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A man walks down the hall of the Cruzeiro do Sul bank in Rio de Janeiro June 4, 2012. 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.RICARDO MORAES/Reuters

Brazil's easy money policies have squeezed yet another of its banking weaklings. The country's central bank seized consumer lender Banco Cruzeiro do Sul on Monday for "serious" financial violations. The episode serves as another example of a bank losing its way in Brazil's lending frenzy.

The economy still looks pretty sound overall. Unemployment isn't rising and household debt, at 49 per cent of income, is better than that of the United States, for example. But thanks in part to government spending and monetary easing, loans are still growing at an alarming rate of 20 per cent a year – five percentage points higher than in China. And non-performing consumer loans rose nearly one percentage point to 7.8 per cent last year.

The big four banks seem to be managing this okay. It's the mid-size lenders who appear to have gotten ahead of themselves. True, Brazilian press reports that Cruzeiro's $637-million (U.S.) loss may have been the result of fraud adds a new wrinkle. But it looks like a badly run bank, regardless.

Its problem loans jumped sixfold in 2011 to 2.9 per cent of all loans – far faster than giant Itau Unibanco's, which rose by around a tenth. And along with other mid-size lenders in Brazil – and many global finance houses in the runup to the 2007-08 crisis – Cruzeiro was too reliant on less stable forms of funding. It met a quarter of its needs last year by selling loans into the securitization market. Another 25 per cent came from selling debt to international investors.

As its funding options diminished, Cruzeiro was forced last October to tap the central bank for a $1.7-billion emergency line of credit, backed by loans. That's almost a third of its total assets.

Cruzeiro's decline continued, so the central bank tried to broker a sale to billionaire Andre Esteves's BTG Pactual. But Mr. Esteves, who bought troubled Banco PanAmericano in January, 2011, begged off last week.

For now, Cruzeiro do Sul is being administered by the FGC, Brazil's deposit insurance fund. Like its U.S. counterpart, the FDIC, it is funded by levies on banks. But it had to plow $5-billion into bailing out three other lenders that failed in the past 18 months. If these banks' woes spread, whether through fraud or not, the FGC could be a lot busier.