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14 July 2000
The basic framework of the Brazilian financial system was set up by Law 4,595 dated December 31 1964 (the Banking Reform Law). This legislation established the National Monetary Council (Conselho Monetário Nacional or CMN) as the body responsible for overseeing monetary and foreign exchange policies, directed towards economic and social development as well as the operation of the financial system. The CMN is authorized to:
The CMN 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 or CVM) is the body responsible for implementing the CMN's policy relating to the organization and operation of the securities industry, in accordance with general rules established by Law 6385, dated December 7 1976 (the Securities Law).
The Central Bank is responsible for implementing the policies of the CMN, and regulating and supervising the activities of financial institutions. Supervising activities are based on Law 4,595 and their main purpose is to:
As the major supervisor of the National Financial System, in order to achieve the purposes above, the Central Bank issues regulations and performs various functions, including:
In order to manage the failure risk of banks and the related negatives consequences (eg, diminished confidence of depositors in the system and financial turbulence), there has recently been a focus on preventative and protective regulation, and the establishment of an official safety net. In 1995 the government launched a structural programme called PROER (Programa de estímulo à reestruração e ao fortalecimento do sistema financeiro nacional) and concurrently implemented the Brazilian deposit insurance system. Both aimed to stimulate the restructuring and strengthening of the national financial system, and to guarantee its solvency and liquidity.
The reform was deemed necessary to adapt the system to the post-stabilization reality and the consequent low profitability of Brazilian banks.
Before 1994, banks in Brazil operated on an expansionary bases, supported by the floating created in the hyper-inflationary period. The main income of the banks had been supported by the loss of real value of the deposit in current accounts appropriated by them in financial applications. Within this context, there was room within the market to support an increase in new banks and subsidiaries of the existing ones.
The implementation of the Real Plan in July 1994, and the subsequent loss of the floating operation post-stabilization (and the high reserve requirements on both deposits and loans, limitations on the provisions of credit, tight money supply and high real interest rates), adversely affected the operations and profitability of Brazilian banks. This created the need to adjust bank structures and operation policies to make them competitive in a non-inflationary economy.
On November 16 1995, the government created the Credit Guarantee Fund (Fundo Garantidor de Créditos or FGC). The fund was created by Central Bank Resolution 2211 and modified by Central Bank Resolution 2249 of 1996. The fund was created to guarantee customer deposits with financial institutions in case of intervention, liquidation, bankruptcy or Central Bank declaration of insolvency.
The FGC is administered by an administrative council, the members of which are appointed by the National Confederation of Financial Institutions (Confederação Nacional de Instituições Financeiras or CNF). The total amount of credits held by each person against a financial institution (or against financial institutions of the same financial group) will be guaranteed by the FGC up to a maximum of R$20,000. When the assets of the FGC reach 5% of the total amount covered by the guarantee, the CMN may suspend or reduce (temporarily) the percentage of contribution from the financial institutions to the FGC.
With effect from February 1996, financial institutions and savings and loan associations (except for credit cooperatives), must contribute monthly to the FGC an amount equal to 0.025% of the balance of the accounts guaranteed by the fund. The rate shall be levied on the total deposit amount calculated.
The special credit facility, PROER, was established by the Central Bank, pursuant to Resolution 2208 of 1995. This was an attempt to promote the restructuring and the strengthening of the Brazilian financial system. PROER has been used to support troubled banks and to safeguard depositors and investors (ie, the rationale is that the failure, or short-term liquidity crisis, of one bank may present a threat of contagious risk to another bank). In order to guarantee liquidity and solvency in the financial system the programme provides for:
Those financial institutions eligible for support include:
The protective regulations mentioned above, 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 empowered the Central Bank to implement the currency and credit policies laid down by the CMN, and to control and supervise all public sector 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
Resolution 2,212 (dated November 16 1995) of the CMN established 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 authorization for incorporation and operation of the financial institutions is granted by the Central Bank. The purpose of the resolution is to avoid non-qualified individuals and legal entities controlling Brazilian financial institutions.
Central Bank Resolution 2099 of 1994 provides that Brazilian financial institutions must comply with a risk-based capital adequacy framework, based on the Basle Accord. This resolution has been amended by the Central Bank from time to time.
The resolution requires a bank to have a ratio of at least 11% of capital to assets (and certain off-balance sheet items), determined on a risk-weighted basis. To assess the capital adequacy of banks under the risk-based capital guidelines, 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).
In addition, Central Bank Resolution 2,678 (dated December 21 1999) establishes that on August 30 2000, the net worth of a Brazilian financial institution shall be not less than 50% of the minimum net worth for that type of financial institution. From August 31 2000 to August 20 2001, the minimum net worth of a financial institution shall be not less than (i) the sum of it's 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 it's net worth as of May 27 1999.
The Central Bank, from time to time, 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.
Brazilian banks are currently required to place with the Central Bank, on a weekly basis, an amount in cash 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 pursuant to the above.
Provisions of overdue debts
On December 21 1999, the Central Bank enacted Resolution 2,682 (effective as of March 1 2000), pursuant to which financial institutions are required to classify their credit transactions at different levels and constitute appropriate provisions according to the level attributed to each transaction. The classification is based on:
Transactions are classified from levels 'AA' to 'H' (with AA being the highest classification). The resolution also establishes that credit classifications should be reviewed on a monthly basis.
For further information on this topic please contact Nei Zelmanovits at Machado, Meyer, Sendacz e Opice by telephone (+55 11 3150 7120) or by fax (+55 11 3150 7071) or by e-mail (firstname.lastname@example.org).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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