UPDATE 2-Brazil takes emergency steps to boost liquidity, bank lending hit by coronavirus

(Adds banks’ decision to extend loan payments for 60 days, quotes)

By Jamie McGeever, Marcela Ayres and Carolina Mandl

BRASILIA, March 16 (Reuters) – Brazil on Monday approved a raft of measures to combat the economic and financial damage from the coronavirus, boosting liquidity in the financial system, maintaining the flow of credit in the economy and expanding banks’ lending capacity.

The National Monetary Council CMN, Brazil’s highest economic policy body comprising the economy minister and central bank president, approved the measures after an emergency meeting.

The new steps will allow banks to offer those firms and households in good financial shape increased loans and better terms over the next six months. This could apply to up to 3.2 trillion reais ($640 billion) of loans, the central bank said.

The new rules allow banks to extend loan maturities for the next six months without requiring them to increase loan-loss provisions.

Brazil’s five biggest lenders – Banco do Brasil SA , Caixa Economica Federal, Itau Unibanco Holding SA , Banco Bradesco SA and Banco Santander Brasil SA – will comply with requests from individuals and small companies to extend loan payments for 60 days, according the banks’ lobby association Febraban.

In addition, a 56 billion reais relaxation in banks’ capital requirements could free up a potential 637 billion reais for fresh lending across the economy, the central bank said.

The central bank estimated that these measures will boost liquidity throughout Brazil’s financial system by around 135 billion reais.

“These are proactive measures, countercyclical steps which will help companies and households face the effects of COVID-19,” the central bank said in a statement. “These are measures in line with action taken by the federal government and other international financial regulators.”

The central bank said it will continue to monitor financial market and economic developments, and will not hesitate to use its full range of tools to ensure the smooth functioning of markets and the economy.

“This arsenal includes several instruments, for example … reserve requirements, currently around 400 billion reais. The $360 billion in international reserves is also a cushion that serves to ensure liquidity and smooth functioning of the foreign exchange market,” the central bank said.

The impact of the measures remained unclear.

“All actions are positive, as they will increase liquidity for individuals and companies, but it is difficult to know if banks will extend loans after this,” Ricardo Gelbaum, head of the Brazilian Association of Banks (ABBC), which represents roughly 80 small and mid-sized lenders.

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