Brazil Shuts 2 Mid-Sized Banks, Raises Oversight Doubts

Brazil's central bank ordered the liquidation of Banco Cruzeiro do Sul on Friday after no one stepped up to acquire the troubled lender, raising doubts about government oversight of small- and mid-sized banks, Reuters reported. The central bank also ordered the closure of Banco Prosper, another small bank facing a liquidity crunch that Cruzeiro do Sul had agreed to take over last November. The decision follows three months of talks between Cruzeiro do Sul's creditors, investors and rival banks to cut mounting debts and find a buyer for the São Paulo-based lender. Cruzeiro do Sul was seized by the central bank in June following fraud allegations. The episode is unlikely to destabilize Brazil's banking system, although it might dent confidence in the soundness of mid-sized lenders and tarnish the central bank's credibility as a sector watchdog, analysts said. Cruzeiro had control of only 0.24 percent of the nation's banking assets and 0.33 percent of deposits. The closure also shines a spotlight on the role of Brazil's deposit guarantee fund and the way bondholders were forced to bear most losses stemming from Cruzeiro do Sul's bankruptcy. "This is an unfortunate political battle that we believe will have larger capital market consequences for small banks in Brazil," said Christina Ronac, an analyst at Gleacher & Co, a New York-based bond trader. Privately owned deposit guarantee fund FGC, which has run Cruzeiro do Sul since it was seized by the central bank in June following fraud allegations, said it was unable to find a buyer for the lender. Efforts to convince bondholders to accept a debt buyback, in which the value of their holdings would be cut by about half, also failed, FGC said. "Should the FGC ever be involved in another situation, our lesson learned is run for the exits," Ronac said. "We should have realized that the FGC wasn't going to try to maximize value." Read more.