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Brazilian banks, foreign lenders generally assumed that the
Brazilian bank would repass its cost of funds (the cost of the
foreign lender's loan) and charge a spread or commission to the
repass borrower.
The Brazilian bank was allowed to charge its borrower only a
repass commission. The repass commission was usually calculated as
a set percentage per year of the principal balance of the repass
loan. The amount of the repass commission was the same as the
commission charged for other types of loans. During the years in
issue, there was no limit on repass commissions, and the commission
was as high as 10 percent, depending upon the individual repass
borrower's credit.
Except for the term of the loan, all other financial
conditions of the loan between the Brazilian bank and the repass
borrower had to be the same as those between the foreign lender and
the Brazilian bank. If the interest rate charged by the foreign
lender to the Brazilian bank was net of the Brazilian withholding
tax, then the interest rate payable by the repass borrower was
likewise net of the Brazilian withholding tax. If the Brazilian
bank was entitled to a pecuniary benefit, then it passed on the
benefit to the repass borrower. The transfer of the pecuniary
benefit from the Brazilian bank to the repass borrower reduced the
repass borrower's cost of the repass loan and thus encouraged
foreign borrowing.
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