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29 June 2001
In August 1998 the National Monetary Council issued Resolution 2,543, which regulates risk-based capital standards, in order to further adapt the Brazilian financial system to the standards suggested by the Basel Committee and provide local banks with new funding alternatives.
Prior to the regulation, local banks were required to maintain a minimum level of capital in relation to the risks of their assets and off-balance sheet exposure, as weighted in accordance with a classification differing slightly to that provided for by the Basle Committee. Capital which counted towards the minimum capital requirement was deemed to relate to equity capital, capital reserves, revaluation reserves, profit reserves, and retained profits and losses. There was no distinction between tier one and tier twocapital.
The main changes introduced by Resolution 2,543 were the distinction between tier one and tier two capital and the authorization for local banks to issue hybrid debt and equity instruments.
On December 21 2000 the National Monetary Council issued Resolution 2,802, which revoked and replaced Resolution 2,543. The resolution created the concept of 'reference capital' for Brazilian financial institutions (for the purposes of determining their operating limits) and established criteria for the determination thereof. Accordingly, it stipulated that the capital of banks is divided into tier one and tier two reference capital.
Resolution 2,802 was subsequently revoked by Resolution 2,837 of May 30 2001, which introduced minor adjustments to the rules of Resolution 2,802.
According to the new resolution, tier one reference capital is represented by the net worth plus positive result account minus negative result account, excluding revaluation reserves, contingency reserves, and special profit reserves related to mandatory dividends not yet distributed, minus the amounts related to preferred cumulative stock and preferred redeemable stock.
Tier two reference capital is represented by revaluation reserves, contingency reserves, special profit reserves related to mandatory dividends not yet distributed, preferred cumulative stock, preferred redeemable stock, subordinated debt, and hybrid instruments.
For the purposes of the new resolution hybrid instruments shall:
Instruments that meet these requirements may integrate tier two as subordinated debts. The exceptions are:
Redemption or amortization of such instruments before the lapse of the five-year minimum period is prohibited.
In addition, Resolution 2,837 states that the Central Bank may authorize the inclusion of other transactions in tier two reference capital, provided that they have similar characteristics to those detailed above.
The eligibility of hybrid instruments and subordinated debts to be included in tier two reference capital, and redemption of hybrid instruments and early redemption of subordinated debts are subject to the prior authorization from the Central Bank, which must consider (among other things) the relevant financial terms and conditions of the transaction.
Hybrid instruments, subordinated debts and preferred redeemable stock included in tier two of adjusted net worth pursuant to the provisions of Resolution 2,543 may be included in tier two reference capital (within the limits of that resolution) until their respective maturities. Extension or renewal is prohibited.
Finally, it should be noted that:
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