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01 February 2002
The basic framework of the Brazilian financial system was established by Law 4,595 of December 31 1964 (the Banking Reform Law), which introduced the National Monetary Council as the body responsible for overseeing monetary and foreign exchange policies. The National Monetary Council is authorized to:
The council is chaired by the minister of finance, and includes the minister of planning and budget, and the president of the Central Bank.
The Central Bank is responsible for:
The president of the Central Bank is appointed by the president of Brazil for an unspecified term, subject to ratification by the Senate.
The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários (CVM)) is responsible for implementing the council's policy relating to the organization and operation of the securities industry, in accordance with general rules established by Law 6385 of December 7 1976 (the Securities Law), as amended.
The Central Bank is responsible for implementing the policies of the National Monetary Council, and regulating and supervising the activities of financial institutions. Supervisory activities are based on Law 4,595 and their main purpose is to:
As the major supervisor of the national financial system, the Central Bank issues regulations and performs various functions, including:
In order to manage the failure risk of banks and related negative consequences (eg, diminished confidence of depositors in the sector and financial turbulence), the law has focussed on preventative and protective regulation, and the establishment of an official safety net. In 1995 the government launched a structural programme, PROER (Programa de Estímulo à Reestruturação e ao Fortalecimento do Sistema Financeiro Nacional), and concurrently implemented the national deposit insurance system. Both initiatives aim to restructure and strengthen the domestic financial sector, and guarantee its solvency and liquidity.
Reform was deemed necessary due to the low profitability of Brazilian banks. Before 1994 domestic banks operated on an expansionary basis, supported by flotations created during the hyper-inflationary period. The banks' main incomes were supported by the loss of real value of deposits in current accounts appropriated by them in financial applications. The implementation of the Real Plan in July 1994, and the subsequent loss of the floating operation post-stabilization, adversely affected the operations and profitability of Brazilian banks, thus creating the need to adjust bank structures and operation policies to make them competitive in a non-inflationary economy.
On November 16 1995 the Credit Guarantee Fund (Fundo Garantidor de Créditos) was created under Central Bank Resolution 2,211, modified by Central Bank Resolution 2,249 of 1996. The fund was created to guarantee customer deposits with financial institutions in cases of intervention, liquidation, bankruptcy or Central Bank declarations of insolvency. The fund is administered by an administrative council, the members of which are appointed by the National Confederation of Financial Institutions (Confederação Nacional de Instituições Financeiras). The total amount of credits held by each individual against a financial institution (or against financial institutions of the same financial group) are guaranteed by the fund up to a maximum of R$20,000. When the fund's assets reach 5% of the total amount covered by the guarantee, the National Monetary Council may suspend or reduce temporarily the percentage of contribution from the financial institutions to the fund.
Since February 1996 financial institutions and savings and loan associations (except for credit cooperatives) have been obliged to contribute monthly to the fund. They pay an amount equal to 0.025% of the balance of the fund's guaranteed accounts. The rate is levied on the total deposit amount calculated.
The special credit facility, PROER, was established by the Central Bank pursuant to Resolution 2,208 of 1995. PROER has been used to support troubled banks, and to safeguard depositors and investors. In order to guarantee liquidity and solvency in the financial sector the programme provides for:
Those financial institutions eligible for support include:
The aforementioned protective regulations, in which the Central Bank as the lender of last resort plays a major role, have not been the only measures taken to deal with the risk related to banking activities.
The Banking Reform Law empowers the Central Bank to implement currency and credit policies laid down by the National Monetary Council, and to control and supervise all public and private sector financial institutions. Some of the regulations laid down by the Central Bank have dealt (directly or indirectly) with the liquidity and solvency of financial institutions from a preventive perspective, and consequently with the protection of depositors and investors.
Incorporation and organization of banks
National Monetary Council Resolution 2,212 of November 16 1995 (as amended) establishes criteria for the incorporation of financial institutions in Brazil (eg, minimum capital requirements and demonstration of the economic capacity of the institution's controllers). The Central Bank grants authorization for the incorporation and operation of financial institutions. The purpose of the resolution is to prevent unqualified individuals and legal entities from controlling Brazilian financial institutions.
Central Bank Resolution 2,099 of 1994 (as amended) provides that domestic financial institutions must comply with a risk-based capital adequacy framework based on the Basel Accord.
The resolution states that banks must have a ratio of at least 11% for capital to assets (and certain off-balance sheet items), determined on a risk-weighted basis. To assess this, a bank's capital is evaluated on the basis of the aggregate risk of its assets and off-balance sheet exposure, which are weighted according to six broad categories of risk. The guidelines also set credit conversion formulae for determining the credit risk of off-balance sheet items (eg, financial guarantees, letters of credit, foreign currency and interest rate contracts).
Central Bank Resolution 2,678 of December 21 1999 establishes that on August 30 2000 the net worth of a Brazilian financial institution must be not less than 50% of the minimum net worth for that type of financial institution. Between August 31 2000 and August 20 2001, the minimum net worth of a financial institution could not be less than (i) the sum of its net worth as of May 27 1999, and (ii) 50% of the difference between the minimum net worth for that type of financial institution as set out in Resolution 2,607 and its net worth as of May 27 1999. Since August 31 2001 the minimum net worth of a Brazilian financial institution must be that established in Resolution 2,099.
Occasionally the Central Bank imposes compulsory reserve and related requirements. Recently, a few of the previously existing reserve requirements had their rates reduced to 0%. However, there is no guarantee that these rates will not be increased in the future.
Currently Brazilian banks must submit weekly sums of money to the Central Bank, equivalent to 15% of the daily average balances of savings deposit accounts (calculated weekly). Reserves with the Central Bank may not be withdrawn except to the extent that cumulative reserves exceed the amounts calculated on a weekly basis.
On December 21 1999 the Central Bank enacted Resolution 2,682 (effective from March 1 2000), pursuant to which financial institutions must constitute appropriate provisions according to the classification attributed to their credit transactions. Classification is based on:
Transactions are classified from levels 'AA' to 'H', with AA being the highest classification. Classifications must be reviewed monthly.
The current Brazilian Payment System (BPS) is composed of four different settlement subsystems:
The subsystems enable the settlement of financial transactions through the banking reserves account held by financial institutions with the Central Bank. None of the systems have a mechanism for risk management that is capable of absorbing any financial losses associated with the possible insolvency of one of its participants. Currently, the Central Bank bears the financial burden in the event of insolvency. A real-time gross settlement system is being discussed by the country's financial institutions, which would enable the BPS to assure the clearing and settlement of the transactions undertaken by its participants (and thus avoid a liquidity or systemic risk).
The implementation programme of the new BPS by the Central Bank comprises the following:
On March 27 2001 Law 10,214 determined the creation of a national system of payments. It consists of various sub-systems, which enable the payment, transfer and financial settlement of funds and assets within them. This law ensures that all assets deposited by a party into a subsystem to guarantee the payment of certain obligations will be applied to the payment of such obligations.
Circular 3,060, enacted by the Central Bank on September 20 2001, defines the following implementation schedule:
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