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Brazil's CMN approves 1M reais coverage limit for deposit insurance program

Brazil's National Monetary Council has approved the maximum coverage of 1 million Brazilian reais for guarantees paid by the country's deposit insurance program, known as FGC, fund for each depositor or investor, according to a statement from Banco Central do Brasil.

The new rule sets the maximum coverage limit for a period of four years, beginning on the date of liquidation or intervention in a financial institution where the individual holds deposits or investments guaranteed by FGC.

The council maintained the guarantee limit of 250,000 reais per institution.

The move aims to crack down on the perceived abuse of the fund, which FGC said has become a marketing tool for smaller banks and financial institutions to attract investors. In turn, investors neglected the risk of buying covered securities by not assessing the credit situation of the institutions.

FGC is the country's deposit insurance program that financially covers bondholders in the case of a financial institution's failure. The fund previously had no limit on the total coverage provided for each investor, regardless of the number of deposits it owns in different financial institutions.

According to Fitch Ratings, the approved limit on the guarantee coverage per investor would not affect deposits at small- and medium-sized banks. These banks could even benefit from some investment arbitrage stemming from the new rule, as the deposit guarantees were applied to all local banks regardless of risk or rating, Fitch noted in a Dec. 22 statement.

Investors that could be affected by the new measure only account for 0.1% of the total base and are not significant enough to impact banks' funding costs, the rating agency said.

Separately, the council also set the long-term interest rate, or TJLP, at 6.75%, down from 7%, Valor Econômico reported. The new rate, which is used as a financing measure by Banco Nacional de Desenvolvimento Econômico e Social, will be taking effect for the entire first quarter of 2018.

The TJLP rate will soon be replaced by the new TLP reference rate.

As of Dec. 21, US$1 was equivalent to 3.31 Brazilian reais.