Brazil’s central bank seized mid-sized lender Banco Cruzeiro do Sul and placed it under the administration of banking insurance deposit fund FGC for 180 days after uncovering a series of irregularities.
The central bank said in a statement on Monday that the decision followed Cruzeiro do Sul’s “breach of rules governing the financial system as well as the verification of problems in some asset items.” The seizure also involves the lender’s brokerage and securitization units.
It is the third time in the last year and a half that Brazil’s government has intervened in a bank, a sign that years of rapid growth have resulted in deteriorating funding and liquidity conditions as well as a relaxation of credit risk and accounting controls among some smaller lenders.
O Estado de S.Paulo newspaper reported on Monday that t he central bank would oust the Indio da Costa family, which controls Cruzeiro do Sul, from management after detecting fraud at the lender that led to 1.3-billion reais ($663-million) of losses. Valor Economico newspaper, citing two sources close to the situation, said the losses were due to fictitious loans.
Calls made to the mobile phones of a spokeswoman for Cruzeiro do Sul and a member of the Indio da Costa family were not immediately answered. Efforts to reach officials at Sao Paulo-based FGC early on Monday were unsuccessful.
The FGC, a fund backed exclusively by commercial banks in Brazil, also helped the central bank take over consumer lender Banco PanAmericano in November 2010.
Cruzeiro do Sul shares plummeted about 40 per cent last week, their worst weekly performance since at least September 2009, as speculation mounted among traders that talks to sell the bank were faltering.
Last Saturday, BTG Pactual, Brazil’s only listed investment bank, withdrew a bid for Cruzeiro after the Indio da Costa family said the offer was too low, according to the Estado report.
As per request of Cruzeiro do Sul, the São Paulo stock exchange suspended trading of the bank’s preferred shares, which closed Friday at 7.60 reais.
Concerns about transparency standards, slow industry consolidation and eroding profits have led many investors to shed Brazilian mid-cap bank stocks for a few months. Shares of Brazil’s mid-cap banks are down 24 percent in dollar terms since this year’s peak in March, according to the MSCI Brazil Small and Mid Financials Index.
At the core of such worries is the segment’s inefficient funding structure, in which cash flow mismatches are frequent, making mid-cap lenders vulnerable to a downturn in credit markets, analysts say.
The future of mid-sized banks is key to Brazil’s banking industry, not only because of the systemic risk their weakness could pose, but also for their ability to foster competition in a market that is becoming more concentrated in the hands of the biggest banks.
The central bank sought to allay fears of a potential risk to the stability of the financial system by calling Cruzeiro do Sul “a small lender” that had control of only 0.22 per cent of the nation’s banking assets and 0.35 per cent of deposits.
Cruzeiro do Sul reported a first-quarter loss of 57-million reais, compared with a profit of 32-million reais in the fourth quarter of 2011 and a year-earlier profit of 41-million reais.
Fears over the sector’s fragility have lingered since late last year on speculation that Cruzeiro do Sul sought support from the FGC. The bank was among several mid-sized lenders in Brazil that had already borrowed near their limit from the FGC.
“The decision won’t affect the normal flow of business of this institution,” the central bank said in the statement. “All third-party liabilities between the institution and other agents should, therefore, remain valid.”
According to the Valor report, as a result of the accounting fraud, Cruzeiro had a 400-million reais capital shortfall.