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STATE OWNED FINANCIAL INSTITUTIONS Brazilian Provincial Banks Brasília, December 2005 1 Provincial banks Commercial banks and development banks. Open access to public savings. All market sources of funding. Long story of problems. In the eighties Restructuring exercises: unsuccessfully. Real Plan and monetary stability. Open difficulties in the banking system. PROER: Government Program to deal with the crisis of private banks. PROES: Government Program for provincial banks. 2 PROER (November 1995) Institutional framework to provide conditions for the purchase and sell of failing banks. Objective: to rescue depositors, investors and savings, in order to keep confidence in domestic financial system and to avoid a chain of bankruptcies. Tax payer money to close the gaps of ailing banks in order to make viable their acquisition by sound banks, domestic or foreign. There was no rescue or help to broken bankers. 3 PROES (August 1996) Objective: to support privatization or closing of provincial banks. Instrument: Central Government long term loans to States. Capitalization of provincial banks to prepare them for privatization. Orderly liquidation of provincial banks. Additional Incentive: in exchange for giving up their commercial or development banks State Governments were entitled to receive another long term loan to create Development Agencies. Development Agencies (Agências de Fomento) were a new kind of financial institution designed to support local or regional economic development. In the beginning there was also the possibility of restructuring instead of privatization or closing. If this were the case, Central Government would provide finance for 50% of the restructuring costs. 4 DEVELOPMENT AGENCIES (Agências de Fomento) Minimum capital requirement: R$ 4.000.000,00 (≈ US$ 1,800,000.00). Leverage ratio: 2,59 (maximum rate between liabilities and capital). Should keep, at least, an amount of capital equal to 30% of risk weighted assets. Liquidity fund equal to 10% of liabilities. Funding confined to Development Financial Institutions (domestic or international) and Official Resources (Fiscal Funds). In December 2002 there were 10 Agências de Fomento (one else have been authorized in 2003). 5 PROES RESULTS 21 Provincial banks disappeared 12 “Agências de Fomento” have been created and two more are to be open. PROES Costs: R$ 94 billion (as of Dec/2003) ≈ US$ 33 billion (exchange rate of R$ 2 ,845 per US$ as of Jan/2004) ≈ 6,2% of 2003 GDP. PROES Privatization Revenues: R$ 15,4 billion (as of Dec/2003) ≈ 1% of GDP or 16,4% of costs. “Agências de Fomento” respond by less than 1% of total credits of Official Financial Institutions. 6