Recent lessons in Brazil's bank receivership process

Author: | Published: 28 Sep 2012
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In recent years, a number of Brazilian financial institutions have been placed into receivership, restructured, and then either sold or declared bankrupt. Some of the most significant examples include Banco Santos and Banco Panamericano. While Banco Santos was placed into bankruptcy, Banco Panamericano was sold to BTG Pactual. Despite the different outcome, these situations shared two features: liabilities exceeded 50% of unsecured credits, and evidence of fraud.

The most recent bank to be placed into receivership is Banco Cruzeiro do Sul, which had been operating under the so-called Temporary Special Administration Regime (Regime de Administração Especial Temporária or RAET) since June 4 2012.

The intervention, or RAET, was conducted by the Credit Guarantee Fund (Fundo Garantidor de Crédito or FGC) which is a not-for-profit civil association supported by private banks. RAET is a form of intervention adopted when the Central Bank considers that the financial institution may return to normal operating status; but this did not happen in the case of Banco Cruzeiro do Sul.

The primary purpose of the FGC is to provide credit guarantees to customers against the bankruptcy, insolvency or receivership of financial institutions. The FGC provides a protective mechanism for account-holders (including savings account-holders) and investors, allowing them to recover deposits or credits in the situations noted above, up to the limits set by the FGC statutes.

In the case of Banco Cruzeiro do Sul, FGC's main concern was to minimise its disbursements when reimbursing the losses suffered by account-holders, savings account-holders and investors. The amount reimbursable is estimated to be around R$2.2 billion ($1.09 billion). FGC intended to minimise its losses by cutting a deal with unsecured creditors, thereby reducing bank liabilities, and subsequently transferring the bank to another financial institution.

Despite a successful negotiation with creditors last September 14 and in view of the failure of the negotiations with prospective buyers, the Central Bank – following FGC`s recommendation – decided to liquidate Banco Cruzeiro do Sul.

The processing of receivership is carried out by the provisions of Law 6,204/74. Within 60 days after taking office, the receiver appointed by the Central Bank will submit a report on the institution's economic and financial condition, indicate possible illicit acts, and propose a liquidation plan. The plan must be either an extra-judicial liquidation under the control of the Central Bank (in accordance with Law 6,024/74) or a bankruptcy (in accordance with Law 11,101/05).

The Central Bank analyses the report and may either authorise the receivership to follow its ordinary course, or may authorise the receiver to submit a court petition for bankruptcy. In the case of Banco Cruzeiro do Sul, if the assets are not sufficient to cover at least half of its unsecured debts, or if there is evidence of fraud, as provided for under Article 21, b, of Law 6,024/74, the probability of bankruptcy increases.

Financial institutions are not totally excluded from the bankruptcy legal regime. If a financial institution is operating normally, upon a default any creditor may file a petition for bankruptcy against it. If, however, the institution is under the receivership of the Central Bank, as in the case of Banco Cruzeiro do Sul, a court cannot declare bankruptcy except upon request of the receiver.