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Fitch warns on impact of new Brazilian bank resolution law on lenders' ratings

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Fitch warns on impact of new Brazilian bank resolution law on lenders' ratings

A new Brazilian bank resolution law could reduce sovereign support for banks and, in turn, affect their issuer default ratings, Fitch Ratings said.

The rating agency said the Brazilian government is likely to approve the new resolution law in the coming months.

Fitch also expects the new regime to exert downward pressure on Brazil's systemically important banks' support rating floors.

One of the key aspects of the law will be the bail-in mechanism, which Fitch expects will be broadly similar to those adopted in North America and Europe. The mechanism will establish the hierarchy of loss absorption by each type of creditor in case of resolution.

The law will also address other features of bank resolution including the role of bridge banks, or those that temporarily manage the assets and liabilities of problem banks; the determination of a "good" or a "bad" bank; and the creation of a more competitive process for the acquisition of problem banks.

However, Fitch noted that the introduction of a formal resolution scheme will bring more transparency to market participants. It will also clarify when regulators can intervene and under what circumstances losses can be imposed on shareholders and bank creditors.

Separately, a new bankruptcy law in Brazil will give more power to banks as they will be allowed to impose management changes and take over companies undergoing judicial reorganization under the new regime, Folha de S.Paulo reported.

In the latest version of the draft law, a troubled company's controlling shareholder will only have 120 days to present a recovery plan, from the previous 180 days.

Creditors holding at least 1/3 of the company's debt will also be allowed to present their own plan in case the debtor fails to offer one. Creditors can also automatically dismiss the management of the company and appoint a new team if their plan is approved, the report said.