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Brazil’s central bank seized mid-sized lender Banco Cruzeiro do Sul in September. Banco BVA SA was seized on Friday, the latest sign of strain in the sector.RICARDO MORAES/Reuters

Brazil's central bank seized Banco BVA SA on Friday, the latest sign of strain facing the nation's small-sized lenders following years of fast credit-fueled growth.

Deteriorating financing conditions and a breach of regulations at the Rio de Janeiro-based lender were cited as the main reasons behind the decision, the central bank said in a statement. Banco BVA had in recent weeks been at the centre of speculation over a potential collapse.

The episode is unlikely to destabilize Brazil's banking system as a whole, although it might dent confidence in the soundness of small-sized lenders, analysts said. Banco BVA had control of only 0.17 per cent of the nation's banking assets and 0.24 per cent of deposits.

A senior government source with direct knowledge of the decision told Reuters on Friday that controlling shareholders failed to inject 1-billion reais ($495-million U.S.) needed to shore up the bank's capital base. Both the central bank and government policy makers unsuccessfully sought a buyer for the bank or its assets, said the source, who declined to be identified because of the sensitivity of the issue.

"The bank's controlling bloc failed to meet the requirements for a capital injection, sought the deposit guarantee fund for help but didn't succeed," the source added. "As a result, liquidity suffered dramatically – the bank had very few liquid assets to monetize."

According to Robert Stoll, head of the unit that oversees Latin American financial institutions at credit ratings company Fitch Ratings, the Banco BVA episode "should not be viewed as a systematic problem, but as an isolated event from which we expect no ripples."

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. Problems have been more evident at lenders specializing in consumer credit such as payroll-deductible and auto loans – markets in which BVA does not operate.

Banco BVA's seizure is the fifth bank intervention in about two years. The central bank pledged to "continue to take all necessary measures to assess responsibility within its legal power," according to the statement.

In September, the central bank seized mid-sized Banco Cruzeiro do Sul and smaller lender Banco Prosper, the biggest collapse of a financial institution since Banco Santos was shuttered in 2005. Banco PanAmericano was shuttered in November 2010 and small lender Banco Morada followed suit a few months later.

"The central bank is doing its job by intervening, while the regulators seek to discover the full details and which measures will be taken going forward," Fitch's Mr. Stoll said.

Banco BVA's 9.125-per-cent bond due in February 2014 last traded on Monday, when the yield jumped to about 22 per cent. The firm sold $45-million of that security, which seldom changes hands in the bond markets, in September last year.

Small and mid-sized lenders have struggled to comply with central bank regulations over the past year that are aimed at enhancing oversight of banks.

Assets at small- and medium-sized banks tripled since 2006 while solvency eroded. As demand for lending remained firm, banks in the segment embarked on ambitious growth plans that are to blame for their current capital shortfalls, analysts said.

Banco BVA, 70-per-cent owned by founder Jose Augusto dos Santos and 30-per-cent owned by financier Ivo Lodo, had a capital shortfall of 580-million reais when the central bank intervened. The bank had not presented financial statements so far this year – a fact that fanned speculation over its health, analysts said.

Last year, the lender reported a surge of 33 per cent in total assets to 6.7-billion reais, of which 67 per cent were loans. By the end of last year, BVA had 403 employees.

"The story of BVA is no different from that of some of its peers in the banking system: used too much leverage for growth, ramped up lending and when the time came to up provisions to cover for bad loans, it had no cash," said Jose Miguel Santacreu, an analyst with local ratings company Austin Rating.

The central bank said in the statement that the assets of BVA's controlling shareholders will remain frozen during the process of intervention.