UPDATE 3-Brazil takes new steps to help banks amid crisis

Wed Oct 22, 2008 11:02am EDT
(Recasts with Mantega comments, adds byline, changes dateline, previous SAO PAULO)
By Isabel Versiani
BRASILIA, Oct 22 (Reuters) - Brazil on Wednesday allowed its two largest state banks to buy stakes in financial firms, the government's latest step aimed at shielding the domestic banking sector from the global credit crunch.
It also freed up the central bank to conduct swap operations with other central banks, giving it another tool to add liquidity to the foreign exchange market as the country's currency, the real, tumbled anew against the dollar.
Finance Minister Guido Mantega told a briefing in Brasilia Brazil's financial system was "solid" and that no bank was collapsing but he said the lack of liquidity could cause problems for some banks.
"We are taking this measure to help facilitate liquidity and to give an alternative to those financial institutions which don't have this liquidity," Mantega said.
"The Brazilian financial system is solid, it's one of the most solid in the world," he added.
Central bank head Henrique Meirelles told the same briefing the move allowing the central bank to carry out swaps with other central banks was a preventive step which would not be used yet.
Despite the new steps, the real BRBY plunged more than 5 percent to 2.36 per dollar on Wednesday and the stock market .BVSP lost nearly 5 percent as investors fled emerging markets and sought safety in dollars.
Recent official steps have ranged from foreign exchange swap auctions to increasing credit lines to farm and construction industries to allowing bigger banks to take over the loan portfolios of smaller banks in potential distress.
Brazil said earlier on Wednesday it would allow state-controlled Banco do Brasil (BBAS3.SA: Quote, Profile, Research, Stock Buzz) and Caixa Economica Federal to buy stakes in other financial institutions.
While Brazil's major banks are seen as sound, some smaller banks are seen as potentially vulnerable to a drying up of credit. Analysts forecast conditions will remain hard for the entire sector -- and probably unbearable for smaller players.
Policymakers have already moved to support smaller banks by sharply reducing reserve requirements to those institutions and injecting as much as 160 billion reais ($68.41 billion) into the banking system.
The government also issued a decree authorizing the central bank itself to acquire such portfolios if needed.