By Eduardo Amaral Gurgel Kiss*
Until March 30, 2012, Brazilian financial institutions did not require the approval of the Brazilian Central Bank or other authorities to directly or indirectly invest in the capital stock of other legal entities either in or outside Brazil. They only needed to inform the Central Bank of their investment and divestments in other companies.
However, upon the enactment of Resolution 4,062, of March 30, 2012, the monetary authorities have established that with a few exceptions financial institutions require the prior approval of the Central Bank to invest in any company in or outside Brazil. The Central Bank has explained that the purpose of this new requirement is to reduce the systemic risks associated with those investments, to give more transparency to such investments and also to follow international recommendation particularly those of the Bank of International Settlements – BIS.
The Central Bank approval is now required for both the initial investment as well as for any increase in any existing investment.
In addition, investments can only be made in companies whose activities are compatible and/or ancillary to those of the financial institution.
When applying for the authorization it is necessary for the applicant to inform the activities of the prospective invested company, how those activities will benefit the financial institution, the synergy between the two companies and how the strategy of the financial institution is in line with the proposed investment.
The prior approval of the Central Bank is not required in the case of typical portfolio investments of development or investment banks or multiple banks authorized to perform activities of investment banks. It is also unnecessary in the case of temporary investments that are not accounted as permanent assets provided that they are made in companies whose financial statements are not consolidated with those of the financial institution.
With respect to existing investments, the Central Bank has now the authority to review them and determine the adjustments it may deem fit.
Brazilian financial system was one of the few that did not face a major setback with the 2008 financial crisis and one of recognized reasons for this is the control exercised by the Brazilian monetary authorities. So, while this new requirement might be viewed as a problem for a few bankers, the authorities believe that it will show its value in the future.
*Partner of the banking area.
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