banco central do brasil banking supervision risk monitoring system for banking industry in brazil...

Directorate of Supervision

The Evolution of Brazilian BankingSupervision

Banco Central do Brasil Banco Central do Brasil

Banking SupervisionBanking Supervision

Banco Central do Brasil Banco Central do Brasil

Banking SupervisionBanking SupervisionRisk Monitoring System for Banking Industry in Brazil

Febraban – IADB – 2004

Lima - Peru



The Brazilian Banking SupervisionThe Brazilian Banking Supervision

Before 1997Before 1997

Reactive Reactive

Compliance focusedCompliance focused

Follow-up of economic plansFollow-up of economic plans

Modular Exams and InspectionsModular Exams and Inspections

Non-consolidated scopeNon-consolidated scope

Limited legal frameworkLimited legal framework



The Brazilian Banking SupervisionThe Brazilian Banking Supervision

1997 to the present1997 to the present

Law # 9447/97–Strengthening powersLaw # 9447/97–Strengthening powers

Consolidated approachConsolidated approach

Risk focused supervisionRisk focused supervision

Bank’s risk classification (Rating)Bank’s risk classification (Rating)

Global Consolidated ExaminationsGlobal Consolidated Examinations

On-site / Off-site supervision functionsOn-site / Off-site supervision functions



EvolutionEvolution

Banks/ConglomeratesBanks/Conglomerates

Total Assets Total Assets (US$ billion)(US$ billion)

Total Deposits Total Deposits (US$ billion)(US$ billion)

Total Credit Oper.Total Credit Oper. (US$ billion) (US$ billion)

Capital Capital (US$ billion)(US$ billion)

19941994

269269

312312

130130

118118

3535

Dec/2003Dec/2003

189*189*

428428

166166

138138

4242

*(Feb/04)*(Feb/04)

The Brazilian Banking SystemThe Brazilian Banking System



Evolution of Intermediation in Brazil

Loans - BFSR$ billion

0

100

200

300

400

500

J un Dec J un Dec

2002 2003

-10

-5

0

5

10

%

Credit operations Growth rate



Off-site Supervision FunctionOff-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



Off-site Supervision Off-site Supervision

Stress TestingStress Testing

• Liquidity - Liquidity - Estimates the impact on the Estimates the impact on the financial institutions’ liquidity due to financial institutions’ liquidity due to fluctuations in interest rates and the foreign fluctuations in interest rates and the foreign exchange rate exchange rate

• Capital – Capital – Estimates the impact on capital Estimates the impact on capital due to changes in interest rates, foreign due to changes in interest rates, foreign exchange rate and deterioration of loan exchange rate and deterioration of loan portfolioportfolio



On-site Supervision FunctionsOn-site Supervision Functions

•Regular Inspections•Global Consolidated Inspections – Areas of analysis:

•Loan portfolio reviewLoan portfolio review•Treasury operations/ Derivatives operationsTreasury operations/ Derivatives operations•Foreign Exchange operationsForeign Exchange operations•Fixed assets / Equity investmentsFixed assets / Equity investments•Demand and time depositsDemand and time deposits•ContingenciesContingencies•Internal Controls / Management AssessmentInternal Controls / Management Assessment•Analysis of consolidated financial statementsAnalysis of consolidated financial statements•Accounting proceduresAccounting procedures

•Assessment of conglomerates (financial and non-financial companies in a group)



On-site - RatingOn-site - Rating

• The Central Bank is currently implementing a The Central Bank is currently implementing a rating system for supervisory purposesrating system for supervisory purposes

• Qualitative and quantitative aspects in line Qualitative and quantitative aspects in line with international best practiceswith international best practices

• The methodology provides guidelines for The methodology provides guidelines for supervisory actions and frequency of supervisory actions and frequency of examinations.examinations.

• The ratings will only be disclosed to the The ratings will only be disclosed to the examined institution or conglomerate.examined institution or conglomerate.



Prudential RegulationPrudential Regulation

• Capital RequirementsCapital Requirements

• Foreign exchange exposureForeign exchange exposure

• Loan classification Loan classification

• Credit Risk CenterCredit Risk Center

• Internal controls and consolidated Internal controls and consolidated financial statementsfinancial statements



Capital RequirementsCapital Requirements

• Minimum capitalMinimum capital

• Tier I and Tier II capital Tier I and Tier II capital

• Risk-weighted assets (Basel 8%, Brazil 11%)Risk-weighted assets (Basel 8%, Brazil 11%)

• Additional Capital for: credit risk on swaps, Additional Capital for: credit risk on swaps, foreign exchange exposure, interest rate riskforeign exchange exposure, interest rate risk

• Deferred taxes weighted at 300%.Deferred taxes weighted at 300%.



Basel capital ratioSFN

14,0

14,8

15,6

16,4

17,2

18,0

18,8

19,6

Dec Mar J un Sep Dec Mar J un Sep Dec

2001 2002 2003

%

Evolution of Basel’s Capital RatioEvolution of Basel’s Capital Ratio

Stable at 17%

Dec 03 = 18.9%



Regulation imposes limits on foreign exchange Regulation imposes limits on foreign exchange exposure which apply to all financial institutions and exposure which apply to all financial institutions and their subsidiariestheir subsidiaries

• Foreign exchange combined net positions can Foreign exchange combined net positions can not exceed 30% of capitalnot exceed 30% of capital

• No capital requirement for net positions not No capital requirement for net positions not exceeding 5% of capitalexceeding 5% of capital

• Capital requirement of 50% of total exposure for Capital requirement of 50% of total exposure for net positions exceeding 5% of capitalnet positions exceeding 5% of capital

Foreign Exchange ExposureForeign Exchange Exposure



• Forward-looking approachForward-looking approach

• Creditworthiness of borrower Creditworthiness of borrower and transactionand transaction

• Past due statusPast due status

Loan Classification Loan Classification (Since December 1999)(Since December 1999)



Classification Past due (days) Classification Past due (days) Provision Provision System’sSystem’s Portfolio*Portfolio*

AA AA 0 0 27.9%27.9%

A A 0.5% 0.5% 35.4%35.4%

B 15 to 30 B 15 to 30 1% 1% 15.4%15.4%

C 31 to 60 C 31 to 60 3% 3% 9.3%9.3%

D 61 to 90 D 61 to 90 10%10% 4.6%4.6%

E E 91 to 120 91 to 120 30%30% 1.7%1.7%

F F 121 to 150 121 to 150 50%50% 0.9%0.9%

G G 151 to 180 151 to 180 70% 70% 0.7%0.7%

H H >180 >180 100%100% 4.1%4.1%

Actual provisionsActual provisions//Required: 116.4% (as of Dec 2003)Required: 116.4% (as of Dec 2003) *Dec 2003*Dec 2003

Loan ClassificationLoan Classification (mandatory classification according to number of days past due and minimum (mandatory classification according to number of days past due and minimum

amounts of provisioning for each level)amounts of provisioning for each level)



Past due loans (15 days in default at least)Past due loans (15 days in default at least)

Past due loans

%



In 1997 the Central Bank implemented a credit risk In 1997 the Central Bank implemented a credit risk center to monitor the overall exposure of the center to monitor the overall exposure of the banking system to the borrowers.banking system to the borrowers.

Information on all borrowers with exposures Information on all borrowers with exposures exceeding R$ 5,000 (exceeding R$ 5,000 ( US$ 1,700) including: US$ 1,700) including:• renegotiated debtsrenegotiated debts• outstanding and past due loansoutstanding and past due loans• guarantees from financial institutionsguarantees from financial institutions• loan classificationloan classification

Credit Risk CenterCredit Risk Center



Credit Information SystemCredit Information System

The Credit Information System contains information allowing The Credit Information System contains information allowing supervisors to analysesupervisors to analyse::

Borrower RiskBorrower Risk

• Promptness to payPromptness to pay

• Balance of investments and Balance of investments and depositsdeposits

• IndebtednessIndebtedness

• Operational revenueOperational revenue

• Credit limitCredit limit

• Beginning of business Beginning of business relationshiprelationship

Transaction RiskTransaction Risk

• Collateral - type and valueCollateral - type and value

• GuaranteesGuarantees

• Type/natureType/nature

• Term or maturityTerm or maturity



Login accessed from the Central Bank’s web page Login accessed from the Central Bank’s web page www.www.bcbbcb..govgov..brbr//scrscr option ‘SCR-Acesso’: option ‘SCR-Acesso’:



Supervision may consult an individual, a company, or an Supervision may consult an individual, a company, or an economic group. Information is displayed in a matrix format. economic group. Information is displayed in a matrix format.

Example: time x type of creditExample: time x type of credit



Other possibilities are available, for Other possibilities are available, for example:example:

Management InformationManagement Information• File information – File information –

CorporateCorporate• Behavioural data Behavioural data • Summary of customer’s Summary of customer’s

information information Significant Borrowers Significant Borrowers

• Customer’s balance sheet Customer’s balance sheet • Customer’s risk rating Customer’s risk rating • Rating from rating Rating from rating

agenciesagencies• Economic groups Economic groups

declared declared • Securities performanceSecurities performance

Detailed Position Detailed Position • Base date X Modality Base date X Modality • Institution x Modality Institution x Modality • Index X Modality Index X Modality • Currency X Modality Currency X Modality • Risk X Base date Risk X Base date • Risk X InstitutionRisk X Institution• Risk X ModalityRisk X Modality• Risk X CurrencyRisk X Currency



• Off-site monitoring of credit riskOff-site monitoring of credit risk

• Calculation of expected losses of banks’ credit portfoliosCalculation of expected losses of banks’ credit portfolios

• Analysis of specific economic sectorsAnalysis of specific economic sectors

• Diagnosis of the solvency of the financial system as a wholeDiagnosis of the solvency of the financial system as a whole

• Stress testing applied to different scenariosStress testing applied to different scenarios

• PD modelling to be applied to the totality of banks (for PD modelling to be applied to the totality of banks (for supervisory use)supervisory use)

• Information to be shared among banks, helping to strengthen Information to be shared among banks, helping to strengthen banks’ soundnessbanks’ soundness

Monitoring Credit Risk helps the Central Bank to Monitoring Credit Risk helps the Central Bank to perform its supervisory function by allowing:perform its supervisory function by allowing:



Internal Controls and Consolidation of Internal Controls and Consolidation of Financial StatementsFinancial Statements

• Internal control system consistent with the nature, Internal control system consistent with the nature, complexity, and risk of their activities.complexity, and risk of their activities.

• The board of directors is responsible for the smooth The board of directors is responsible for the smooth functioning of the internal control system.functioning of the internal control system.

• The internal auditors must present semi-annual report The internal auditors must present semi-annual report on the quality and effectiveness of internal controlson the quality and effectiveness of internal controls

• Supervision can restrict activities and operations where Supervision can restrict activities and operations where the internal controls are not satisfactorythe internal controls are not satisfactory

• Financial institutions must prepare consolidated Financial institutions must prepare consolidated financial statements including all businesses located financial statements including all businesses located within Brazil and abroadwithin Brazil and abroad



Prevention of Money LaunderingPrevention of Money Laundering

Regulation resulting from Law 9.613/1998:Regulation resulting from Law 9.613/1998:• compliance with the GAFI/FATF recommendations, compliance with the GAFI/FATF recommendations, “know “know

your customer” policy and suspicious transactions your customer” policy and suspicious transactions report;report;

• procedures for the identification and recording of procedures for the identification and recording of transactions;transactions;

• internal control systems and training policy;internal control systems and training policy;

• transactions with residents in non-co-operative countriestransactions with residents in non-co-operative countries

• criteria for customer acceptance, rating, and for updating criteria for customer acceptance, rating, and for updating customer files; declaration of purpose and reasons for customer files; declaration of purpose and reasons for opening accounts, transactions profile, source of funds; opening accounts, transactions profile, source of funds; previous notification for cash withdrawalsprevious notification for cash withdrawals



Supervision ManualSupervision Manual

• An entirely set of instructions for An entirely set of instructions for supervisory activity contemplating supervisory activity contemplating concepts and practices in placeconcepts and practices in place

• It is available at It is available at www.bcb.gov.brwww.bcb.gov.br, , both in Portuguese and Englishboth in Portuguese and English



Financial Stability ReportFinancial Stability Report

• Twice yearly – Last Edition Nov 2003 (as of June Twice yearly – Last Edition Nov 2003 (as of June 2003) 2003)

• Diagnosis of Efficiency and Solvency of the Diagnosis of Efficiency and Solvency of the Financial SystemFinancial System

• Financial Market Evolution; Financial System Financial Market Evolution; Financial System Structure; Payments System; Stress Scenarios; Structure; Payments System; Stress Scenarios; Rules on Prudential Regulation; Selected Rules on Prudential Regulation; Selected StudiesStudies

• It is available at www.bcb.gov.br, both in It is available at www.bcb.gov.br, both in Portuguese and EnglishPortuguese and English



Preparation for Basel’s New Capital AccordPreparation for Basel’s New Capital Accord

• The development of the New Accord is The development of the New Accord is being closely followed by Brazilian being closely followed by Brazilian supervision, in order to ensure that our supervision, in order to ensure that our banks will be ready to conform with the banks will be ready to conform with the new rules once they are implementednew rules once they are implemented

• Participation in Basel efforts to quantify Participation in Basel efforts to quantify the impact of Basel II in Brazilthe impact of Basel II in Brazil

• Working-group is preparing the adoption Working-group is preparing the adoption for Brazilian banks environmentfor Brazilian banks environment



Contact Contact

BANCO CENTRAL DO BRASILBANCO CENTRAL DO BRASIL

Directorate of SupervisionDirectorate of SupervisionE-mail: [email protected]: [email protected]

Phone: 55-61-414-2442Phone: 55-61-414-2442

Fax: 55-61-321-4280Fax: 55-61-321-4280

banco central do brasil banking supervision risk monitoring system for banking industry in brazil...

Documents

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