue to guarantee general depositors (up to BRL250,000 per investor). The new law should also address other aspects of bank resolution such as the role of bridge banks (banks that will temporarily manage the assets and liabilities of problem banks); the process of defining a bank as a 'good' or a 'bad' bank; and the creation of a more competitive process for the acquisition of problem banks. Potential revision to the determination of a bank's point of non-viability (PONV) by regulators should not cause changes in the ratings of hybrid issuances. We also do not expect any type of exceptions or policies in the law that are not aligned with the recommendations of the Financial Stability Board. The new resolution regime approach is likely to reduce the probability of imposing losses on taxpayers in cases of bank failures or defaults. The introduction of a formal resolution framework will also bring more transparency to market participants and clarify when regulators can intervene and under what circumstances losses can be imposed on shareholders and bank creditors. In the past, federal assistance programs to the banking sector, namely PROER and PROES, have provided more than BRL80 billion in resources for the restructuring of public and private banks. The approval of the Fiscal Responsibility Law in 2000, made it more difficult to use public resources in such situations. The creation of the FGC in 1995 guaranteed the deposits of individual depositors within established limits and its scope expanded in 2008, providing emergency funding lines to certain banks under specific conditions. Contact: Claudio Gallina Senior Director, Financial Institutions +55 11 4504 2216 Fitch Ratings Brasil Ltda. Alameda Santos, 700 -7 andar, Cerqueira Cesar Sao Paulo Pedro Carvalho Analyst, Financial Institutions +55 21 4503 2602 Justin Patrie, CFA Fitch Wire +1 646 582 4964 33 Whitehall Street New York, NY 10004 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.