Banco de Brasília SA, known as BRB, is in a tight spot. The bank suffered significant damage after a failed lender called Banco Master left big gaps in its finances. Brazil's central bank shut down Banco Master in November due to fraud allegations, and BRB reckons it inherited approximately 22 billion reais worth of assets from the bankrupt institution, some of which are now believed to be fraudulent.
To fix things, BRB's owner - Brasília's city government, the capital of Brazil - came up with a plan. The country's deposit insurance fund, the FGC, would lend 6.6 billion reais (roughly $1.3 billion) to the city government, which would then pump that money into BRB. A group of public and private financial institutions would guarantee the loan, using federal revenue that gets sent to Brasília as collateral.
Here is where the trouble starts. Private banks in that syndicate are raising concerns about legal risks. According to sources, the private banks in the group have expressed worries about potential legal complications tied to the collateral.
Laws that permit the government to confiscate federal revenue if a default occurs could be deemed invalid for these private lenders. The result is a standoff that puts the whole rescue plan in question.
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Recently, Standard & Poor's downgraded BRB's short-term issuer credit rating to brCCC+/brC from brB-/brB and projects the bank requires 6 billion to 8 billion reais in new capital.
Beyond the capital shortage, BRB revealed a further obstacle: negotiations with Quadra Capital to offload a 15-billion-real portfolio inherited from Banco Master collapsed. In a statement released at the time, BRB explained, "The decision to discontinue the talks resulted from differences over the economic and financial terms the bank considered appropriate for the transaction."
Last week, BRB CEO Nelson Antonio de Souza stated the bank maintains sufficient liquidity to continue operations as it pursues another agreement to dispose of those assets. The bank itself says talks about the rescue are "ongoing, with the necessary procedures and assessments for its implementation continuing." Furthermore, BRB says it "remains confident" that the initiatives designed to enhance its capital will be carried out.
Standard & Poor's warned that "schedule slippage or insufficient resources to absorb losses could increase the risk of the institution's liquidation."
BRB is a key financial institution for the federal district, serving as the official bank for the capital's government and many public employees. Its collapse would severely impact the local economy and could trigger a crisis of confidence in other regional banks. The rescue loan from the FGC, funded by contributions from all Brazilian banks, is designed to prevent contagion. However, the legal standoff with private lenders threatens to unravel the plan, leaving BRB in a precarious position.
Negotiators are now exploring alternatives. One idea being discussed is having public banks guarantee the loan for their private peers, which could get around the collateral concerns. According to sources, the discussions continue without any final determination yet.
Standard & Poor's summed it up in a May 27 report, saying the outcome will "hinge on a complex structuring process subject to market conditions, state-sourced funding flows, and institutional dynamics."
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