Brazil’s central bank seized control of Banco BVA S.A, a small Rio de Janeiro based bank, due to the bank’s deteriorating financial situation and lack of compliance with banking regulations. It is the third such intervention in four months as rising defaults and more restrictive regulation put pressure on smaller banks. It is reported to be the seventh small and midsized lender to be subject to an intervention over the past two years as result of the financial difficulties.

Impact on country risk

The problems faced by a number of smaller banks in Brazil do not threaten the country’s financial stability given their limited size. The growth of credit to the private sector has expanded rapidly over the past several years. This credit boom was largely financed by domestic funding (bank deposits), which mitigates the risk of financial instability. Nevertheless, the importance of external funding is increasing though it remains so far smaller than other funding sources. The recent credit boom in Brazil reflects the process of financial deepening but also an increase in private sector leverage. Even if non-performing loans are on the rise, the situation in Brazil’s largest banks is under control for the moment as financial soundness indicators are robust and financial supervision is strong. As a result, ONDD’s classifications will  remain  stable.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com