The Central Bank of Brazil’s (BCB) Board of Governors has defined strategic guidelines for enhancing its Liquidity Assistance Framework (AFL), with the objectives of increasing market efficiency, enhancing access to liquidity, and shrinking the structural level of reserve requirements. The action is within the ‘Agenda BC# Competitiveness Dimension’.
There will be two new liquidity lines: a short-time standing facility, which will accept securities issued by private entities as eligible collateral—in addition to the already accepted government securities; and a longer term facility, in which the BCB will use more discretion in providing emergency funds for temporary liquidity needs. Based on the pricing and risk mitigation analysis related to collateral, credit limits will be set.
In the initial phase, two asset classes of corporate debt will be eligible as collateral: commercial paper (‘notas promissórias comerciais’) and corporate bonds (‘debentures’), whose estimated potential outstanding is about BRL40 billion in bank portfolios and BRL126 billion in investment fund portfolios, as of late July 2019.
The definition of other classes of assets as eligible collateral is expected to take place after the implementation of the new lines in 2021, with the conclusion of the following actions: development of pricing tools and haircuts, interaction with Financial Market Infrastructures (FMIs) and market participants for operational specifications, development of internal IT systems, regulation, and approval of systems.
Efficiency, competitiveness and international responsiveness
The inclusion of private securities as eligible assets to access BCB’s liquidity assistance has also the potential to increase the efficiency of the money market and to further develop the Brazilian capital markets—by reducing costs and increasing its domestic and global competitiveness. Furthermore, expanding the list of suitable collaterals will increase potential access to liquidity, contributing to the BCB’s institutional mission of ensuring a solid and efficient financial system. Effectively, the enlarged list will also allow the structural reduction of reserve requirements balances without weakening the stability of the National Financial System.
The new facilities, when operational, will increase the robustness of the financial system’s safety net (an international recommendation). Therefore, the BCB’s capability to respond to international initiatives on global financial stability should be broadened, particularly with regards to resolution and liquidity support to global systemically important institutions (G-SIBs).