(Rewrites with central bank director comments, background on banking industry)
By Guillermo Parra-Bernal and Marcela Ayres
SAO PAULO/BRASILIA, Oct 1 (Reuters) - Fallout from Brazil’s biggest corruption scandal and the impact of a currency slump on bank balance sheets require “special attention” from regulators, the country’s central bank said on Thursday, potentially a warning sign that market turmoil in Latin America’s largest economy could escalate.
Nevertheless, the country’s banking system remains highly resilient to an adverse credit event, even under “the most extreme hypotheses,” the central bank said in its semi-annual financial stability report.
According to a series of simulation exercises, the bank found that the country’s banking system could absorb massive default-related losses, at the cost of a decline in profitability.
Lenders in Brazil are mitigating the risk of growing interdependence between engineering firms, suppliers and services companies involved in the so-called “Operation Car Wash” scandal by lending more prudently and increasing requirements that additional guarantees be placed, the report said.
Banks are also ready to withstand additional shocks such as sudden swings in currency and interest rates, or pronounced decline in property assets and borrower creditworthiness, the report said. The findings come as Brazil’s economy braces for two straight annual contractions for the first time in 80 years.
Debt refinancing and hedging costs after a slump in the Brazilian real skyrocketed the cost of borrowing in dollars for the nation’s companies. The real is the world’s worst-performing major currency this year.
Some of Brazil’s largest lenders have been struggling this year with the impact of “Car Wash,” an investigation that began early last year and found that engineering firms and other suppliers paid bribes to executives at state-controlled firms such as Petróleo Brasileiro SA.
The scandal led to a number of large firms seeking bankruptcy protection and has President Dilma Rousseff’s administration facing a grave political crisis.
“Our assessment shows that the system has very large capacity to absorb any potential shortfalls, and I‘m not here trying to play down nor minimizing the impact of this situation,” Anthero Meirelles, the central bank director in charge of oversight, said at a news conference.
His remarks come as banks are having a harder time predicting trends in defaults amid an uncertain outlook for some industries and policies to revive the economy. Defaults have risen for two straight quarters, offsetting the benefits of rising borrowing costs and prudent loan-loss provisioning policies.
Defaults may climb further this year, Meirelles added. (Editing by Chizu Nomiyama and Bill Rigby)