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Crisil Certified Analyst Programme

Financial Institutions and Markets and
Commercial Banking Assignment

Submitted by
Name: P.Hemanth Kumar
Roll NO:A019
Policy Instruments important

Central Bank of Brazil - Main Activities

Differently from many countries, the BCB has both mandates: monetary policy, financial regulation and financial
supervision. This fact is evidence of a clear understanding that they are not orthogonal.
The wide scope of Central Bank's authority helps to minimize problems related to policy coordination
Monetary Policy
Financial Regulation
Financial Supervision

Macroprudential instruments
Brazil has recently resorted to some macroprudential tools to achieve financial stability and reduce macroeconomic
Reserve requirements
Capital requirements (above Basel recommendations)
FX interventions
Measures to reduce excessive capital inflows (e.g. tax on financial operations 10F)
MP (Selic rate) to reduce inflationary pressures
Conventional monetary policy was applied
Complemented by fiscal policy tightening
MaP to reduce excessive financial risks
Calibrate consumer credit growth
Monitor household indebtedness
Reducing excessive bank and firms exposures in FX
MaP in Brazil:
Two Examples
Two different periods in which MaP's were used:
MaP measures to face the 2008-2009 crisis
MaP measures are using currently now by brazil

MaP Measures
From February 2010 to March 2011 Brazil adopted many macroprudential measures:
Measures to moderate credit growth
Increase of reserve requirements over demand and time deposits
Increase of capital requirements on new consumer credit operations (particularly, personal credit, payroll-
deducted loans and vehicle financing, involving longer maturities or high loan-to-value ratios)
Measures to deal with exchange rate appreciation
Increase in taxes (IOF) on purchases with credit card abroad
Increase in IOF for short run external loans
Increase in IOF on fixed income inflows
BCB began to increase the Selic rate in April 2010

Reserve Requirements
As proposed by the classical theory, a Central Bank has at its disposal three instruments to perform monetary policy:
Open market operations,
Reserve requirements (or compulsory reserves)
Discount window.
Reserve requirement is an instrument that the Central Bank can use to influence the volume of money in the
economy; it represents a portion of bank deposits that must be held at the Central Bank.
The reserve requirements ratio is one of the elements of the money multiplier, in other words, the relation
between monetary basis and money supply. For example, the less the reserve requirement is set, the more banks will
have to loan out and, consequently, they will increase the total money volume from a monetary basis's volume.

Nowadays, in Brazil, the types of reserve requirements are:

On Demand Deposit
On savings Deposit
On time Deposit
On Deposits and Honors received

Brazil Payment System

1. Reserves Transfer System

2. Special System for Settlement
3. Foreign Exchange Clearinghouse
4. Equities Clearinghouse
5. Securities and Organized Over-the-Counter Market Systems
6. Deferred Settlement System for Interbank Credit Orders
7. Checks Clearinghouse
8. Central Credit Assignments
9. BM&FBOVESPA Clearinghouse operated by BM&FBovespa on registering, clearing and settling commodities and
financial derivatives, overseen under the principles applicable to securities settlement systems, trade repositories, and
central counterparties
10. Multicard Clearing System

Brazil Basel norms


The Basel Agreement

1. Since its creation in 1930, the Bank for International Settlements (BIS) acts as a cooperation agent for the central banks,
providing emergency financial allocation in case of crises which may threaten the international financial system as a whole.
2. In 1975 was established the Basel Committee on Banking Supervision (BCBS), linked to the BIS and formed by the central
banks of the banks integrating the Group of the Ten (G10). Today, it is formed by representatives of supervision authorities
and of the central banks of South Africa, Germany, Saudi Arabia, Argentina, Australia, Belgium, Brazil, Canada, China,
Korea, Spain, United States, France, the Netherlands, Hong Kong, India, Indonesia, Italy, Japan, Luxembourg, Mexico, the
United Kingdom, Russia, Singapore, Sweden and Switzerland and Turkey.
3. In 1988, BCBS publicized the first Basel Capital Agreement, officially denominated International Convergence of Capital
Measurement and Capital Standards, with the objective of establishing minimum requirements of capital for financial
institutions, as a way of confronting credit risk.
4. In Brazil, the 1988 Agreement was implemented by means of Resolution 2,099, of August 17, 1994. It introduced in the
country the minimum capital requirement for financial institutions, which vary according to the degree of risk of its active
5. In 1996, the Committee published an amendment to the 1988 Agreement, incorporating to the capital requirement one
installment for coverage of market risks (1996 Amendment).
The New Basel Capital Agreement
6. In 2004, the BCBS publicized the revision of the Basel Capital Agreement, known as Basel II, with the objective of seeking
for a more accurate measure of the various risks incurred by the internationally active banks.
7. The new agreement focuses on the large scale banks, internationally active, taking as the basis, besides the Essential
Principles for Efficient Banking Supervision (Basel Principles), three mutually complementary pillars:
a) Pillar 1: capital requirements;
b) Pillar 2: revision by the supervision of the process of banking capital adequacy; and
c) Pillar 3: market discipline.
8. The implementation of the New Basel Capital Agreement in the country is being conducted in a gradual manner. The first
formal manifestation of the Central Bank of Brazil (Bacen) in the sense of its adoption took place by means of
Communiqu 12,746, of December 9, 2004, through which was established a simplified schedule with the main phases to
be followed by the adequate implementation of the new capital structure.
Agreements with organizations and institutions
9. For the improvement of the processes of supervision of financial institutions and conglomerates, whose businesses
encompass subsidiary entities in other countries, various procedures are adopted, such as:
a) Elaboration of supervision agreements with foreign authorities;
b) Monitoring of activities of international organizations in matters related to supervision;
c) Exchange of information with foreign supervision authorities;
d) Coordination, support na follow-up of missions by foreign supervisors in the country;
e) Dissemination of the Brazilian supervision to the international context.
10. Pursuant to the recommendations of the Basel Supervision Committee, contained in the document The Supervision of
Cross-Border Banking, of October 1996, the Central Bank of Brazil (Bacen) has struggled to carry out cooperation
agreements with banking supervision bodies from other countries. The framework of these documents entails, in general,
the following points:
a) exchange of information related to supervision of banking organizations authorized in a given country, and which
have trans-border establishments in another country;
b) direct inspections of the trans-border facilities;
c) confidentiality of information, emphasizing existing restrictions in the legislation of each country and the use of
shared information based on the agreement solely for purposes of supervision; and
d) other items related with contacts, meetings, duration, modifications, etc.
11. Bacen maintains agreements with banking supervision bodies from diverse countries, such as: Germany, Argentina,
Bahamas, Spain, United States of America, Cayman Islands, Mexico, Panama, Portugal, Paraguay and Uruguay.

CAR ( Capital Adequacy Ratio)

The banking system reports high levels of capitalization, liquidity and profitability. In September 2011, Brazilian banks, in
general, were capitalized above regulatory minimum levels. The average Basel capital adequacy ratio was 17.17 percent, well
above the 11percent required in Brazil, and above the 8 percent required by the Basel I and Basel II methodologies. The leverage
ratio (9.57) and liquidity ratio (around 1.08) were also prudentially adequate. The liquidity ratio is based on a liquidity
buffer/stressed cash flow. The Return on Equity (RoE) of
the banking system was 22.83 percent.

Method of calculation
Minimum capital adequacy ratios (CAR) are set as core tier I capital: 4.5%; tier I capital: 5.5% for 2013 and 2014 and 6.0%
from then on; and total capital: declining from 11% in 2013 to 8.0% in 2019
By the end of 2011 the new definition of total capital will be set
By July of 2012 the calculation of the required capital for counterparty credit risk will be revised and by the same time it
will start the phase-in of deductions from common equity of items such as tax credits (two years ahead of the
recommended by Basel III)
Compliance timeline: beginning of 2013
By the end of 2012 the regulation on both conservation and counter-cyclical Capital will be adopted and financial
institutions could be required to meet new goals anytime from the beginning of 2016 and 2014, respectively, depending on
the macroeconomic cycle

Final methodologies to calculate liquidity coverage ratio and net stable funding ratio will be announced by the end of 2013
and 2016, respectively (preliminary methodologies will be announced by the end of 2012 and 2014, respectively)
The minimum regulatory levels of both new indicators are set at 100%
Compliance timeline: liquidity coverage ratio by the beginning of 2015 and net stable funding ratio by the end of 2018

Balance Sheet Date/DLO Date: Date of the financial statement used for calculating Brazil's Top 50 Banks, which may contain
data from financial statements of different dates.

Capital Adequacy Ratio (Basel Ratio): International concept defined by the Basel Committee recommending a minimum ratio
of 8% between the Capital Base (PR) and the risks weighed according to the current regulations (Required Net Worth - PRE). In
Brazil, the minimum ratio required is given by the "F" factor.

a) 0,11 (eleven one hundredths), in the case of financial and other institutions under the supervision of the Central Bank of Brazil,
except for individual credit cooperatives not affiliated to central credit cooperatives; and

b) 0,15 (fifteen one hundredths), in the case of individual credit cooperatives not affiliated to central credit cooperatives.

The ratio is calculated according to the following


PR*100 / (PRE/F factor)

An institution the Capital Base (PR) of which is lower than its Required Net Worth is considered non-compliant in relation to the
Required Net Worth Limit (PRE), that is, its capital is insufficient to cover the risks arising from its operations, whether they are
asset, liability or memorandum account-related operations. This situation may also be evidenced through the capital adequacy
ratio calculation, as demonstrated in the following examples.

a) Compliant Institution:
PR = 150 PRE = 120. Therefore: PR > PLE
Basel Ratio = 150*100/(120/0,11) = 13,75 (the institution has enough capital)

b) Non-compliant Institution:
PR = 150 PLE = 160. Therefore: PR < PLE
Basel Ratio = 150*100/(160/0,11) = 10,31 (insufficient capital)

Fixed Asset to Equity Ratio: indicates the committed percentage of the Capital Base (PR) in relation to the Fixed Assets.
Beginning in December /2002, the maximum allowed ratio is 50%, pursuant to Resolution no. 2,669, dated November 25th,
1999. This ratio is calculated by the following formula:

(Fixed Assets - Deductions) / (PR - Investment in Equities)

Capital Base (PR): used to verify if the institution's capital is enough to support the risk of its operations, recorded either in
assets, liabilities or memorandum accounts, and the adequacy of the investments in fixed assets, which are limited by the Fixed
Asset to Equity Ratio. It is presently defined in Resolution no. 3444, published in February 28th, 2007.
Required Net Worth (PRE): required net worth of the financial institutions as a function of the associated risks of their activity,
as registered in their assets, liabilities and memorandum accounts. It is now defined in Resolution no. 3490, dated August 29th,
2007, and in later amendments. It's calculated by the following formula:


where each of the components corresponds to the required capital to cover exposures to the following risks:
PEPR - exposures weighted by their own risk level;
PCAM - exposures in gold, foreign currencies and operations exposed to exchange rate changes;
PJUR - operations exposed to interest rate changes;
PCOM - operations exposed to commodity price changes;
PACS - operations exposed to stock price changes; and
POPR - operational risks.
AdicBC is an additional amount to an institution's PRE that, eventually, may be determined by the Banco Central do Brasilat its

Top 3 Brazil bank

1)Banco do Brasil, Brazil ($555 billion in assets)

2) Ita Unibanco Holding, Brazil ($445 billion in assets)

3) Banco Bradesco, Brazil ($391 billion in assets)

1.) Banco do brasil

2) Ita Unibanco Holding
3) Banco Bradesco


Bradescos capital structure is compliant with Basel III requirements, ensuring that management is better positioned to
achieve strategic targets and inspire trust and peace of mind for shareholders and investors. In December 2015, Reference Equity
totaled R$102,825 million, compared with risk weighted assets of R$612,217 million, resulting in a

Total Basel Ratio of 16.8% and common equity of 12.7%.The Total Basel Ratio increased 0.3 p.p. compared with the
previous year, impacted basically (i) by the increase in shareholders equity due to the higher results in the year and (ii) by the
issuance of subordinate debts; and partially offset, (iii) by the increased risk-weighted assets, mainly in credit risk, driven by the
loan portfolio expansion, and (iv) by the application of a factor of 40% in prudential adjustments (the factor applied in 2014 was
20%), in accordance with CMN Resolution n 4,192/13. These factors, with the exception of the increase in share holders equity
and the issuance of subordinate debt, contributed to the 0.2 p.p. reduction in Tier I common equity.


Banking system soundness indicators are encouraging, but private sector leverage and the rapid past expansion of
public banks are potential sources of stress requiring vigilance. The central bank ran stress tests with scenarios constructed by
staff, and the overall outcome was within the parameters of the stress tests published in the central banks own September 2014
Financial Stability Reportthat is, in a high stress scenario, some banks would become noncompliant with capital requirements,
but the capital shortfall would be small, less than 0.5 percent of regulatory capital, given existing provisions.10This said, risks
could arise from high private sector leverage and growing FX exposure in an environment of sustained low growth and possibly
rising unemployment. The increase in delinquencies of high-risk loans by public banks could generate a demand for additional
capital if loan defaults increase, but, more importantly, underscores the need for greater vigilance and close monitoring of the
health of bank balance sheets in response to evolving economic conditions. The banking systems soundness indicators remain
favorable, but sustained low growth and the transition to a low credit growth environment could put bank balance sheets
under pressure. Recently, credit growth has decelerated from high rates to 11.3 percenty/y in 2014, driven by a slowdown in
credit expansion by public banks, while private bank credit continued to expand at a moderate pace. Real growth in home prices
has also slowed down to about 1 percent as of November 2014.

Total and Tier 1 capital ratios remain well above the regulatory minimum at 16.5 and 13.1 percent, respectively, in
the third quarter of 2014 (broadly in line with fully-loaded Basel III basis). Banks are also well provisioned (170 percent of
nonperforming loans), and liquidity risk for the system as a whole is low.5 Banks continue to rely mainly on domestic funding
sources, with the ratio of foreign funding to total funding at less than 10 percent. Household and corporate leverage have
increased in recent years, to a large degree as a result of increased borrowing from banks. The rising proportion of mortgages in
household borrowing has lengthened average maturities, containing the growth in debt service. Corporate bond issuance has
become increasingly important, including overseas borrowing, raising FX exposure but also allowing firms to access credit at
longer maturities and lower rates. Leveragealready high by international standardshas edged up without translating into higher
capital outlays as firms built cash cushions instead of augmenting their capital stock. In the case of commodity exporters, the
decline in commodities is also contributing to raising leveraging by reducing free cashflow and equity growth. While FX debt
accounts for about 30 percent of the total, it is largely hedged.6 Against this backdrop, tepid growth, possibly rising
unemployment, exchange rate depreciation and tighter financial conditions ahead will likely put strains on private sector balance
sheets. Indeed, there are emerging signs of balance sheet pressures. While the overall NPL ratio remains stable at about 3 percent,
weak activity has already caused an uptick in NPL ratios for some segments of consumer and corporate loans, such as overdraft,
credit card, working capital, and SME loans, particularly by public banks (Appendix II). These segments have, however, been the
ones leading the recent deceleration in credit growth in public banks.

Nonperforming Loans of Public Banks

1. Nonperforming loan ratios at public banks have been around 2 percent in recent years; but these banks now face the
risk of a gradual deterioration in loan quality.
2. 2. When looking at loan performance, it is clear that traditional business lines have
held up their quality over time.
3. However, some high-risk lines of business have recently shown declining

The Inflation Targeting Framework

1. Inflation has been above the midpoint of the central banks tolerance band for several years, and longer-term
inflation expectations have risen.
2. Brazil's central bank has enjoyed de facto independence since 1999, but it does not have statutory independence.
3. While no institutional framework guarantees success, experience suggests a higher
degree of autonomy can help central banks execute their functions more effectively.
4. Brazils inflation tolerance band is relatively wide and can accommodate persistent
inflation deviations from target midpoint.
5. To support the central banks effectiveness and credibility going forward, further strengthening of the inflation
targeting framework would be useful.
Credit Market

Nature/Source of Likelihood Expected Impact on Economy Policy Responses

Abrupt surges in H Increasing Brazils risk premiums, pressures The flexible exchange rate remains an
global financial on the real and reversal of capital flows. important capital flow shock absorber.
market volatility Increasing yields in domestic bond markets. In Recourse to FX intervention if FX volatility
particular corporates lacking FX hedging becomes excessive. Provide FX liquidity and
could be exposed. support individual banks if dollar shortages
appear. Increase policy rate to ensure
adequate external financing. May also need
to tighten fiscal policy to further strengthen
policy credibility and avoid sell-offs of
Brazilian domestic bonds.

Debt coverage.

Brazils gross debt statistics cover the NFPS, defined to exclude Petrobras and Eletrobras and consolidate the Sovereign
Wealth Fund. The NFPS debt includes Treasury securities on the central bank's balance sheet, including those not used
under repurchase agreements. At end-2014, the gross debt amounted to 71 percent of GDP.2 The (consolidated) public
sector has a large stock of assets, amounting to 39.1 percent of GDP in 2014, which include 19.4 percent of GDP in
international reserves. Although net debt reported by the government corresponds to the public sector, defined to
include the central bank, in this Debt Sustainability Analysis (DSA) we use net debt of the NFPS to maintain
consistency. Nonfinancial public sector assets amount to 32.5 percent of GDP (see Box). Brazils debt is reported at
nominal value.

Measurement of Gross Public Debt in Brazil

This Appendix explains in detail the methodological difference between the Brazils Central Bank (BCB) indicator of
General Government Gross Debt (GGGD) and that employed by the Fund, which follows the guidelines in the current
Government Financial Statistics Manual (GFSM 2001 and 2014 editions).The key difference between these indicators
is the treatment of government bonds held by the BCB and not pledged as security in monetary policy operations,
which are counted as part of government debt under GFSM standards, but not under the BCBs definition. The debt
maturity profile and composition have improved over time, but spreads on government bonds remain somewhat
elevated and external financing requirements are large. Debt profile. Brazils Federal government(FG) domestic
tradable securities account for 92 percent of total NFPS gross debt in2014, of which 2/3 were held by the
public.4Active debt management in recent years has improved the profile of these instruments, which now display
longer maturities, of about 4.4 years on average, up from less than 3 years in 2008. Still, a large share of domestic
tradable securities, nearly 25 percent of total, matures within 1 year.5 The government has the objective of raising
average maturity to 5.5 years and bringing total short term debt (on both original and residual maturity basis) down
toward 20percent of all debt. Fixed-rate and inflation-linked domestic bonds have gradually replaced foreign-currency
linked instruments and floating-rate bonds. Zero-coupon bonds with original maturities over one year constitute slightly
more than half of FG domestic tradable securities held by the public, or 21.7 percent of GDP. Foreign holding of
domestic debt has increased and amounted to 17 percent of total at end-2014.In addition to tradable securities, other
NFPS debt consist of liabilities issued by SOEs and subnational governments, as well as direct bank lending to the FG.
Foreign currency denominated debt of the NFPS accounted for only 5 percent of the total in 2014, representing slightly
more than 4 percent of GDP. Gross financing needs have tended to be high, above15 percent of GDP. However, this
figure overstates rollover risk, as a large fraction of the federal government debt (about 20 percent of GDP, with a
maturity profile in line with that of overall debt) is held by the central bank, which follows a policy of automatic
rollover of its holdings of government securities.

Risk Assessment

1. The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow
if exceeded under specific shock but notbaseline, red if benchmarkis exceeded under baseline, white if stress test is not relevant.

2. The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or
baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress
test is not relevant.

3. The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds
the upper risk-assessment benchmark,yellow if country value is between the lower and upper risk-assessment benchmarks. If data
are unavailable or indicator is not relevant, cell is white.Lower and upper risk-assessment benchmarks are:
200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for
change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the
share of foreign-currency denominated debt.

4. Long-term bond spread over U.S. bonds, an average over the last 3 months, 25-Oct-14 through 23-Jan-15.

5. External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total
external debt, and short-term total external debt at the end of previous period.