Banco Central do Brasil Banking Supervision

1. Banco Central do Brasil Banking Supervision • Risk Monitoring System for Banking Industry in Brazil • Febraban – IADB – 2004 • Lima - Peru

2. The Brazilian Banking Supervision • Before 1997 • Reactive • Compliance focused • Follow-up of economic plans • Modular Exams and Inspections • Non-consolidated scope • Limited legal framework

3. The Brazilian Banking Supervision • 1997 to the present • Law # 9447/97–Strengthening powers • Consolidated approach • Risk focused supervision • Bank’s risk classification (Rating) • Global Consolidated Examinations • On-site / Off-site supervision functions

4. Evolution 1994 269 312 130 118 35 Dec/2003 189* 428 166 138 42 *(Feb/04) Banks/Conglomerates Total Assets (US$ billion) Total Deposits (US$ billion) Total Credit Oper. (US$ billion) Capital (US$ billion) The Brazilian Banking System

5. Evolution of Intermediation in Brazil

6. Off-site Supervision Function • Continuous monitoring of institutions, conglomerates and market trends, including: • Capital adequacy • Significant deviations • Risk exposure: Credit/Forex/Interest Rate - stress testing • Peer group analysis

7. Off-site Supervision • Stress Testing • Liquidity - Estimates the impact on the financial institutions’ liquidity due to fluctuations in interest rates and the foreign exchange rate • Capital – Estimates the impact on capital due to changes in interest rates, foreign exchange rate and deterioration of loan portfolio

8. On-site Supervision Functions • Regular Inspections • Global Consolidated Inspections – Areas of analysis: • Loan portfolio review • Treasury operations/ Derivatives operations • Foreign Exchange operations • Fixed assets / Equity investments • Demand and time deposits • Contingencies • Internal Controls / Management Assessment • Analysis of consolidated financial statements • Accounting procedures • Assessment of conglomerates (financial and non-financial companies in a group)

9. On-site - Rating • The Central Bank is currently implementing a rating system for supervisory purposes • Qualitative and quantitative aspects in line with international best practices • The methodology provides guidelines for supervisory actions and frequency of examinations. • The ratings will only be disclosed to the examined institution or conglomerate.

10. Prudential Regulation • Capital Requirements • Foreign exchange exposure • Loan classification • Credit Risk Center • Internal controls and consolidated financial statements

11. Capital Requirements • Minimum capital • Tier I and Tier II capital • Risk-weighted assets (Basel 8%, Brazil 11%) • Additional Capital for: credit risk on swaps, foreign exchange exposure, interest rate risk • Deferred taxes weighted at 300%.

12. Evolution of Basel’s Capital Ratio Dec 03 = 18.9% Stable at  17%

13. Regulation imposes limits on foreign exchange exposure which apply to all financial institutions and their subsidiaries Foreign exchange combined net positions can not exceed 30% of capital No capital requirement for net positions not exceeding 5% of capital Capital requirement of 50% of total exposure for net positions exceeding 5% of capital Foreign Exchange Exposure

14. Loan Classification (Since December 1999) • Forward-looking approach • Creditworthiness of borrower and transaction • Past due status

15. Loan Classification(mandatory classification according to number of days past due and minimum amounts of provisioning for each level) • Classification Past due (days) Provision System’sPortfolio* AA 0 27.9% • A 0.5% 35.4% • B 15 to 30 1% 15.4% • C 31 to 60 3% 9.3% • D 61 to 90 10% 4.6% • E 91 to 120 30% 1.7% • F 121 to 150 50% 0.9% • G 151 to 180 70% 0.7% • H >180 100% 4.1% • Actual provisions/Required: 116.4% (as of Dec 2003) *Dec 2003

16. Past due loans (15 days in default at least) Past due loans %

17. Credit Risk Center • In 1997 the Central Bank implemented a credit risk center to monitor the overall exposure of the banking system to the borrowers. • Information on all borrowers with exposures exceeding R$ 5,000 ( US$ 1,700) including: • renegotiated debts • outstanding and past due loans • guarantees from financial institutions • loan classification

18. Credit Information System The Credit Information System contains information allowing supervisors to analyse: Borrower Risk • Promptness to pay • Balance of investments and deposits • Indebtedness • Operational revenue • Credit limit • Beginning of business relationship Transaction Risk • Collateral - type and value • Guarantees • Type/nature • Term or maturity

19. Login accessed from the Central Bank’s web page www.bcb.gov.br/scr option ‘SCR-Acesso’:

20. Supervision may consult an individual, a company, or an economic group. Information is displayed in a matrix format. Example: time x type of credit

21. Management Information File information – Corporate Behavioural data Summary of customer’s information Significant Borrowers Customer’s balance sheet Customer’s risk rating Rating from rating agencies Economic groups declared Securities performance Detailed Position Base date X Modality Institution x Modality Index X Modality Currency X Modality Risk X Base date Risk X Institution Risk X Modality Risk X Currency Other possibilities are available, for example:

22. Monitoring Credit Risk helps the Central Bank to perform its supervisory function by allowing: • Off-site monitoring of credit risk • Calculation of expected losses of banks’ credit portfolios • Analysis of specific economic sectors • Diagnosis of the solvency of the financial system as a whole • Stress testing applied to different scenarios • PD modelling to be applied to the totality of banks (for supervisory use) • Information to be shared among banks, helping to strengthen banks’ soundness

23. Internal Controls and Consolidation of Financial Statements • Internal control system consistent with the nature, complexity, and risk of their activities. • The board of directors is responsible for the smooth functioning of the internal control system. • The internal auditors must present semi-annual report on the quality and effectiveness of internal controls • Supervision can restrict activities and operations where the internal controls are not satisfactory • Financial institutions must prepare consolidated financial statements including all businesses located within Brazil and abroad

24. Prevention of Money Laundering Regulation resulting from Law 9.613/1998: • compliance with the GAFI/FATF recommendations, “know your customer” policy and suspicious transactions report; • procedures for the identification and recording of transactions; • internal control systems and training policy; • transactions with residents in non-co-operative countries • criteria for customer acceptance, rating, and for updating customer files; declaration of purpose and reasons for opening accounts, transactions profile, source of funds; previous notification for cash withdrawals

25. Supervision Manual • An entirely set of instructions for supervisory activity contemplating concepts and practices in place • It is available at www.bcb.gov.br, both in Portuguese and English

26. Financial Stability Report • Twice yearly – Last Edition Nov 2003 (as of June 2003) • Diagnosis of Efficiency and Solvency of the Financial System • Financial Market Evolution; Financial System Structure; Payments System; Stress Scenarios; Rules on Prudential Regulation; Selected Studies • It is available at www.bcb.gov.br, both in Portuguese and English

27. Preparation for Basel’s New Capital Accord • The development of the New Accord is being closely followed by Brazilian supervision, in order to ensure that our banks will be ready to conform with the new rules once they are implemented • Participation in Basel efforts to quantify the impact of Basel II in Brazil • Working-group is preparing the adoption for Brazilian banks environment

28. Contact BANCO CENTRAL DO BRASIL Directorate of Supervision E-mail: secre.difis@bcb.gov.br Phone: 55-61-414-2442 Fax: 55-61-321-4280