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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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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)
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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.
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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%.
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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%
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
• 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)
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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)
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
Past due loans (15 days in default at least)Past due loans (15 days in default at least)
Past due loans
%
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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’:
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
• 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:
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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
Directorate of Supervision
The Evolution of Brazilian BankingSupervision
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