On July 26, 2012 the Brazilian Monetary Council (Conselho Monetário Nacional – CMN), through CMN Resolution No. 4115 (CMN Res. 4115/2012), amended CMN Resolution No. 4087, of May 24, 2012 (CMN Res. 4087/2012), which deals with the bylaws and regulation of the Brazilian Credit Guarantee Fund (Fundo Garantidor de Crédito – FGC), and changed and consolidated the rules on raising Time Deposits with Special Guarantee (Depósitos a Prazo com Garantia Especial – DPGE) of FGC.
The DPGE is one of the main funds´ raising instruments used by small and medium size banks in Brazil. The new DPGE not only ensures the liquidity of these banks as well as it brings a major relief to FGC.
FGC is a private institution responsible for the protection of checking/saving account holders and investors against financial institutions in case of intervention, liquidation or bankruptcy. The public policy objective of FGC are: (i) to protect depositors and investors under the financial system up to the limits set forth by regulation; (ii) to contribute to maintenance of the stability of the Brazilian Financial System; and (iii) to contribute to the prevention of systemic banking crises.
The members of FGC are the financial institutions operating in the country that: (a) receive demand deposits, deposits in current account for investments, saving account deposits and time deposits; (b) accept bills of exchange; (c) raise funds by issuing and placing real estate bills, mortgage bills and real estate credit bills; and (d) raise funds by compromised operations linked to securities issued by associated companies. This comprises the following entities: multiple banks, commercial banks, investment banks development banks, the Federal Savings Bank (Caixa Econômica Federal – CEF), credit, financing and investment companies, real estate credit companies and savings and loan associations.
Under the current regulation the limit of value guaranteed by FGC per institution is R$ 70 thousand for each deposit holder or investor1, regardless of the total value and distribution of the deposit and investment. In the case of the DPGE, the guarantee of FGC is limited to R$ 20 million, including principal and interest amounts by investor in each institution (or group of entities belonging to the same financial conglomerate). These limits have been maintained by CMN Res. 4115/2012.
With the changes introduced by CMN Res. 4115/2012, now a financial institution can issue a new modality of DPGE with fiduciary alienation of receivables (alienação fiduciária de recebíveis) of the issuer in favor of FGC, hereinafter referred to as DPGE II, as opposed to the traditional DPGE (without fiduciary alienation of receivables), hereinafter referred to as DPGE I. With the creation of DPGE II the issuing banks will have to give collateral to FGC in the form of credit portfolios (the fiduciary alienation of receivables)2. If the issuing institution enters into financial difficulties, FGC can sell the credits given in guarantee to pay the DPGE II purchased by the investors. In practice the new system eliminates the guarantee of FGC since the guarantee will be given by the issuing bank´s credit portfolio. This makes the system healthier because it enables the financial institutions to raise funds and at the same time takes a risk of FGC.
The fiduciary alienation of receivables reduces the risk to FGC. Consequently the contribution due to FGC by the financial institution that issues DPGE II is only 0.3% per year calculated on the volume of secured time deposits. This rate is lower if compared to the 1% per year contribution which is required in the case of unsecured time deposits (DPGE I).
Initially the limit of DPGE II was set at an amount equivalent to the Level I Reference Equity (Patrimônio de Referência – PR) of the issuing institution3. This limit will prevail until December 31, 2012, when it will be raised at a rate of 0.2% per year until it reaches an amount equivalent to twice the Level I PR as from January 1, 2017.
From now on, the limit for raising funds through the issue of DPGE I (without fiduciary alienation in favor of FGC) will be reduced at a rate of 0.20% per year, until January 1, 2016, when it will be completely prohibited. Therefore, DPGE I can be issued by December 31, 2015 and as from January 1, 2016 only issues of DPGE II will be admitted.
For the time being, financial institutions can continue issuing DPGE I as long as there is available limit. However, this modality of fund raising must be immediately stopped when the institution issues DPGE II.
For depositor holders and investors there is no change. The amount of their claims against the set of institutions belonging to the same financial conglomerate, resulting from the sum of the two modalities of time deposit which will continue to exist (DPGE I and DPGE II), remains guaranteed by the FGC in up to R$ 20 million under the same hypothesis and conditions currently in force. The ordinary guarantee of R$ 70 thousand given by FGC to each deposit holder and investor also follows without any modification whatsoever.
In addition to the guarantees which are required from the issuing institution, DPGE II has a different maturity term from DPGE I. The maturity term of DPGE I vary between two and five years. DPGE II has a lower term from one to three years. The change in maturity was made to better fit the terms of the banks´ portfolios, avoiding mismatch and the need for replacement of assets pledged as collateral prior to the expiration of DPGE II.
At the beginning only those institutions that operate with payroll loans (crédito consignado) and auto financing (financiamento de veículos) will benefit from DPGE II but soon FGC should also extend this possibility to short term portfolios (up to 30 days). It is expected that the first issues of DPGE II will be authorized in September of 2012 and that this source of funding will make the management of assets and liabilities easier for the Brazilian small and medium size banks.
1 Spouses are considered separately whatever their marital law, so each one will receive up to the maximum value of R$ 70 thousand. The same principle applies to dependants.
2 FGC is the leading provider of liquidity of the smaller financial institutions since the international crisis of 2008 and, according to CETIP, today FGC guarantees R$ 26 billion DPGEs that were purchased by investors. The volume is equivalent to 85% of the total equity of FGC, which corresponds to R$ 31 billion. If any issuing bank becomes insolvent, FGC is responsible for pay those investors up to the limit of R$ 20 million per investor.
3 For example, for every R$ 100 million of issued DPGE II, the issuing institution shall deliver to FGC the fiduciary alienation of receivables in the amount of credit operations of approximately R$ 120 million. FGC will only give go-ahead for CETIP to authorize the issuance of DPGE II by the financial institution up to this limit of R$ 100 million after the delivery and acceptance of the corresponding guarantees totaling R$ 120 million.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.