BRAZIL'S Banco Itau Holding Financeira and Uniao de Bancos Brasileiros have agreed to merge and create the country's biggest bank as fallout from the global credit spreads to Latin America's largest economy.

The merger will create a bank with 575 billion reais (US$261.4 billion) in assets, the companies said yesterday. The accord follows 15 months of negotiations between Itau, the second-largest non-government bank, and Unibanco, the third-largest non-state bank, Bloomberg News said.

The transaction may signal that Brazilian financial institutions will have to consolidate to ride out the global financial crisis. Brazil's central bank has injected more than 100 billion reais in the banking system since September 24 to spur lending and prevent smaller institutions from going out of business.

"A crisis situation usually triggers takeovers as it exposes the fragilities of the players," Carlos Eduardo de Freitas, a former director of the central bank, said in Brasilia.

Itau Chief Executive Officer Roberto Egydio Setubal will be the top executive of the combined bank while Unibanco CEO Pedro Moreira Salles will be chairman. Itau's controlling shareholders and the Moreira Salles family will name six of the 14 board members of Itau Unibanco. "Theoretically, this merger would raise more concern about the banking system, but it's hard to say which names would be affected," said Jacopo Valentino, head of Latin American equity at BNP Paribas Asset Management in Sao Paulo.

Unibanco called on policy makers last week to lend more foreign currency to the financial system to help finance trade after international banks had cut their credit lines.