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Head of Brazil's central bank defends bank bail-out bill
October 10, 2017 / 4:45 PM / 2 months ago

Head of Brazil's central bank defends bank bail-out bill

BRASILIA (Reuters) - The head of Brazil’s central bank on Tuesday defended a bill allowing the government to partially bail-out struggling banks as another step in efforts to strengthen the financial sector.

Brazil's Central Bank President Ilan Goldfajn speaks during the Progredir plan launching ceremony (Qualification, Employment and Income for Those Who Need More) in Brasilia, Brazil, September 26, 2017. REUTERS/Ueslei Marcelino

Central Bank Governor Ilan Goldfajn confirmed the plan, originally reported by local press, in an audience with the Senate’s economic affairs committee on Tuesday, stressing a bail-out would be a measure of last resort.

“We must have a plan for such occasions. If we don‘t, you all know who’s paying the bill,” he told senators.

Under current law, the central bank may intervene directly in struggling financial institutions or call for their liquidation but no taxpayer money may be used to shore them up.

Newspaper Valor Econômico said on Monday the government intended to change the current regulations. The central bank, which in Brazil is charged with bank oversight, would be allowed to choose between a variety of measures before resorting to a bail-out, according to the report.

The new rules would address long-standing demands from the nation’s banks, bringing Brazil’s regulatory framework closer to that of major developed and emerging economies.

Over the last decade, policymakers worldwide have been forced to come up with new ways to handle solvency and liquidity issues in the financial sector in the wake of the global financial crisis.

Controversy followed a string of bank bail-outs in the United States and the euro zone, which some believe led to the perception that certain institutions were too interconnected to be allowed to fail.

The planned reform is one in a string of regulatory reforms spearheaded by President Michel Temer’s administration meant to improve the business climate and foster long-term economic growth.

The moves come as Brazil emerges from its deepest recession in a century. The nation’s gross domestic product collapsed by 8 percent between the fourth quarter of 2014 and year-end 2016, helping to drive unemployment rates to an all-time high.

Goldfajn said the outlook for a gradual economic recovery has not changed since central bank policymakers last met, suggesting it is still on track to reducing the pace of interest rate cuts.

Improved consumer spending and newfound strength in the labor market have led several economists to raise their growth estimates in recent weeks, though inflation remains near 18-year lows. Goldfajn said he expected a pickup in investments to be the next step in generating sustainable growth.

Reporting by Marcela Ayres; Writing by Bruno Federowski; Editing by W Simon and Chris Reese

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