July 16, 2012 / 12:42 PM / 5 years ago

Brazil central bank mulls aid to mid-size banks

* Central bank mulls aid to banks, Estado says

* Aid aims to boost funding for mid-cap banks

* Central bank did not have immediate comment

SAO PAULO, July 16 (Reuters) - The Brazilian central bank, concerned by a deepening scarcity of funding for small- and mid-sized lenders, is considering creating a fund to invest in sales of loan-backed receivables, O Estado de S. Paulo newspaper reported on Monday.

So-called mid-cap banks are responsible for about 220 billion reais ($108 billion) in loans, or about 10 percent of Brazil's total outstanding lending, the report said. Banks in that segment are facing a dearth of funding in the wake of the central bank's seizure of Banco Cruzeiro do Sul for alleged accounting irregularities.

Among some of the measures to untie funding in the mid-cap segment is the creation of an investment vehicle that would buy debt from those banks backed by their own loans, Estado reported, citing one source familiar with the situation. The central bank declined to immediately comment on the report.

The investment vehicle would buy shares in loans receivable-backed funds, which could help funnel money directly into mid-cap banks, in turn fueling available credit at those institutions, Estado added. Banks are rapidly scaling back loan disbursements in order to preserve capital, the newspaper said, citing an industry executive who declined to be quoted by name.

Years of rapid credit expansion in Brazil have resulted in tougher funding and liquidity conditions as well as a relaxation of risk assessment and auditing controls among smaller lenders. Assets at mid-cap banks tripled since 2006 at the expense of eroding solvency.

More problems may surface if authorities take no steps to fix the segment's inefficient funding structure, in which cash flow mismatches are frequent, analysts said. Furthermore, the central bank's decision to place Cruzeiro do Sul under the administration of privately owned deposit guarantee fund FGC further damaged what little trust market participants had in the segment's accounting practices.

Funds in asset-backed receivables are known as FIDCs in Brazil. FIDCs have become a key source of funding for mid-cap lenders that have no infrastructure to draw massive deposits from savers. Banks use money from the securitizations to originate new loans.

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