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Brazil's central bank simplifies reserve requirement rules

Confirming earlier reports, Banco Central do Brasil on Jan. 24 announced measures to simplify mandatory deposits requirements in an effort to free up capital and lower the cost of credit.

As part of the simplification, which reduced some 80 rules connected to the mandatory deposit system to fewer than a dozen, the regulator unified the calculation and collection time periods for term, demand and savings deposits, which previously had varying time frames.

The move will also gradually phase out deductions from those required reserves. Those deductions had been implemented in 2008 to create a pool of funds that could be used to bolster certain sectors of the economy or rescue smaller financial institutions.

Under the current time table, the amount of deductions will be cut by 50% at the start of 2018, 70% at the start of 2019 and completely phased out by the beginning of 2020.

In explaining the reason for the move, central bank's monetary policy director Reinaldo Le Grazie argued that the deduction system no longer fits into Brazil's current economic climate.

"[These measures] were adopted in another time and had the desired effect," he said at a press conference. "I do not believe it will make a big difference for the system, or for small- and medium-sized banks," the director said in a press conference.

Le Grazie stressed that the measures will not have a monetary impact on the amount of mandatory deposits kept at the central bank, which currently totals some 400 billion Brazilian reais.

However, the central bank hopes that the moves will lower administrative expenses for financial institutions, which will then allow them to lend at lower rates.

"Over time, this will create a lower cost environment and the cost of credit will fall," Le Grazie said.

The new deduction rules will come into force Feb. 3, while the unification of mandatory deposits calculation and collection will take effect in April.

As of Jan. 24, US$1 was equivalent to 3.16 Brazilian reais.