Financial Stability Report – May 2008

Transcription

ISSN 1677-8138
Financial Stability Report
May 2008
Volume 7 – Number 1
ISSN 1677-8138
CNPJ 00.038.166/0001-05
Brasília
v. 7
n. 1
May
2008
p. 1-136
Half-year Banco Central do Brasil publication.
The texts and corresponding statistical charts and graphs are under the charge of the following departments:
Department of Financial System Surveillance and Information Management (Desig) – Preface, Summary
and National Financial System supervision
(E-mail: [email protected])
Open Market Operations Department (Demab) – Financial market evolution
Department of Economics (Depec) – Financial market evolution
Department of Banking Operations and Payments System (Deban) – Brazilian Payments System
Financial System Organization Department (Deorf) – Financial System Organization
Financial System Regulation Department (Denor) – National Financial System regulation
Research Department (Depep) – Selected studies
Reproduction permitted only if source is stated as follows: Financial Stability Report, Volume 7, no. 1.
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Number printed: 300
Statistical Conventions:
...
0 ou 0,0
*
Data not available.
nil or non-existence of the event considered.
less than half the final digit shown on the right.
preliminary data.
Hyphen (-) between years (1970-75) indicates the years covered, including the first and last year.
A bar (/) between years (1970/75) indicates the average of the years covered, including the first and last year or even crop or agreement year, when
mentioned in the text.
Occasional discrepancies between constituent figures and totals as well as percentage changes are due to rounding.
There are no references to sources in tables and graphs originated in the Banco Central do Brasil.
Consumer Complaints and Public Enquiries Center
Banco Central do Brasil
Secre/Surel/Diate
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70074-900 Brasília – DF – Brazil
Fax: +55 (61) 3414-2553
Internet: http://www.bcb.gov.br/?english
Summary
Preface
7
Summary
9
Financial market evolution
13
1.1 Introduction _________________________________________________________________
1.2 International financial markets ___________________________________________________
1.2.1 Analysis of international finantial markets _____________________________________
1.2.2 Financial institutions ______________________________________________________
1.3 National finantial markets ______________________________________________________
1.3.1 Analysis of national finantial markets _________________________________________
1.3.2 Assets market ____________________________________________________________
1.4 Conclusion __________________________________________________________________
13
14
14
18
25
25
31
35
National Financial System supervision
2.1 Overview ___________________________________________________________________
2.2 Balance sheet structure _________________________________________________________
2.2.1 Capital _________________________________________________________________
2.2.2 Assets __________________________________________________________________
2.2.3 Liabilities _______________________________________________________________
2.2.3 Results _________________________________________________________________
2.3 Credit Guarantee Fund (FGC) ___________________________________________________
2.4 SFN operating limits __________________________________________________________
2.4.1 Basel Capital Ratio _______________________________________________________
2.4.1.1 Evolution _________________________________________________________
2.4.1.2 Concentration _____________________________________________________
2.4.1.3 Analysis by segments _______________________________________________
2.4.1.4 Noncompliance with Basel Limits _____________________________________
2.4.2 Fixed Asset Limit ________________________________________________________
2.4.2.1 Evolution _________________________________________________________
2.4.2.2 Analysis by segments _______________________________________________
2.4.2.3 Noncompliance with the Fixed Asset Limit ______________________________
2.5 Risks _______________________________________________________________________
2.5.1 Loan operations __________________________________________________________
2.5.1.1 Operations written-off as losses _______________________________________
2.5.1.2 Joint liabilities _____________________________________________________
2.5.1.3 Largest SFN debtors ________________________________________________
39
39
40
40
42
45
46
51
51
51
52
53
53
55
55
55
56
56
57
57
60
61
61
2.5.1.4 Sector of economic activity ___________________________________________
2.5.1.5 Classification of loan operations _______________________________________
2.5.1.6 Delinquency ______________________________________________________
2.5.1.7 Provisions ________________________________________________________
2.5.1.8 Provisions set aside/minimum provision ________________________________
2.5.2 Exposure in foreign currencies and gold _______________________________________
2.5.2.1 Net exposure in the basket of currencies _________________________________
2.5.2.2 Volume of long and short positions in the basket of currencies _______________
2.5.2.3 Net exposure of the basket of currencies ________________________________
2.5.2.4 Net exposure in the basket by segment __________________________________
2.5.2.5 Volume of long and short positions in the basket by segment ________________
2.5.2.6 SFN concentration __________________________________________________
2.6 Stress tests __________________________________________________________________
2.6.1 Universe analyzed ________________________________________________________
2.6.1.1 Initial situation ____________________________________________________
2.6.2 Upward stress scenarios ___________________________________________________
2.6.2.1 Scenario I: increased credit risk _______________________________________
2.6.2.2 Scenario II: increased interest and exchange rates _________________________
2.6.2.3 Scenario III: increased interest rates exchange rates and credit risk ____________
2.6.3 Downward stress scenario __________________________________________________
2.6.4 Temporal analysis ________________________________________________________
2.6.4.1 Scenario I: increased credit risk _______________________________________
2.6.4.2 Scenario II: increased interest and exchange rates _________________________
2.6.4.3 Scenario III: increased interest and exchange rates and credit risk _____________
2.6.4.4 Scenario IV: reduction in interest and exchange rates ______________________
2.6.5 Sensitivity analysis _______________________________________________________
2.6.5.1 Credit risk ________________________________________________________
2.6.5.2 Market risk – rate of exchange ________________________________________
2.6.5.3 Market risk – interest rate ____________________________________________
2.7 Conclusion __________________________________________________________________
Brazilian Payments System – SPB
62
62
67
67
68
68
69
70
70
70
71
71
72
73
73
73
73
73
74
74
75
75
75
75
76
76
76
77
77
77
93
3.1 Introduction _________________________________________________________________ 93
3.2 Major developments in the second half of 2007 _____________________________________ 94
3.3 Performance of settlement systems _______________________________________________ 95
3.3.1 Fund Transfer Systems ____________________________________________________ 95
3.3.1.1 Reserves Transfer System – STR ______________________________________ 95
3.3.1.2 Funds Transfer System – Sitraf _______________________________________ 101
3.3.1.3 Deferred Settlement System for Interbank Credit Orders – Siloc _____________ 102
3.3.1.4 Centralizer Clearance for Checks and Other Documents – Compe ___________ 102
3.3.2 Securities, derivatives and FX interbank clearing and settlement systems ____________ 103
3.3.2.1 Special System of Settlement and Custody – Selic ________________________ 103
3.3.2.2 Clearinghouse for Custody and Settlement – Cetip _______________________ 104
3.3.2.3 Brazilian Clearing and Depository Corporation – CBLC ___________________ 104
3.3.2.4 BM&F-Securities Clearinghouse – BM&F-Securities _____________________ 106
3.3.2.5 BM&F-Derivatives Clearinghouse – BM&F-Derivatives __________________ 106
3.3.2.6 BM&F-Exchange Clearinghouse – BM&F-Foreign Exchange ______________ 107
3.4 Conclusion _________________________________________________________________ 108
Financial System Organization
111
4.1 Introduction ________________________________________________________________
4.2 Market strategies and the quantity of SFN institutions _______________________________
4.3 Reorganization processes, capital structure and SFN operational
dynamics and concentration levels _______________________________________________
4.4 Microfinance ________________________________________________________________
4.4.1 Credit unions ___________________________________________________________
National Financial System regulation
5.1
5.2
5.3
5.4
5.5
5.6
111
112
114
116
117
119
Required Base Capital (PRE) __________________________________________________
Measuring the risk of operations not classified in the Trading Book (Banking Book) ______
Limit on exchange exposure __________________________________________________
Ombudsman _______________________________________________________________
Accessibility _______________________________________________________________
Bank fees _________________________________________________________________
119
124
125
125
126
127
Boxes
Credit Classification Migration Matrix ____________________________________________ 64
Concepts and Methodologies ____________________________________________________ 79
Concepts and Methodologies – Credit Operations ____________________________________ 84
Concepts and Methodologies – Exchange Exposure __________________________________ 86
Concepts and Methodologies – Stress Scenarios _____________________________________ 88
Riskmetrics Methodology to Calculating Value-at-Risk _______________________________ 89
Hybrid Approach to Calculating Value-at-Risk ______________________________________ 91
General Overview of the Brazilian Payment System _________________________________ 110
Appendix
129
Preface
The Central Bank of Brazil has the mission of guaranteeing
the stability of the currency’s purchasing power, together
with a solid and efficient financial system. These two
objectives are closely intertwined. Serious disturbances
within the financial system would affect the efficiency of
monetary policy, while macroeconomic stability aids in
reducing risks and ensuring financial stability.
The institutional responsibility of the Central Bank of Brazil
is to contribute to preservation of the stability of the financial
system as a whole, by fulfilling its responsibilities of
monetary policy implementation, National Financial System
(SFN) supervision, oversight of the payments system and
lender of last resort. Among its functions, one must include
monitoring of macroeconomic scenarios, of situations or
events that can not be classified within the standards of
expected behavior, of exposure to risks and capital and
financial aspects capable of impacting the stability of the
National Financial System or its subsystems.
Consequently, publication of analyses on financial system
performance carried out by central banks not only reveals
the degree of system stability, but is widely recommended
as a way of ensuring monetary authority transparency and
convergence of agent expectations.
Viewed in this context, the Financial Stability Report has
the objective of disseminating a diagnosis of the efficiency
and solvency of the SFN, in such a way that financial market
participants can better evaluate and manage inherent risks.
The Report is produced on a half-yearly basis and published
internationally. Its basic reference is the second half of
2007 and, in some sections, the early months of the first
half of 2008.
The analyses released in this edition and the database utilized
refer to facts that occurred through March 3, 2008. Therefore,
any differences in relation to other publications that utilize
May 2008
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a more recent database may result from possible alterations
in the international economic-financial scenario.
The Financial Stability Report is available in PDF at the
following address: www.bcb.gov.br.
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May 2008
Summary
Global growth rate projections have been revised downward
in recent months. There is a general feeling within the
international economic scenario that the United States
economy has shifted toward a period of reduced economic
activity. Corroborating this conviction, one only needs to
recall the fact that new international market credits have
become increasingly more difficult to obtain, primarily as
a result of the crisis on the United States subprime home
mortgage financing market.
The large emerging economies have been able to weather the
crisis relatively unscathed due to their strong international
reserve levels and robust macroeconomic fundamentals.
Nonetheless, the fact that world growth forecasts have been
revised downward may well impact the pace of international
trade expansion.
With the turmoil triggered by the mortgage market
crisis, national financial market indicators have shown a
considerable degree of resilience, basically as a result of
consolidation of the macroeconomic achievements of recent
years. This process has made it possible for investors to draw
a clear distinction among the different emerging countries,
with particularly favorable impacts for Brazil. However, it
should be stressed that domestic indicators have not been
totally indifferent to the adverse external scenario and, in
recent months, have shown a trend toward greater volatility,
particularly in the case of interest rates and stock markets.
On the other hand, intensification of growth in the Brazilian
economy in recent years was triggered by the growing
dynamics of domestic demand, evident both in significant
increases in investment levels and in expanding household
consumption. In this sense, credit demand has remained
strong in early 2008, despite growth in the interest rates
applied to the major loan modalities. This behavior further
reinforces perceptions that the national credit market will
tend to provide continued support to sustaining the pace of
economic activity.
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Credit operations within the country have continued the
process of expansion evident since December 2004, while the
ratio of these operations to GDP has gradually increased. It is
enough to emphasize that bank credits have been subjected
to special attention by the financial system supervisory
institution. This monitoring process has demonstrated that
the volume of provisions set aside by the system remains
sufficient to cover possible losses caused by bad loans.
Through the end of 2007, the default level has remained
at its lowest point since this Report was first published;
the provisions set aside were consistently greater than
any expected losses; and institutions had volumes of
capital well above the minimum required level to cover
unforeseen losses.
With regard to real estate credit operations, it is important
to perceive that this type of operation plays only a minor
role when viewed in the context of overall loan operations
contracted within the financial system, while at the same
time being one of the modalities with the lowest rate of
delinquency in the entire SFN. Parallel to this, one should
consider that Brazil’s regulatory framework is quite different
from that of Europe and the United States. Here, it is
important to observe that the type of loan that would be
classified as subprime and which is at the roots of the current
international crisis does not play a role of any significance
in the Brazilian system.
Consequently, credit growth in Brazil has in no way
jeopardized financial system solidity. As a matter of fact,
the scenario of expanding credit has been responsible
for the fact that many financial institutions have adopted
business strategies aimed at expanding operational scales,
either by acquiring other institutions or by investing in
their own expansion. However, differently from what one
could imagine, this environment has had a healthy impact
on competition among the economic agents in the sector,
despite processes of concentration that occurred in the past.
The competitive environment has been ensured by entry
of new competitors into the financial market, attracted by
the profitability generated by both foreign and domestic
investments in this sector of the economy.
Viewed in the context of the payments system, all of the
different clearance and settlement systems and, particularly,
those considered essential from the viewpoint of financial
stability, operated without interruption and without any
significant delays in the second half of 2007, while all
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May 2008
of them concluded their daily settlement cycles with no
difficulties whatsoever.
Some institutions showed a greater need for liquidity,
without impacting the system as a whole. On the other hand,
none of the retail payment systems showed alterations that
would justify reevaluation in terms of their importance from
the point of view of systemic risk.
With regard to risk management of the various clearinghouses
that operate as central counterpart, stress tests have shown
results that are adequate to ensure settlement of operations,
though there has been some degree of growth in risks caused
by greater international market volatility.
Starting on July 1, 2008, the provisions of Resolution
n. 3,490/2007 will produce their due effects, including,
among other factors, calculation of shares of Required
Base Capital (PRE), improvement in the former concept of
Required Net Worth (PLE), which corresponds to the volume
of capital to be maintained by financial institutions and
other institutions authorized to operate by the Central Bank
of Brazil, adapting this concept to the recommendations
contained in the document “International Convergence of
Capital Measurement and Capital Standards”, known as
“Basel II”, as stated in Communiqués n. 12,746/2004 and
16,137/2007.
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1
Financial market evolution
1.1 Introduction
The recent evolution of international financial conditions
has been characterized by accentuation of risks to stability
rooted in the subprime mortgage market crisis in the United
States. This situation has been evolving since the final
quarter of 2007 and has now rippled out into other local and
international credit markets.
Although the financial systems of developed countries
in Asia, Oceania and, primarily, Europe have also been
impacted by events on the American credit market, the
United States economy itself has been most seriously
impacted by the dimensions and dynamics of these events,
which now stand as the greatest risk to the stability of
markets, the financial system as a whole and even Gross
Domestic Product (GDP) growth.
While it is true that the major emerging economies have
been relatively unscathed by these events due to their high
levels of international reserves and robust macroeconomic
fundamentals, countries with high current account deficits
and accentuated dependence on foreign capital have become
particularly vulnerable to the volatility that now reigns on
the financial markets of the United States and Europe.
National financial market indicators have shown themselves
to be highly resistant to the turmoil triggered by the high risk
mortgage market crisis in the United States. Consolidation
of the macroeconomic advances achieved in recent years
by government commitments to fiscal austerity, coupled
with adoption of the inflation target system, has made it
possible for investors to distinguish between Brazil and other
emerging countries, in a way that has clearly favored Brazil.
Nonetheless, domestic indicators have not been totally
indifferent to the adverse external scenario, principally in
the months of August 2007 and January 2008, when interest
and stock market volatility spiraled.
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In the wake of the decline caused by the outbreak of the
international financial market crisis in August, the São Paulo
Stock Exchange Index (Ibovespa) recovered rapidly, setting
a new historical record in the month of September. However,
since that time it has operated at approximately the same
level but with significantly higher volatility. Impacted by
external events, the interest rate trajectory was determined
by the commitment to the inflation target system and by the
enhanced dynamics of the domestic economy. The inversion
of the incline of the term structure of interest rates at the
start of the half-year period, coupled with an accentuated
increase in longer term rates in August, was followed by
a reduction in the positive incline which lasted through
mid-October. Starting at that point, futures interest rates
moved gradually upward as the cycle of a more flexible
domestic monetary policy was brought to a close.
Differently from what occurred in other situations marked
by deteriorating international scenarios, the value of the real
rose against the United States dollar as the dollar devalued
against other currencies. With the strong inflow of exchange
resources, the Central Bank of Brazil intensified its policy
of rebuilding the country’s international reserve position,
generating a situation in which Brazil became a net external
creditor at the end of 2007. The guidelines and major goals
defined by the National Treasury Secretariat (STN) for the
internal federal public securities debt (DPMFi) in 2007
were fully implemented, resulting in longer maturities and
reductions in the participation of floating-rate securities.
1.2 International financial
markets
1.2.1 Analysis of international
financial markets
The crisis that began in the United States real estate market
generated repercussions that interrupted the credit flow on
several markets, imposing severe restrictions on international
banking system financing operations. Beginning in mid-June
2007, the crisis spilled over into financial markets, when
Moody’s downgraded several subprime mortgage-backed
assets and placed others under review.
Since then, risks that were not foreseen in the securitization
strategies of various financial institutions, particularly
in Europe and the United States, became evident and
revealed deep-seated difficulties in the process of pricing
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May 2008
complex financial products, inhibiting secondary market
operations. Asymmetric information regarding the intensity
and identification of investors who had reportedly suffered
severe losses generated increased market volatility. Various
events led to a worsening of the crisis, particularly inclusion
of billions of dollars in book losses by a number of financial
institutions. More recently, underwriters of municipal bonds
were seen to be particularly vulnerable to the financial crisis
as a result of their role in providing collateral to structured
residential mortgage-backed products. It became evident that
the greatest race was that of the credit crisis being transformed
into a solvency crisis for leveraged institutions.
Despite market interventions by the major central banks
through liquidity injections, the system practically shut down
the credit supply. As a matter of fact, the sharp reduction in
liquidity was evident not only in more costly bank credits, but
also higher cost corporate loans and sovereign risk spreads
for the emerging economies. On the other hand, demand for
bonds issued by the developed countries remained strong
during the period.
Yields on treasury bonds
Nominal yields on 10 year's treasury bonds
% p.y.
6.0
4.8
3.6
2.4
1.2
0.0
3.31
2006
6.12
8.22
11.1
USA
1.11
2007
3.23
6.4
Germany
8.14
10.24
1.3
2008
UK
3.14
Japan
Source: Bloomberg
Embi Global
Basis points
550
440
330
220
110
0
3.17
2006
6.16
9.15
12.15
3.16
2007
6.15
EmbiG
South Africa
Argentina
Mexico
Source: Bloomberg
9.14
12.14
3.14
2008
Since publication of the most recent Financial Stability
Report, demand for long-term government bonds has
remained strong. Since these papers were considered secure,
in an environment of less restrictive monetary policies, rising
demand favored a steady reduction in annual returns on the
10-year government bonds issued by important economies
as of last June. Between September 30 and March 14, annual
earnings on 10-year bonds issued by the United States,
Germany, the United Kingdom and Japan dropped 112 basis
points (b.p.), 60 b.p., 68 b.p. and 61 b.p., in that order.
The Emerging Market Bond Index Plus Global (Embi
Global), the risk indicator for emerging markets, continued
the upward movement begun last June as a result of the
international financial market liquidity squeeze. Since the
end of September, the Embi Global rose 110 b.p., closing at
324 points on March 14, the highest level since July 2005. On
that same date, the Embi Global for South Africa, Argentina,
Mexico and Turkey closed at 279, 541, 200 and 338 points,
respectively, corresponding to increases of 154 b.p.,
143 b.p., 69 b.p. and 118 b.p., in the period under analysis.
Here, it is important to stress that the sharp upward
movement in risk premiums for South Africa and Argentina
was strongly impacted by questions of a domestic nature.
Turkey
The sharp accounting losses registered in the balance
sheets of important banks located mainly in the Northern
Hemisphere, as well as expectations of new and significant
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iTraxx & DJ CDX – 5 year
Points
600
480
360
240
120
0
3.27
2007
5.10
8.8
6.25
9.21
11.6
12.20
2.4
2008
3.14
iTraxx Europe crossover, series 7
iTraxx Europe, series 7
DJ CDX (USA) crossover, series 8
DJ CDX (USA) investment grade, series 8
Source: Thomson Datastream
5 year CDS – Premiums of major banks1/
Points
200
160
120
losses in 2008, impacted the evolution of premiums on
Credit Default Swap (CDS) at these banks. On March 14,
average CDS premiums of five important United States
banks and five important European banks reached levels
of 198 b.p. and 155 b.p., respectively, compared to 35 b.p.
and 25 b.p., at the end of September. It should be stressed
that, at the end of May 2007, the CDS issued by the same
banks registered averages of 14 b.p. and 7 b.p., in that order.
The cost for hedging corporate securities against default
reached record levels, indicating significant deterioration
in perceptions of the quality of these credits. In this sense,
the indicators iTraxx Crossover and Dow Jones CDX
US Crossover, which measure the premiums required to
guarantee loans of European and United States companies
with risk classifications below investment grade, moved
up from 340 b.p. and 250 b.p., respectively, at the end of
September, to 548 b.p. and 430 b.p., on March 14.
80
40
0
9.15
2006
11.9
1.3
2007
2.27
4.23
8.9
6.15
10.3
11.27
European banks
1.21
2008
3.14
USA banks
Source: Thomson Datastream
1/ European index is the aritmethic average of HSBC, UBS, Santander, BNP Paribas
and Deutsche Bank 5-year CDS premiums. USA index is the aritmethic average of
Citigroup, Bank of America, JPMorgan, Goldman Sachs and Wells Fargo 5-year CDS
premiums. Since it's not a random sample, it may not reflect the behavior of the
financial system as a whole.
VIX
Points
48
40
32
24
16
8
3.14
2000
3.14
2002
3.14
2001
3.14
2003
3.15
2004
3.15
2005
3.15
2006
3.15
2007
3.14
2008
Source: Bloomberg
Stock exchanges
Developed countries
12.31.2003 = 100
210
188
166
144
122
100
3.28
2005
7.26
11.23
3.23
2006
7.21
11.20
3.20
2007
7.18
Japan Nikkei 225
UK FTSE 100
Germany DAX
USA S&P500
Source: Bloomberg
16 |
11.15
|
May 2008
3.14
2008
The deteriorating financial scenario continued impacting
the Volatility Index (VIX), which is used to measure stock
market volatility. Between September 30, 2007 and March
14 of this year, the VIX jumped from 18 points to a level of
31.2 points, the highest mark in the last five years, surpassing
the 30.8 point level registered at closing on August 16 of
last year, just one day before the Federal Reserve began
adopting a series of measures aimed at injecting liquidity
into the system.
Intense stock market volatility since the turbulence began
in the middle of last year resulted in sharp stock market
losses. As a matter of fact, in the nine-month period ended
on March 14, the major indicators of stock market growth in
the major economies showed substantial losses, varying from
15.4% (S&P 500 – United States) to 31.4% (Nikkei – Japan).
When one considers only the changes that have occurred
since the most recent Financial Stability Report, stock
market indicators in the United States, Germany, the United
Kingdom and Japan registered valuations of 15.6%, 17.9%,
12.9% and 27.1% in that order, in the period extending from
September 30 to March 14. In the year, following the same
order as stated above, losses through March 14 reached
respective levels of 12.3%, 20%, 12.8% and 20%.
Differently from previous crises, in which the stock markets
of the emerging economies were the most heavily impacted,
the markets of these economies have, with few exceptions,
shown considerable resilience during the current crisis, when
compared to their counterparts from the developed world.
From June 14, 2007 to March 14, 2008, the major indicators
for the South African and Indian exchanges registered
Stock exchanges
Emerging economies
12.31.2003 = 100
380
324
268
212
156
respective gains of 5.9% and 1%, while the Mexican and
Turkish indices posted losses of 4.1% and 21.2%, in that
order. It is important to stress that both the XU100 (Turkey)
and Sensex (India) accumulated strong devaluation in the
current year, with cumulative losses of 23.3% and 22.3%,
respectively, through March 14. In the same time span, the
IPC (Mexico) and Jalsh (South Africa) accumulated losses
of 1.7% and gains of 5.8%, respectively.
100
3.28
2005
7.26
11.23
3.23
2006
7.21
South Africa
11.20
Mexico
3.20
2007
7.18
11.15
Argentina
3.14
2008
Turkey
Source: Bloomberg
Developed countries currencies
Dollar exchange rates
9.19.2003 =100
115
106
97
88
79
70
3.18
2005
7.6
10.24
2.9
2006
5.30
9.15
Pound sterling/Dollar
1.3
2007
4.23
8.9
Yen/Dollar
11.27
3.14
2008
Euro/Dollar
Source: Bloomberg
Emerging markets currencies
Dollar exchange
9.19.2003 =100
130
114
98
82
66
50
3.17
2006
5.30
8.10
10.23
3.1
2007
Brazilian real/Dollar
Turkish lira/Dollar
Source: Bloomberg
3.16
5.29
8.9
10.22
1.2
3.14
2008
Russian rublo/Dollar
South African rand/Dollar
Since the end of 2005, the United States dollar has
depreciated against the euro and pound sterling. More
recently, deteriorating economic conditions in the United
States and clearly unattractive interest rates in that country
as a result of successive reductions in the basic rate,
resulted in sharp devaluation, particularly against the yen
and euro. Expectations for the remainder of 2008 indicate
continuation of this trajectory, given the outlook for
additional cutbacks in Fed fund rates and maintenance of
basic interest rates in the Euro Area and Japan. From June
14, 2007 to March 14, 2008, the dollar depreciated 19.4%
against the yen, 15.1% against the euro and 2.5% against
the pound sterling. In the year through March 14, the dollar
devalued 11.3% against the yen, 6.9% against the euro and
1.7% against the pound sterling.
Comparison of the United States currency with emerging
market currencies shows that the dollar has followed varied
paths. In Turkey, the high current account deficit has been
a source of concern in relation to exchange rate evolution.
In South Africa, energy supply restrictions and the outlook
for lesser world economic expansion, with evident negative
impacts on local industry, have had a highly adverse impact
on investor intentions in a country with a high current
account deficit. In Hungary, the 15% upward or downward
fluctuation band in relation to the euro was eliminated with
the objective of making it possible for the Hungarian Central
Bank to concentrate on combating inflation. In China, the
speed of appreciation of the renminbi in relation to the United
States dollar increased, further strengthening the conviction
that the Chinese Central Bank is allowing the local currency
to appreciate in an attempt to combat growing inflation in that
country. From June 14, 2007 to March 14, 2008, the dollar
depreciated 6.3% against the Turkish lira and 9.4% against
the Russian ruble, in contrast to 10.4% appreciation against
the South African rand. In the year through March 14, the
dollar devalued 4.2% against the Russian ruble, compared to
valuation of 5.9% against the Turkish lira and 15.6% against
the South African rand.
May 2008
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| 17
1.2.2 Financial institutions
The increase in defaults in subprime mortgage loans in the
United States, not previously shown in rating assessments,
revealed the deficiencies that exist in the valuations carried
out by the major risk rating agencies for the securitization
instruments of these credits. This provoked uncertainties
regarding the pricing of a wide array of securitized papers
and resulted in sharp liquidity contraction in their markets.
In the face of reputational risks or contractual obligations
assumed, financial intermediaries responsible for organizing
credit securitizations were forced to incorporate operations
into their balance sheets that would have previously been
sold on security markets, thus generating an important
source of pressure on their liquidity positions in the final
months of 2007.
USA – Net income performance
US$ million
40 000
32 000
24 000
16 000
8 000
0
11.15
1993
8.15
1995
5.15
1997
2.15
1999
11.15
2000
8.15
2002
5.15
2004
2.15
2006
11.15
2007
Net income
Source: FDIC
USA – Loss provisions and net charge-off
US$ million
35 000
Increased counterpart risks and persistent uncertainties
regarding total losses of the system resulted in adoption of
defensive postures by financial institutions, with the aim
of minimizing new losses, strengthening their liquidity
positions and conserving capital. This posture generated
important repercussions on the reduction in interbank market
transactions, growth in insurance premiums against credit
defaults by financial institutions and spreads in general, as
well as cutbacks in the financial system’s willingness to grant
new credits to businesses and individuals.
According to the Federal Deposit Insurance Corporation
(FDIC), the fourth quarter of 2007 witnessed acrossthe-board deterioration in the major asset quality and
profitability indicators of insured financial institutions,
particularly in the case of large-scale institutions, a group
in which one out of every four institutions registered losses.
Aside from lesser consolidated net profits (US$5.8 billion)
since the final quarter of 1991, for the first time in history
operations with stocks and securities registered overall losses
(US$10.6 billion) for the consolidated financial system.
New provisions for bad debts reached record levels of
US$31.3 billion, more than three times the amount set aside
in the same quarter of 2006.
28 000
21 000
14 000
7 000
0
Q4
1999
Q4
2000
Q4
2001
Q4
2002
Q4
2003
Q4
2004
Q4
2005
Loss provisions
Q4
2007
Net charge-off
Source: FDIC
18 |
Q4
2006
|
May 2008
In a clear sign of the tendency toward deteriorating
credit operation quality in the portfolios of insured
institutions, defaults (arrears of more than 90 days) increased
US$26.9 billion, reaching a level of US$109.9 billion in
the fourth quarter of 2007. This was the highest level of the
last 24 years and was 91.5% higher than the level registered
at the end of the fourth quarter of 2006. Credits in arrears
between 30 and 90 days increased US$18.7 billion compared
to the previous quarter, reaching US$110.94 billion or 55.1%
more than at the end of 2006. Accounting losses in the final
quarter of 2007 added up to US$16.2 billion.
With the losses and liquidity access problems experienced by
hedge funds, coupled with decapitalization of the insurance
companies that guaranty the credit risk of municipal bonds
(monolines) – holding credit derivatives in their portfolio –,
the drop in the prices of securitized debt bonds introduced
another level of risk to the system and to financial markets.
Based mainly on the credit risk evaluations attributed by
rating agencies to assets and institutions, new provisions
can be required of banks and other financial institutions as
a result of their positions in municipal bonds, particularly
in those cases in which monoline capital has deteriorated,
resulting in the downgrading of these ratings, with similar
consequences for the ratings and the prices of the securities
guarantied by them. At the same time, continued restrictions
on credit access by institutions with high levels of leverage,
such as hedge funds, could obligate them to sell positions
on markets that have already been debilitated by liquidity
and pricing problems, introducing new downward pressures.
Should this occur, both movements have potential to generate
losses and problems related to financial system capitalization,
thus further accentuating already apparent problems.
In response to these losses and to pressures on liquidity
and capital adequacy, several American institutions, mainly
from the grouping of large-scale corporations, sought to
capitalize themselves by reducing stock buybacks and
dividend distributions, while raising additional capital, in
such a way as to maintain capital levels sufficient to satisfy
regulatory limits. Up to early March, just over US$50 billion
in additional capital was raised among the major banking
institutions. An important share of this amount originated in
stock acquisitions by sovereign investment funds in Asian
and Middle Eastern countries.
In the final quarter of 2007, a commercial bank decreed
bankruptcy and the number of commercial banks and
savings institutions insured by the FDIC and facing problem
situations increased by 10, reaching a total of 75 institutions
with total assets of US$22.2 billion. In March 2008, with
the support of the Federal Reserve, the virtual impossibility
of gaining access to liquidity on the interbank market led
to the sale of the fifth largest American investment bank to
another large bank in that country.
May 2008
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| 19
In contrast to market and financial system difficulties,
American monetary policy concentrated with greater intensity
on reestablishing the flows of financial transactions, while
restricting their impacts on the level of economic activity.
In response to the severe liquidity crisis, the Federal Reserve
Bank reduced the basic Fed fund rate six times since
mid-August, dropping from 5.25% per year to 2.25% per
year, while cutting the rediscount rate eight times to a
level of 2.5% per year. With the sharp reduction in credit
flows and the relative decline in the level of economic
activity, the central banks of the United States, Euro Area
(ECB), England (BoE), Canada (BoC) and Switzerland
(BNS) announced in mid-December that they would take
temporary and coordinated measures based on intervention
in their money markets. With this, they began carrying out
credit auctions at rates lower than those available through
their respective discount windows. In the United States,
these auctions were known as Term Auction Facility (TAF).
These operations, which conjugate acceptance of a larger
array of guaranties and longer maturity terms for resale
of the securities, coupled with efforts to reduce pressures
on the dollar on offshore interbank markets, giving rise to
the establishment of swap lines between the Fed and ECB
(US$20 billion) and between the Fed and the BNS
(US$4 billion). Whether in Europe or the United States, the
auctions have been efficient in reducing the spreads between
three-month interbank rates and the basic interest target.
In the United States, the TAF has the objective of reducing
liquidity preference incentives by banks and increasing
their willingness to provide credits to businesses and
individuals. With two monthly offers in the auction system
with terms of 28 or 35 days, the initial limit of this operation,
US$20 billion for each auction, was later raised to
US$30 billion and US$50 billion, respectively, in January
and March 20081.
Emergence of capitalization problems among monolines
and access to financing by hedge funds, which coincided
with the period in which the liquidity problems of the
country’s fifth largest investment bank further accentuated,
led the United States Central Bank to create two new credit
lines for primary dealers on March 11 and 16, including
institutions that did not have banking reserve accounts. With
the explicit objective of improving the capacity of primary
1/ A detailed description of this and other measures taken by the Federal Reserve, together with information on the coordinated measures taken by the central
banks of the developed countries, are available in the box “The International Financial Crisis – Analysis of Central Bank Measures”, on page 76 of the
March 2008 Inflation Report, published by the Central Bank of Brazil.
20 |
|
May 2008
dealers to provide financing to participants in securitized
bond markets, these credit lines expanded the spectrum of
assets eligible as collateral for carrying out such operations
with the Central Bank.
Initially, the Federal Reserve utilized the Term Securities
Lending Facility (TSLD) in order to allow for 28 day
exchanges in auctions of various securities up to a maximum
of US$200 billion in Treasury bonds. Aside from the usual
collateral in liquidity assistance operations, this line of credit
allows for presentation of the securities of federal agencies,
securities guarantied by residential mortgage loans issued
by federal agencies and private agencies, provided that they
have a AAA or Aaa rating, as collateral.
For the first time since the 1929 Great Depression, the
monetary authority of the United States created a direct
liquidity assistance line, which also includes non-banking
institutions (approximately 10 institutions among the 20
primary dealers periodically chosen by the Federal Reserve),
called the Primary Dealers Credit Facility (PDCF). Based on
maturities and costs identical to those of liquidity assistance
operations for institutions with banking reserve accounts
at the Central Bank, this credit line is different from the
TSLD in that it accepts a wider array of securities, including
corporate securities and municipal bonds, provided that they
have an investment grade rating and that their price quotes
are available on the market. In this new liquidity line, loans
can be obtained at any time whatsoever without depending
on previously scheduled auctions.
In a decision parallel to institution of the PDCF, on March
16 the Fed once again reduced – this time to 0.25 percentage
points – the difference between the rate of its liquidity
assistance lines in relation to Fed fund rates and expanded
the maturity of these operations from 30 to 90 days.
USA – Noncurrent loans
Percentage by loan category
4.5
3.7
2.9
Despite the efforts of the monetary authority, liquidity
restrictions in the financial system and the consequent
conservative stance adopted by financial institutions in
granting loans to businesses and individuals exerted a powerful
influence on the economic activity level in the United States,
particularly as of the first two months of 2008.
2.1
1.3
0.5
Q4
1999
Q4
2000
Q4
2001
Q4
2002
Total loans
Comercial & Ind.
Source: FDIC
Q4
2003
Q4
2004
Q4
2005
Q4
2006
Consumer
Agricultural
Q4
2007
In addition to intense contracting of activities in the
residential real estate sector, deceleration in the pace of
domestic consumption and spending on non-residential
construction provoked a cutback in available jobs, suggesting
the possibility of a recession in the world’s largest economy.
Evidently, this would be accompanied by worsening of the
May 2008
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| 21
USA – Noncurrent mortgages
Percentage by mortgage category
%
3.5
2.9
2.3
1.7
1.1
0.5
Q4
1999
Q4
2000
Q4
2001
Total
Q4
2002
Q4
2003
Q4
2004
Q4
2005
Residential
Source: FDIC
Q4
2006
Q4
2007
Commercial
underlying risk of increased financial institution losses, with
possible acceleration in the growth of loan provisions set
aside to offset increased defaults among consumers and the
nonfinancial business sector.
FDIC information reveals that, even before that period,
default rates in loan categories other than mortgages,
particularly consumer loans, were already increasing –
though still at historically low levels. In final analysis, the
persistence and depth of a possible downturn in the United
States economy will determine the evolution of these
indicators and their aggregate impacts on the stability of the
country’s financial system.
Aside from demanding a response in monetary policy
terms, the evolution of the residential mortgage market,
its repercussions on the financial system and the risk of
plunging the country’s economy into a recession resulted
in formulation of a package of fiscal incentive measures,
approved by the United States Congress last February.
Offering powerful incentives to household consumption and
business investments programmed for 20082, these measures
should be seen in the context of the Federal Reserve’s efforts
to shore up the residential real estate sector, viewed as the
point of origin of the problems affecting the financial system
and of the restrictions on continued GDP growth.
In this sense, the limits on acquisitions of mortgages by
federal real estate credit securitization agencies were
increased from US$427,000 to US$730,000, with the aim
of stimulating mortgage operations involving high value
residential real estate. At the same time, the limit imposed
on the granting of insurance by the Federal Housing
Administration (FHA) for private mortgage loans was raised
from US$362,000 to US$730,000.
In the Euro Area, despite this worrisome scenario, the
reflections of the financial crisis are unequally distributed and
losses have been restricted to French and German institutions
with high levels of exposure to subprime-backed assets,
either directly or through their investment portfolios. In the
German case, even in the wake of strong accounting losses,
some large banks remained heavily exposed to high risk
assets. In France, exposure to the subprime market, coupled
with compliance problems at a major institution, contributed
to a worsening of tensions on the local market.
2/ The fiscal incentives included in this package totaled US$ 168 billion, including US$ 118 billion targeted to stimulating consumption and US$ 50 billion
in incentives to business investment. At the same time, one should understand that these measures are temporary in nature and are to remain in force
only in 2008.
22 |
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May 2008
Similar events occurred among the major Swiss financial
groups, registering massive accounting losses in their efforts
to reduce the value of the mortgage and exchange assets held
in their portfolios, raising serious doubts as to the adequacy of
their controls and risk management procedures. This turbulent
scenario is further worsened by liquidation of a hedge fund
backed by local median capitalization companies.
In the United Kingdom, the solid base capital position and
high profit levels registered by British banks, with the sole
exception of Northern Rock, anchored the expectations
of agents during the periods of turmoil. To some extent,
the result reflects the increased diversification of these
institutions and limited exposure to international credits,
which are concentrated in a small number of banks.
Otherwise, these institutions carry a high level of domestic
loans and interest, particularly mortgage loans. In a period
in which real estate prices reversed course, additional risks
may constitute new sources of tension.
Less exposed to the repercussions of the financial crisis
caused by the United States mortgage market, the economies
of Asia have demonstrated solid economic fundamentals and
good financial health. According to International Monetary
Fund (IMF) data, the fact that the Asian economy has
distanced itself somewhat from the crisis has been perceived
by several indicators, such as the default rate. According to
data available through September 2007, these rates stood at
6.6% in China; 2.8% in India; 1.5% in Japan (large-scale
banks); 0.8% in South Korea; and 0.9% in Hong Kong. All
of these rates were either equal to or below those registered
at the end of 2006. Confirming the assertion regarding the
solidity of the Asian banking system, IMF data shows that
less than 6% of the more than US$190 billion in world
banking system losses were written off by Asian banks.
Differently from most of their United States counterparts,
the excellent performance turned in by Asian financial
institutions is mirrored in the fact that the ratings of major
banks and funds in that region of the world have not been
downgraded by the different ratings agencies, at the same
time in which there has been no significant tightening of credit
conditions in the region. With the exception of South Korea,
which should be understood in the framework of domestic
regulatory questions, this scenario has been generated as
much by the fact that real lending rates have declined as
inflation increased, while the major source of funding for
bank loans has been deposits, and not the money market.
In this context, credit growth has been particularly strong,
especially in Hong Kong, Singapore and Indonesia.
May 2008
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| 23
In Japan, despite the fact that the Financial Stability Report
published by the BoJ in March 2008 affirms that there is
a correlation between the cost of guaranties against bank
defaults (Credit Default Swaps – CDS) in that country and
CDS of American and European banks, the local financial
system remains stable. In times of a global crisis, one should
stress that, albeit small, there has been a reduction from
¥12 trillion to ¥11.9 trillion in total defaults between March
and September 2007, a sure indication that the Japanese
banking system remains solid and diversified. Despite the
fact that the crisis rooted in subprime mortgages contributed
to reducing banking system profitability by approximately
¥600 billion in the fourth quarter of 2007, the Bank of Japan
stresses that this does not represent a risk to the stability of
the system. In the opinion of that institution, net income,
particularly among large-scale banking institutions, is
sufficiently robust to absorb the accounting losses. The
current situation can be described as well-capitalized and
tending toward a greater volume of loans.
Referring once again to the Bank of Japan stability report,
one must affirm that the factor that has cushioned the impact
of the financial crisis on the Japanese banking system can
be found in the structure of its liabilities. Differently from
European and United States banks, where it is more common
for long-term assets to be financed with short-term money
market liabilities, thus favoring balance sheet deterioration
at critical moments, the liability structure of Japanese
banks is based on deposits. Evidently, this guarantees
that their financing capacity will be more independent of
the money market. In the opinion of many observers, the
quality of these liabilities has been the determining factor
underlying improvement in the credit ratings of several
Japanese banking institutions. Finally, one notes that bank
loans have continued expanding both at large institutions
and smaller regional banks. This has helped to restrict the
profitability losses of the system, particularly those caused
by the recent increase in operating costs and losses on local
stock markets, which have followed a downward curve for
more than nine months.
In China also, the impacts of the United States second line
mortgage segment have not been sufficiently intense to
generate any profound impact on the local financial system.
Though the Bank of China, one of the four large state-owned
commercial banks, announced that it had approximately
US$8 billion in assets related to these mortgages – while
the other state-owned banks had lesser volumes, it is now
estimated that, notwithstanding the losses suffered in the
United States subprime segment, Chinese banks will close
24 |
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May 2008
2007 with strong profits. As a matter of fact, confirming the
scenario of resilience in the face of the international financial
crisis, the Industrial & Commercial Bank of China and the
China Construction Bank Corporation, which are also part of
the grouping of large state-owned commercial banks, have
already announced that they expect their net income for 2007
to increase more than 40%. According to IMF data through
mid-2007, both returns on assets and returns on equity of
Chinese banks expanded from 0.7% to 1% and from 14.8%
to 19.9%, respectively.
1.3 National financial markets
1.3.1 Analysis of national financial markets
Consolidation of the progress achieved in the nation’s
macroeconomic fundamentals in recent years as a result of
implementation of responsible and consistent policies was
clearly reflected in national financial market performance
in 2007. Fiscal austerity, floating exchange rate and a
commitment to the inflation target regime guarantied the
conditions required to withstand external shocks, such as
those triggered by the high risk mortgage market crisis in
the United States in the second half of the year.
In October 2007, prudential implementation of Brazilian
monetary policy resulted in interruption of the cycle of more
flexible monetary policies begun in September 2005. Over
that two-year period, the Selic rate target defined by the
Monetary Policy Committee (Copom) dropped 850 b.p. to a
level of 11.25%, the lowest point since the indicator was first
created. At its most recent meetings, Copom has maintained
this rate in light of the balanced impact of monetary policy
on price dynamics in an environment of robust growth
in domestic demand, driven by an increased credit flow3,
employment and wage growth. Analysis of national financial
market indicators for the second half of 2007 and early
months of 2008 indicates that the most important elements,
aside from the worsening external scenario, are the enhanced
dynamics of the domestic economy and positive evolution
of the country’s external sustainability conditions4.
Despite rising oil prices, the positive external scenario that
predominated in the first half of 2007 generated favorable
impacts on investor perceptions of emerging country risks,
3/ In February 2008, total credits stood at 34.9% of GDP, reflecting an increase of 13.0 p.p. in five years and 4.0 p.p. in the last 12 months.
4/ More detailed information can be found in Focus-BC External Sustainability Indicators of Brazil – Recent Evolution.
May 2008
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| 25
particularly in the case of Brazil. The Emerging Market
Bond Index Plus Brazil (Embi+ Brazil) dropped 42 points
in the period and, starting in the month of April, posted
figures that were below those of the Embi+ index, reflecting
a better evaluation of Brazil when compared to the other
emerging countries included in the index. This result reflects
the good performance of the domestic economy, together
with improvements in the country’s solvency indicators. In
the second half of 2007, in the face of rising uncertainties
triggered by the subprime mortgage market crisis in the
United States, the external financing conditions available
to the emerging economies worsened, raising the Embi+
Brazil to a level of 218 points on September 10, still 27
points below the Embi+.
Embi+
Points
320
280
240
200
160
120
Jan
2007
Feb
Apr
May
Jun
Aug
Sep
Nov
Embi+ Brazil
Dec
Jan
2008
Embi+
Source: Bloomberg
Mar
Starting in September, the United States Central Bank
began adopting a series of measures aimed at mitigating the
impact of the crisis on that nation’s economy. Among these,
the following deserve mention: reduction of the basic rate
of interest; adoption of new procedures for money market
operations; and coordinated measures with the central banks
of other countries in order to regulate the liquidity supply
on local markets. At the same time, the authorities of that
country organized fiscal incentives and programs aimed at
strengthening companies operating in mortgage loan markets,
so as to anticipate the potential effects of a worsening of the
crisis on the United States economy. Following a period
of greater stability in October 2007, perceptions that the
crisis had taken a turn for the worse, evident in significant
accounting losses recognized by financial institutions with
exposure to real estate credit markets and the potential
impact of across-the-board credit restrictions on United
States economic expansion, continued generating negative
reflections for the risk evaluations of the emerging countries.
At the end of 2007 and during the course of 2008, these
evaluations had the impact of generating increased volatility
and upward trajectories in these indices. The trajectory of
the Embi+ Brazil, which showed 265 points at the end of
February 2008, remained approximately 20 points below the
Embi+, despite the already mentioned upward movement.
This evolution can be attributed to the country’s solid
economic fundamentals that transformed Brazil into a net
creditor toward the end of 2007.
The performance of domestic interest rates was quite
different in the first and second halves of 2007. In the early
part of the year, interest futures dropped sharply and the term
structured of interest rates was marked mainly by a negative
incline over the longer term (two and three years). However,
starting in the second half of May, long-term rates reversed
26 |
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May 2008
Interest rates
One-day Selic rate and swap of 3 months,
6 months, 1 year, 2 years and 3 years
Yield % p.y.
13.5
12.8
12.1
11.4
their downward slide as a consequence of fears regarding
the potential impacts of mortgage market problems on the
United States fund industry. Starting toward the end of July
and more intensively in mid-August, the curve returned
to a positive incline for maturities of more than one year,
keeping step with the increase in the volatility of financial
assets during the period.
10.7
10.0
Jan
2007
Feb
Apr
May
Jun
One-day Selic
1 year
Aug
Sep
Oct
3 months
2 years
Dec
Jan
2008
Mar
6 months
3 years
Sources: BM&F and Bacen
Domestic Yield Curve
Rate % p.y.
13.5
12.8
12.1
11.4
10.7
1 year
1
252
2 years
503
1.2.2007
5.22.2007
8.16.2007
1.21.2008
3.3.2008
3.14.2008
Sources: BM&F and Bacen
3 years
10.0
754
10.17.2007
In the second half of August through mid-October, the
domestic interest rate curve gave ground once again,
principally for longer terms. This movement was influenced
by the unexpected 0.5 p.p. reduction in the United States
basic interest rate in September and by lesser concern with
inflationary pressures generated by expanding activity, as
investment rates increased and GDP expanded below median
market projections. However, with the October interruption
of the more flexible monetary policy cycle by Copom,
coupled with the worsening of the external scenario, longerterm rates turned upward once again and, this time, were
accompanied by short-term rates, which are more sensitive
to Central Bank decisions. Increased external market risk
aversion caused by rising oil prices5 and announcement of
less than expected corporate results by major United States
companies reignited fears of a sharp downturn in the US
economy and triggered a movement to reduce long positions
in the futures interest market negotiated on the Commodities
and Futures Exchange (BM&F). The outlook for a world
economic recession impacted financial markets in the
remaining months of 2007 and early part of 2008, bringing
added pressure on domestic interest rates, which hit their
high point in the second half of January 2008. Internally,
price indices pointed to higher inflation, while uncertainties
spread regarding renewal of the Provisional Contribution
on Financial Operations (CPMF) by the Senate6 and all
indicators showed an increased activity level, generating a
negative impact on the interest rate curve.
Starting on January 24, interest rates shifted as a result of
favorable events on both the domestic and external scenarios.
Steady cutbacks in United States basic interest rates7 and the
5/ The rise in international market oil prices raised the per barrel price of Brent-type oil to a level of US$ 100 at the end of February, where it has remained
ever since.
6/ On December 12, the constitutional amendment that would extend the CPMF did not pass, representing a revenue loss of approximately R$40 billion/
year. The increase in the Financial Operations Tax (IOF) rate on exchange and insurance operations, personal and corporate loans, coupled with the
increase in the Social Contribution on Net Income (CSLL) charged to banks and spending cutbacks announced on January 2 reaffirmed the commitment
to preserving fiscal equilibrium and aid in avoiding undue expansion of demand.
7/ The decision taken by the Federal Open Market Committee (FOMC) to reduce United States basic interest rates, initially by 0.75 p.p. at the extraordinary
meeting held on January 2 and, later, by an additional 0.50 p.p. at the ordinary meeting held toward the end of the month, stimulated investment flows as
a result of the widening of the differential between internal and external interest rates.
May 2008
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| 27
interest shown by American authorities in approving a package
of fiscal incentives and measures aimed at economically and
financially strengthening companies responsible for ensuring
mortgage credits contributed to an accentuated drop in
long-term rates. At the same time, in Brazil, expectations
of declining inflation, backed by announcement of price
indicators below market expectations further strengthened
the conviction of a benign interest rates scenario.
Selected rates of interests
Date
1 day 3 months 6 months
01/02/07
13.19
12.82
12.56
05/22/07
12.43
11.86
11.42
06/29/07
11.93
11.47
08/16/07
11.43
10/17/07
1 year
2 years
3 years
12.31
12.17
12.17
10.91
10.36
10.10
11.17
10.77
10.63
10.66
11.34
11.51
11.90
12.58
12.69
11.18
11.06
11.08
11.17
11.30
11.34
12/28/07
11.18
11.21
11.45
12.05
12.80
12.96
01/21/08
11.17
11.22
11.51
12.10
13.02
13.24
03/03/08
11.18
11.19
11.43
11.86
12.41
12.44
03/14/08
11.18
11.35
11.79
12.50
13.13
13.16
In early March, however, a record volume of defaults and
mortgage foreclosures in the United States, coupled with
consequent difficulties on the part of financing institutions
to meet their margin calls, generated negative impacts on
Brazilian interest rates. Toward the middle of March, the
Minutes of the Copom meeting revealed the body’s concern
with demand pressures8, together with adoption of exchange
measures in Brazil9 and the worsening of the external
crisis10 provoked an uptick in domestic interest rates, further
reinforcing expectations of an inversion in the tendency of
that indicator.
Evaluation of the behavior of short-term domestic interest
rates, particularly three and six-month rates, reveals greater
sensitivity of these indicators to predominately domestic
questions. During the first half of 2007, for example,
expectations of continued basic interest rate cutbacks
by Copom maintained shorter-term rates on a steadily
downward curve at levels below the Selic rate. This was
quite different from the behavior of longer-term rates, which
had already reversed course in the months of May and
June. In the second half of the year, interest rates for three
and six months moved into a downward curve, following a
brief uptick in the month of August. This continued through
mid-October, when the cycle of a more flexible monetary
policy was interrupted. With maintenance of the Selic
rate target at the October 17 Copom meeting, short-term
interest rates shifted into an upward trajectory. As inflation
expectations and the levels of output capacity rose, while
the adverse external scenario solidified, expectations of a
possible renewed cycle of interest rate reductions in Brazil
were left aside, with evident repercussions on very shortterm rates. This situation continued through March 2008,
when the Minutes of the Copom meeting led many agents
8/ The Minutes emphasized concerns with demand pressure and, since inflation expectations were quite close to the target defined by the CMN, expectations
of an interest rate increase in the following months intensified among market agents.
9/ Among these exchange measures, one should cite levying of the IOF at a rate of 1.5% on foreign investments in fixed rate securities.
10/ On March 14, it was announced that the J.P. Morgan Bank and the New York Federal Reserve were acting jointly to provide temporary 28-day financing
to Bear Stearns, which was then facing liquidity difficulties. On March 16, following an extraordinary meeting, the Fed announced an emergency
0.25 p.p. reduction in the Federal Reserve rediscount rate to a level of 3.25%, together with J.P. Morgan’s purchase of Bear Stearns.
28 |
|
May 2008
to believe that the Central Bank would increase the basic
interest rate as early as the April meeting, thus provoking a
realignment of interest rates for all of the various maturities.
The General Price Index (IGP-DI) accelerated in 2007,
registering a high of 7.90% in the year, 4.1 p.p. more than
in the previous year. In February 2008, the cumulative
12-month IGP-DI showed an increase of 8.66%, driven by
wholesale prices and, more specifically, farm prices, with a
high of 23.91%, due mainly to expanding internal demand
and international commodity prices.
IPCA
Rate % p.y.
6.0
5.3
4.6
3.9
3.2
2.5
Jul
2006
Sep
Nov
Jan
2007
Mar
May
Jul
Sep
Nov
Jan
2008
Acumulated Core IPCA – 12 months
Expected IPCA – 12 months
Inflation target
IPCA last 12 months – Smoothed
Exchange Rate
R$/US$
EUR/US$
2.20
0.80
2.08
0.76
1.96
0.72
1.84
0.68
1.72
0.64
1.60
0.60
Jan
2007
Feb
Apr
May
R$/US$
Jun
Aug
Sep
Nov
Dec
Jan
2008
EUR/US$
Source: Bloomberg
Mar
Measured by the Broad National Consumer Price Index
(IPCA), inflation closed 2007 at 4.46%, compared to 3.14%
in 2006. Here, one should highlight the 10.77% increase
under food products, compared to just 1.23% under this
item in 2006. In February 2008, the IPCA expanded 4.61%
in cumulative 12-month terms11, while the diffusion index12
reached 66.41, returning to the May 2005 level, when
12-month IPCA inflation surpassed the mark of 8%. In the
second half of 2007, the smoothed trimmed means core
reversed the steady downward trajectory of the first half
of the year. Despite this, it closed the year with growth of
4.05%, less than the 4.63% level registered in December
2006, remaining stable in the first two months of 200813. The
high in market prices and the clearly unfavorable external
scenario, starting in the second half of 2007, coupled with
increased domestic demand for goods and services vis-à-vis
growth in the level of utilization of installed output capacity
resulted in upward revision of inflation expectations.
However, the positive exchange flow, the continued
devaluation of the real against the dollar, together with
expectations that maturing investments would in some way
attenuate the lag between supply and demand maintained
12-month smoothed IPCA on a trajectory compatible
with inflation targets14, closing the year at 4.28%15, and it
remained around this rate in the first two months of 2008.
The behavior of the exchange rate as of the second half of
2007 reflected dominant expectations of a weakened dollar
on international markets. The real appreciated steadily
against the United States dollar. This trend was temporarily
11/ In the first two months, consumer inflation was pressured by a temporary increase under the heading of Education.
12/ Proportion of items that registered positive price growth.
13/ In February, the smoothed trimmed means core reached 4.06% in cumulative 12-month terms.
14/ National Monetary Council Resolutions n. 3,291, dated 6/23/2005, n. 3,378, dated 6/29/2006, and n. 3,463, dated 6/26/2007, set inflation targets at 4.5%
for 2007, 2008 and 2009, with tolerance intervals of plus or minus 2.0 p.p.
15/ At end of 2006, expected 12-month smoothed IPCA growth stood at 4.06%.
May 2008
|
| 29
Exchange rate
EUR/US$
R$/Euro
2.85
0.80
2.78
0.76
2.71
0.72
2.64
0.68
2.57
0.64
2.50
0.60
Jan
2007
Feb
Apr
May
Jun
Aug
Sep
Nov
R$/Euro
Dec
Jan
2008
EUR/US$
Source: Bloomberg
Mar
interrupted in August, a period of particularly severe
turbulence as a result of the repercussions of the mortgage
market crisis in the United States. On August 15, 2007, the
exchange rate reached 2.06 R$/US$, the highest level for
the entire period. However, maintenance of positive flows
favored an exchange rate downturn, resulting in 17.15%
appreciation of the real against the dollar in 2007. When
viewed against the euro, one cannot perceive a clear cut
tendency as the exchange rate fluctuated around 2.60
R$/EUR. After reaching 1.66 R$/US$ on March 5, 2008,
the lowest level since April 13, 1999, the exchange rate
moved to 1.71 R$/US$ on March 14. In its turn, the balance
of contracted exchange totaled US$87.5 billion in 2007, of
which 87.8% originated in the net trade surplus, compared
to US$37.8 billion in 2006. Exchange rate movement was
also favored by inflows of foreign direct investments, which
set a new record of US$34.6 billion in 2007, 84.4% more
than the 2006 result. With rising imports and net outflows
of resources through financial operations, the balance of
contracted exchange dropped sharply in the first two months
of 2008, with net inflows of US$0.9 billion, compared to
US$10.7 billion in the same period of 2007.
The positive exchange flow favored the Central Bank’s
policy of rebuilding international reserves. In February
2008, the reserve position reached the very significant
level of US$192.9 billion, compared to US$85.8 billion in
December 2006. Coupled with anticipated external debt
buyback operations by the National Treasury Secretariat
(STN), this policy shifted the country into the position
of a net external creditor at the end of 200716, with an
estimated balance of US$18.8 billion17. Though closing
the fifth consecutive year with a current account surplus,
the monthly balances of this indicator have ended in
deficit positions since October 2007, primarily as a result
of growth in import operations in volumes that surpassed
the increase in exports. In February 2008, the cumulative
12-month trade balance surplus showed a result of
US$36.4 billion, 21.2% less than the cumulative 12-month
result through February 200718.
16/ In June 2006, the public sector had already become a net international creditor.
17/ For more details see: Press Release – External Sector, dated 3/24/2007, at www.bcb.gov.br.
18/ In order to preserve the dynamics of Brazilian exports a series of exchange measures were taken in mid-March at the initiative of the Ministry
of Finance. The measures were aimed at exempting foreign sales from the IOF, terminating demand for exchange coverage (that is, the demand
that dollars must be brought into the country by exporters), while levying the IOF on public security investments made by foreign investors –
previously exporters were obligated to bring 70% of the financial result of commercial transactions into Brazil.
30 |
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May 2008
1.3.2 Assets market
With the turbulence triggered by the high risk mortgage
market crisis in the United States, the positive performance
of national economic and financial indicators was, to some
extent, made possible by the existence of a developed
and solid financial market. Interest rate and dollar futures
derivative markets showed growth in the volume of their
operations and acted as an important indicator of the
tendency of the different variables, while also making it
possible to structure hedge positions capable of mitigating
financial losses in moments of market stress. The Brazilian
stock market has registered positive profitability for the
fifth consecutive year and has consolidated its position as
an important source of funding for productive investments,
attracting both foreign and national investors interested in
diversifying their portfolios, particularly in the wake of the
sharp reduction in domestic interest rates in the recent past.
In the same sense, private issuance of stocks and securities
also expanded. In the public debt market, in its turn, the
guidelines and targets set out in the Annual Borrowing Plan
(PAF) have been fully met.
Between July 2007 and February of this year, 126.5 million
contracts were negotiated on the BM&F interest futures
markets, reflecting growth of approximately 5.2% over the
same period of the preceding year. Here, one can observe
a migration of operations into longer-term contracts, as
a result of increased participation on the part of foreign
investors and corporate financial entities. Compared to the
eight-month period ended in February 2007, the relative
participation of contracts maturing in less than six months in
overall operations carried out diminished 7.9 p.p., to 28.6%
of average daily volume, while the participation of contracts
with terms of more than two years expanded 13.9 p.p., to a
level of 30.3%.
The increased relative participation of long-term contracts
reflects the National Treasury’s strategy aimed at lengthening
the average maturity of the federal public debt, at the same
time in which investors seek larger premiums, since the
enhanced predictability of Brazil’s short-term monetary
policy has had the impact of reducing premiums on the short
segment of the interest curve. Futures contracts maturing
in January 2009 and January 2010 represented 26.6% and
28.4%, respectively, of the average daily volume of contracts
negotiated in the period.
On the dollar futures market, the number of contracts
negotiated between July 2007 and February of this year
May 2008
|
| 31
totaled 58.2 million, up 55.7% compared to the same
period of the previous year. In the month of November, the
number of contracts negotiated reached a daily average of
404.4 thousand, with 69.6% growth over the same month of
2006. This performance reflected the structuring of positions
founded upon expectations of gains rooted in the differential
between internal and external interest rates and continued
appreciation of the real. Between early July 2007 and the
end of February of this year, corporate financial entities
(PJF) reduced their net long positions slightly. National
institutional investors (IIN) reduced their net short positions,
acting as a counterpart to reductions in long positions by
nonresident institutional investors (INR), which shifted from
net long positions to short positions during part of November
2007 and, once again, as of February of this year.
Bovespa index
Points (thousand)
68
62
56
50
44
38
Jan
2007
Feb
Apr
May
Jun
Aug
Sep
Nov
Source: Bovespa
Dec
Jan
2008
Mar
In 2007, the stock market registered an upward trajectory,
as the Ibovespa closed the year at a level of 63,886 points,
up 43.65% in nominal terms. The combination of sound
fundamentals in the Brazilian economy, rising international
commodity prices and growing expectations that Brazil would
soon receive an investment grade rating further reinforced
stock market performance. In the early part of the second half
of the year, the crisis in the United States real estate credit
market and uncertainties with respect to its impacts on the
real sector of the economy affected stock markets throughout
the world. In that time period, the Ibovespa dropped more
than 10,000 points in less than a month, closing August 16 at
48,016 points. Starting at that point, the index turned upward
once again as a result of the more flexible monetary policy
adopted by American economic authorities and of good
news regarding the performance of the Brazilian economy.
Internally, expectations of GDP growth19 remained above
5.0%, while inflation expectations were firmly anchored and
the rate of exchange continued rising in value.
The end of 2007 was marked by a new wave of pessimism
abroad that impacted the Brazilian stock market. Although
the impact of this process on the Ibovespa led investors to
demand assets with lesser risks, what they basically meant
was an increase in volatility, as the index fluctuated in the
range of the already high level of 62,000 points. Uncertainties
regarding extension of the CPMF in the domestic framework
also contributed to increased volatility. In light of the
possibility of a reduction in federal government inflows,
many observers concluded that the upgrading of the country
to investment grade expected in 2008 might be pushed
further into the future. In 2008, with the worsening of the
19/ Brazilian GDP expanded 5.4% in 2007.
32 |
|
May 2008
crisis and increases in domestic interest rates, the Ibovespa
registered a strong decline to 53,709 points on January 21.
Over the following months, this movement reversed course
as the most visible signs of the crisis became less evident.
From July to October 2007, precisely the period in which
the local stock market registered its sharpest expansion, the
flow of foreign investments registered a loss of R$1.9 billion,
while the flow moved to R$8.2 billion from November 2007
to March 14, 2008, the period of greatest volatility.
In 2007, 516 primary public offers were registered on the
stock market, with a total value of R$131.2 billion, of which
R$46.5 billion corresponded to debentures, R$33.1 billion
to stocks and R$22.3 billion to quotas of investment funds
based on stockholdings20 (FIP). Compared to 2006, growth
in the overall financial volume of primary offers was 19%,
with strong performances under stock offers and FIP. These
two categories registered respective growth rates of 133%
and 366%, while debentures declined 33%. Maintenance of
the more flexible monetary policy through September and
the solid foundations of the internal economy stimulated new
issuances of variable yield assets. In the months of January
and February 2008, 53 issuances of primary public offers
were registered, with a total value of R$39.4 billion, in which
debentures accounted for 82% of the total.
Despite the turbulence that marked the second half of
2007, adequate management of the DPMFi was favored
by the performance of the Brazilian economy, making it
possible to close the year with debt indicators quite close
to the targets defined in the PAF 200721. In December 2007,
the Internal Federal Public Security Debt (DPMFi) totaled
R$1,225 trillion, up 12.0% in the year but only 2.2% in the
half-year period. The sharp rise in international reserves was
not fully offset by the fiscal surplus22 or by growth in the
DPMFi and generated strong R$106 billion growth in the
balance of repo operations carried out by the Central Bank
in the year, totaling R$199 billion in February.
The guideline stated in the 2007 PAF calling for gradual
substitution of floating rate securities and exchange-indexed
20/ According to CVM Instruction n. 391, dated July 16, 2003, investment funds based on stockholdings are created as closed groups in which the resources
targeted to acquisitions of stocks, debentures, bonds or other types of securities that can be converted or exchanged for stocks issued by open or closed
capital corporations are held in common and to participate actively in the decision-making process of the company in which investments are made,
exercising effective influence in the definition of its strategic policies and management, particularly through designation of members to the Council
of Administration.
21/ See Annual Borrowing Plan - PAF 2007 and the 2007 Debt Report, both of which are published by the National Treasury Secretary.
22/ In 2007, the primary surplus closed at 4.1% of GDP, 0.3 p.p. above the target defined at 3.8%. In January 2008, the nominal surplus ended at
R$ 5.5 billion.
May 2008
|
| 33
Domestic federal debt held by the public1/
Exposure by type of return
R$ billion
Itemiza-
2004
2005
2006
tion
Dec
Dec
Jun
2007
Dec
2008
Feb Apr
Jun
Agu Oct
Dec
Feb
Fixed rate
Value
163
273
320
395
396
417
464
433
422
457
443
%
20
28
31
36
35
36
39
36
35
37
36
Value
425
522
470
440
456
454
451
463
464
449
466
%
52
53
46
40
41
39
38
39
39
37
37
Value
121
152
221
246
253
269
286
295
313
322
334
%
15
16
22
23
23
23
24
25
26
26
27
- 12 - 14 - 30 - 30 - 27 - 28
- 27
Selic rate
Price index
Exchange rate
Value
80
11
%
10
1
- 15 - 12
-1
-1
-1
-1
-2
-3
-2
-2
-2
Value
22
21
20
24
26
27
27
28
27
26
26
%
3
2
2
2
2
2
2
2
2
2
2
Total
810
980
1120 1151 1199 1189 1199 1225
1242
Others
1016 1093
Open Market
Value
47
23
70
60
98
116
137
185
190
166
199
%
6
2
6
5
8
9
10
13
14
12
14
Total
857
1003
1218 1267 1336 1374 1389 1391
1442
1086 1154
1/ Exchange rate swap of Banco Central do Brasil included.
securities by others with fixed-rate earnings or inflationlinked earnings has been gradually implemented by the
STN. In December 2007, the sum total of participation of the
latter two categories reached 63.6% of DPMFi, representing
an increase of 4.9 p.p. in the year. The problems generated
by external factors did not substantially alter the profile of
DPMFi. Participation of fixed-rate securities, which had
risen to 39% in June, dropped back to 36% in July and
remained stable in the month of August before closing the
year at 37%. In 2008, growth in issuances of inflation-linked
securities raised the February participation of this category
to 27% of the overall debt, contributing decisively to:
(i) lengthening of the average DPMFi term which, in the
period from June 2007 to February 2008, rose from 34.4
months to 37.5 months; (ii) reduction of the share of the
debt to mature in 12 months from 32.8% to 31.3%, thus
reducing the refinancing risk of the issuer. As of the month
of August, steady improvements in the regulations of the
dealers system of public securities regarding the procedures
to be followed in selecting accredited institutions attributed
greater23 weight to participation in outright operations and
in public offers of fixed-rate securities and IPCA-indexed
securities with longer maturities.
In terms of institutional and regulatory aspects of the
secondary market, it is important to highlight creation of the
Secondary Securities Market Workgroup24 in 2007, together
with continued improvement in the dealers system. Both
of these measures had the common objective of increasing
the liquidity of the secondary fixed income securities
market in Brazil, while stimulating increased transparency
in operations carried out on that market. Thus, in February
2008, daily opening of purchase and sale proposals by
specialist dealers in electronic trading systems came to be
considered a performance item for purposes of contracting
special operations with the National Treasury25.
In managing banking liquidity, the Central Bank carried
out very short-term repo operations on an almost daily
basis, with weekly longer term repo operations, with
maturity terms from five to seven months. Between July
2007 and February 2008, the financial volumes of five
and seven-month operations came to respective totals of
R$39.6 billion and R$70.1 billion. In February, a breakdown
of the total balance of these operations indicates that seven-
23/ Joint Normative Act (Central Bank and National Treasury) n. 13, dated August 7, 2007.
24/ Coordinated by ANDIMA (National Association of Financial Market Institutions) and by ABRAPP (Brazilian Association of Closed Pension Fund Entities),
with representatives of the Central Bank, National Treasury, Securities and Exchange Commission and Secretariat of Complementary Pension Funds.
25/ Joint Normative Act (Central Bank and National Treasury) n. 15, dated January 14, 2008.
34 |
|
May 2008
month operations accounted for 70%. At the same time, the
Central Bank carried out reverse exchange swap auctions
with the objective of rolling over maturities that had occurred
in the period. With this, its position in this instrument
compared to the end of the first half of 2007 remained
practically unchanged, while, on February 29, 2008, the
Central Bank’s position in swaps stood at approximately
US$23.0 billion.
1.4 Conclusion
In the midst of sharp growth in defaults on the United States
mortgage market and uncertainties surrounding potential
financial system losses, the early diagnoses put forward
by the authorities charged with banking supervision in that
country clearly recognize that, even in a more favorable
macroeconomic environment than now exists, a return to
full operation and liquidity in the markets of major financial
assets is going to take a considerable amount of time.
The collapse of the subprime mortgage market and subsequent
problems in other markets reveal important deficiencies in
financial intermediation. The criteria governing credits in
the mortgage market were shown to be excessively lenient,
particularly when extending credits to individuals with
higher risk credit worthiness. The institutions involved in
transforming credits originating in negotiable securities,
including rating agencies, failed to ensure that the quality
of the credits underlying these securities would be
sufficiently clear. The rather opaque nature of some of the
financial instruments developed in recent years has made it
difficult to administer risks derived from transformation of
maturities and liquidity, as evident in the recent evolution
of various financial asset markets. Banking institutions
demonstrated that they had not made sufficient use of stress
tests in assessing the liquidity of markets and of their own
institutions and the possible impacts on the liquidity of
interbank markets and adjustment of capital adequacy to
regulatory rules.
The crisis that broke out in the subprime mortgage segment
in the United States rippled out into international credit and
capital markets by means of direct channels (exposure to
securities backed by subprime portfolios) and indirect channels
(market interruptions). Their effects threaten global economic
growth and have called into question the liquidity conditions
and solvency of systemically important institutions.
May 2008
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| 35
The financial turmoil should be viewed as the first test
of the complex securitization instruments and trading
models created in recent years. In this model, financial
institutions transfer securitized credits to companies with
specific objectives which then bring these assets together
according to strategies aimed at transforming excessive
risk of collateralization (when the value of the collateral
exceeds the total value of the debt issued) and subordination
(imposition of sequential losses) and then transfer them to
other investors.
Although it makes it possible to diversify risk, creation of
structured products weakened the discipline of the party
extending the credit and made it possible for the system to
operate with a higher than desirable volume of risk-prone
credits. At the same time, these products further worsened
the dimensions of the crisis as a consequence of the complex
methods utilized to determine the real value of such products
and of the absence of transparency regarding the nature of the
risks transferred and of the final holders of such products.
As turbulence grew, inadequate information regarding
the totality and distribution of exposures, both direct (in
portfolio) or indirect (exposure through a company with
a specified objective) further eroded the potential benefits
of risk dispersion and transfer, thus interrupting operation
of the interbank market. Parallel to this and in a manner
quite different from other moments of intense repricing,
uncertainties focused on systemically important institutions,
which are normally the beneficiaries of inflows of flights
to quality on the part of investors and sources of a natural
stabilizing impact in periods of acute crisis.
The fact of the matter is that the rates practiced on interbank
markets expanded sharply, reflecting rising counterpart risks
and efforts by banks to minimize their exposure. In order to
limit the repercussions of these events, major central banks
announced a series of refinancing operations.
Despite this, banks remain reticent with regard to the
granting of new loans. Growing difficulties in securitizing
new loans and obtaining stable sources of medium and
long-term bank financing, coupled with the need to maintain
liquidity levels that reflect this cautious stance, have given
rise to additional risks regarding loans to households and
businesses, thus generating concerns with the evolution of
the real economy.
The evolution of national financial market indicators in
recent months has been impacted by the United States
36 |
|
May 2008
mortgage market crisis and its potential, albeit still
unmeasured, repercussions on the American economy. The
solid macroeconomic foundations of the Brazilian economy,
coupled with a highly sophisticated financial system, have
acted as a cushion against external shocks, avoiding adverse
effects on the nation’s economic and financial stability.
Despite increased risk aversion, some emerging economies
have shown themselves to be less vulnerable, favored
by rising international commodity prices. However, the
hypothesis that these emerging economies, particularly
Brazil, would distance themselves from the United States
economy has not yet been demonstrated and will depend
on the future behavior of activity levels and world inflation.
The adverse external scenario and changes in inflationary
expectations as a result of increases in market prices and
rising aggregate demand have contributed to reversing the
incline of the forward structure of domestic interest rates.
Starting toward the end of the second half of 2007, market
projections for interest rate futures began pricing increases
in the basic interest rate by Copom as early as the first half
of 2008. The possibility of imbalances between supply and
demand being offset by the maturity of investments; the
continuity of responsible implementation of an economic
policy founded upon compliance with inflation targets; and
the solidity of the national financial system are elements that
make the balance of risks favorable to the good performance
of the Brazilian economy.
May 2008
|
| 37
2
National Financial System supervision
The objectives of this chapter are as follows: provide
information on financial stability, National Financial System
(SFN) efficiency and solvency; and discuss alterations in
financial aggregates and the results of stress metrics.
2.1 Overview
In the second half of 2007, the SFN Basel capital ratio
remained above 17%. Tier I capital was sufficient to cover
assets weighted by risk and, following the trend evident in
recent years, tier II capital has expanded consistently.
Base Capital (PR), Required Net Worth (PRE)
and Basel capital ratio
Banking-consolidated I
%
R$ billion
250
19.0
200
18.6
150
18.2
100
17.8
50
17.4
0
17.0
Dec
2003
Dec
2004
PR1
Dec
2005
PR2
Dec
2006
PRE
Dec
2007
Basel capital ratio
Composition of the capital base and excess
of capital
Banking-consolidated I by size and control type
100%
80%
60%
40%
20%
PR2/PR
Foreign
Domestic
private
Government
owned
Size
PR1/PR
Micro
Small
Medium
Large
0%
Control type
PRE/PR
The participation of loan operations in total SFN assets also
increased. Financial institutions have targeted more resources
into loans to individual borrowers and businesses instead of
investing these resources in stocks and securities. Despite
the decline in basic interest rates in recent years, profitability
on assets and capital has remained high as a result of greater
exposure to risks. On the other hand, the non-operating result
also increased its participation in 2007.
The credit portfolio registered a consistent reduction in terms
of the concentration index, thus reducing the possibility of
one client or group of clients having a significant impact
on the financial system as a whole. In aggregate terms, the
volume of provisions has remained at a level sufficient to
cover current defaults and losses occurring in the following
year. This fact reveals the adequacy of provisions in relation
to bad loans. In some modalities, although credits in arrears
have increased at a proportionately higher rate than portfolio
growth, the level of provisions remained adequate. Despite
the growth registered in the last two years, real estate credits
account for only 5.5% of the system’s total loan volume.
Though they are still the major component of callable
liabilities, deposits have not grown at the same pace as other
May 2008
|
| 39
liabilities, indicating that institutions have sought to diversify
their funding modalities.
Evolution of the non usual assets and the
commitment of the Adjusted Net Worth (PLA)
with low liquidity assets
Comp.
of PLA (%)
R$ billion
230
121
184
119
138
117
92
115
46
113
0
111
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Fixed assets
Tac credits
Others
Debtors of deposits in guarantee
Commitment of PLA
Evolution of the committed adjusted net worth
(PLA)
240%
192%
144%
96%
48%
As regards exchange exposure, current rules guarantee that
banks are in a position to withstand positive or negative
variations of at least 100% in the rate of exchange, without
suffering problems related to regulatory capital. In much
the same way, an interest rate shock would not generate
capitalization problems at any important institutions,
independently of whether rates moved upwards or downwards.
In general, stress tests demonstrate that no important
institutions would be subjected to capitalization problems.
2.2 Balance sheet structure
Contrary to previous versions, this study of the capital
structure will deal exclusively with the grouping termed
Consolidated Banking Segment I26, which is composed of
financial conglomerates with at least one institution with a
commercial portfolio, together with independent institutions
with commercial portfolios.
Analyses will always be based on consolidated data, in
the case of conglomerates, and on individual data when
dealing with independent institutions. As a result, many of
the statistics presented in this chapter may not coincide with
others presented in this Report.
0%
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Large
Small
Foreign
Domestic private
Dec
2007
2.2.1 Capital
Medium
Micro
Government owned
Number of active current accounts
Banking-consolidated I by control type
Million
80
64
48
32
16
From the regulatory point of view, the level of capitalization
of Consolidated Banking Segment I has remained in a
comfortable position, with a Basel Capital Ratio of 17.2%,
a level higher than those of several other countries27 and well
above the regulatory minimum. Among the items included
in Base Capital (PR), tier 2 capital (PR 2) has increased its
participation, particularly as a result of a greater volume
of issuances of subordinated debt. However, only tier 1
capital (PR1) has been sufficient to support the minimum
regulatory limit.
0
2000
2001
2002
Government owned
2003
2004
2005
2006
Domestic private
2007
Foreign
From the economic point of view, Resolution n. 3,444, dated
February 28, 200728, improved calculation of regulatory
26/ See box “Concepts and Methodologies – General”.
27/ Pages 49 and 50 contain a series of indicators for selected countries. For a broader overview, please consult the Global Financial Stability Report, released
by the International Monetary Fund.
28/ See chapter 5 of the Financial Stability Report – November 2007 – Volume 6, Number 2.
40 |
|
May 2008
capital by instituting deduction of tax credits and deferred
permanent assets, together with other advances.
The major issuers of PR2 are large-scale banks29: public
institutions, mainly through government funds and loans
from controllers, and private sector institutions, mostly
through subordinate Bank Deposit Certificates.
Number of branches and banking
correspondents
Thousand
80
64
48
32
16
0
2002
2003
2004
Branches
2005
2006
2007
Banking correspondents
Note: on the basis of the information on banking correspondents of Resolution
3,110/03, the number of combinations of CNPJ of the correspondent with the
CNPJ of Financial Institution was counted so that, if a correspondent represents
two FIs, according to criterion, it is turned into 2.
In December 2007, the commitment of Adjusted Net Worth
(PLA)30 to low liquidity assets31 dropped to 11.4%. This
marked a return to the trend evident in December 2003 and,
once again, accompanied the reduction in the immobilization
index, which slipped from 30% in December 2003 to
21.8% in December 2007. In 2007, the factors underlying
this behavior were reduction of the deferred amount, down
R$4.1 billion, and reduction of debtors for guaranty deposits,
down almost R$4.5 billion.
Despite reduction of the overall volume of the PLA
commitment to low liquidity assets, tax and fiscal credits
and anticipated expenditures rose well above growth in
total assets in the period under consideration. The rate of
growth of tax credits was 39.2% in 2007, as nine of the
10 largest banks showed net activation, principally those
referring to inter-temporal differences. This fact is related
to sharp loan portfolio growth and, consequently, to growth
29/ The segmentations encompass the grouping of Financial Conglomerates and Independent Institutions which form Consolidated Banking Segment I. In
this context, the individual data of the institutions included within financial conglomerates are not considered. Thus, for example, individual information
(doc. 4010) regarding a commercial bank or a security broker that are included in the same conglomerate, are not considered. Only consolidated information
(doc. 4040) of the correspondent financial conglomerate is considered. Those with relative participation of more than 15% in Average Total Assets of
the banking system are considered large-scale and are withdrawn from the list of institutions to be classified. This process of elimination is repeated,
once again considering the list of remaining institutions. Following this preliminary step, size is obtained on the basis of the percentage of cumulative
participation of institutions, following the steps below:
i.
Classification of the entities in decreasing order of participation;
ii. The entities included in the bracket from 0 up to and including 75% of overall cumulative participation in the total amount of Average Total Assets
of Banking Segment I are considered large-scale;
iii. The entities in the bracket between 75% and 90% of cumulative participation are considered medium size;
iv. The entities in the bracket between 90% and 99% are considered small size; and
v.
other entities, including the bracket above 99% up to and including 100%, are considered micro institutions.
30/ Adjusted Net Worth (PLA) = Net Worth (account 6.0.0.00.00-2) adjusted by the net value between revenues (account 7.0.0.00.00-9) and expenditures
(account 8.0.0.00.00-6).
31/ These are assets that are not related to the end-activities of the institution. For purposes of analysis, the following headings were considered: Tax Credits,
Debtors for Guaranty Deposits, Uncommon Earmarked Credits and Miscellaneous Uncommon Assets. Uncommon Earmarked Credits: Uncommon
Earmarked Credits include SFH headings – Bonds – Final Buyers – Decree Law n. 2,164/1984, SFH – Stabilization Fund Quotas, SFH – Fahbre Deposits;
SFH – FGTS to be Refunded, SFH – Wage Variation Compensation Fund, SFH – Transfers of Savings Deposits and Rural Credit – Proagro to be Received.
Miscellaneous Uncommon Assets: are composed of Other Credits – Specific Values, Other Goods and Assets and Other Credits – Miscellaneous; Advances
against the Immobilization Account, Credits Originating in Export Contracts, Tax Credits Involving Taxes and Contributions, Deposits for Acquisition of
Telephones, Debtors for Purchases of Goods and Assets, Debtors for Guaranty Deposits, Taxes and Contributions to be Offset, Income Tax to Recover,
Options for Fiscal Incentives and Securities and Credits to be Received.
May 2008
|
| 41
in provisions. Anticipated spending expanded almost
R$12 billion (130.6%) during the course of the year, with
growth in utilization by all 10 of the major banks, and
came to represent 11% of PLA in large-scale banks and
18% in medium-sized banks. In this grouping, the greatest
impact was generated by amounts paid for the right to effect
payment of the wages of state and municipal workers.
Total assets
R$ billion
%
1000
60
800
48
600
36
400
24
200
12
0
0
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Government owned
Domestic private
Foreign
% Government owned
% Domestic private
% Foreign
2.2.2 Assets
Main assets and total assets to GDP
Total asset /
GDP %
R$ billion
2 100
85
1 680
79
1 260
73
840
67
420
61
0
55
Dec
2003
Dec
2004
Dec
2005
Credit
Others
Fixed
Dec
2006
Dec
2007
Securities and portfolio
Money market investments
Total assets / GDP
Main investments to total assets
100%
80%
60%
40%
20%
0%
Consolidated
Government
owned
Domestic private
Credit operations
Money market investments
Fixed assets
Foreign
Securities portfolio (TVM)
Reserve requirements and others
Other assets
32/ Source: Bacen – Circular n. 0049.
42 |
|
Public banks remained as the segment with the largest
commitment of PLA to uncommon assets, even though
they registered a considerable decline in the last five years.
However, this reduction is explained by the operations of
just one bank, in which the index dropped from 487% in
2003 to 299% in 2007. Other public banks continued with
an average index of 148%. The most significant uncommon
assets in the segment of public banks are credits earmarked
to the SFH Wage Variation Compensation Fund (FCVS)
and tax credits.
May 2008
Since 2003, the importance of the financial industry to
the remainder of the economy has been expanding, as
demonstrated by growth in the number of current accounts32
and the participation of Consolidated Banking Segment I in
GDP, 78.7% in 2007, against 62.6% in December 2003.
The number of branches has remained practically unchanged,
since most of the growth in the banking system’s participation
in the economy has apparently taken place through
correspondent banks, since these have expanded sharply
and become increasingly more similar to traditional bank
branches, as a consequence of the highly varied activities
and services they render.
Aside from the process of expanding the supply of banking
services, banking concentration increased slightly, as the five
largest national banks moved to a level of 62.2% of system
assets compared to 60% in 2002. Despite this, banking
concentration in Brazil is still lower than in various other
countries, including Australia, Canada, Mexico and Chile.
Compared to private banks, the difference in the pace
of growth of public banks is illustrated mainly by the
reduction in the representativeness of public banks in
Total Consolidated Assets, which dropped from 41.3% in
December 2003 to 32.9% in December 2007.
Evolution of default and margin requirement of
nonperforming loan by control type
Margin
requirement
Default
5%
250%
4%
224%
3%
198%
2%
172%
1%
146%
0%
120%
Dec
2003
Dec
2004
Dec
Dec
Dec
2005
2006
2007
Default – Domestic private
Default – Foreign
Default – Government owned
Margin requirement – Domestic private
Margin requirement – Foreign
Margin requirement – Government owned
Evolution of mortgage portfolio by control type
R$ billion
6.5%
35
6.2%
28
5.9%
21
5.6%
14
5.3%
7
5.0%
0
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
CEF
Government owned (except CEF)
Domestic private
Foreign
% mortgage to total porfolio
Evolution of securities portfolio (TVM) by
issuer
Quotas of funds
R$ billion
25
TVMs
R$ billion
600
500
22
400
19
300
16
200
13
100
10
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Foreign – Securities and derivatives
Domestic private – Securities and derivatives
Government owned – Securities and derivatives
Quotas of funds
Dec
2007
Among the major asset categories, there was a significant
channeling of resources into credit operations, which
moved to a level of 41.7% of Total Assets on the base date,
compared to 34.4% in December 2003. Consequently,
the risk level associated to these assets increased, as the
proportion of APR33 in relation to Total Assets moved from
60.7% in December 2003 to 70.2% in December 2007.
Broken down by control, differences exist among the asset
structures of the various banking segments. Public banks,
with the exception of the National Bank of Economic and
Social Development (BNDES) had the lowest proportion of
assets invested in loan operations. At the same time, these
banks also had the largest volume of Stocks and Securities
(TVMs) and uncommon assets. Private banks led the way
with the largest volume of interbank liquidity investments,
accompanying the tendency to make greater use of funding
through repo operations and permanent assets, explained
mainly by investments in stockholding positions. In the case
of foreign institutions, one perceives greater use of other
common assets, particularly derivatives.
In an environment of expanding credit, monitoring of
default34 and capitalization levels of financial institutions
becomes increasingly more important. The level of default
dropped from 3.7% in the 2005-2006 period to 3.2% in 2007.
This reduction in the percentage of credits in arrears was
generated partly by improvements in the process of granting
loans and also by the economic environment itself.
A comparison in international terms shows that the level of
loans in arrears compared to the overall portfolio remained
higher than the median level of the selected countries, though
it did diminish in 2007. However, the proportion between
provisions and credits in arrears in Brazil is higher than
the median level of the selected countries (see comparative
charts on page 68). This occurs mainly when the comparison
is made solely on the basis of the coverage margin35 of private
and foreign banks, which have a much better situation than
public banks.
In the period extending from December 2003 to December
2007, real estate credits expanded 95.2%, rising at a pace
33/ The adjusted APR utilized here is the result of multiplication of Required Base Capital by 9.09 (1/0, 11) in order to also reflect the components added to
the original Basel formula, such as credit swap risks, exchange exposure risks and interest rate risks – see box “Concepts and Methodologies – General”
for greater detail.
34/ In this item, the concept of delinquency does not follow the international standard and means overdue operations classified within risk levels E, F, G and
H of the classified portfolio.
35/ Coverage Margin = (Total Accounted Provision)/(Overdue Credit Operations classified under risk levels E,F,G and H).
May 2008
|
| 43
Variable yield securities to total assets
TRV /
Total assets
0.8%
R$ billion
16.0
12.8
0.7%
9.6
0.6%
6.4
0.5%
3.2
0.4%
0.0
0.3%
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Variable yield securities
Equity funds quotas
TRV – Tied to guarantees
TRV / Total assets
Managed resources – Composition of portfolio
as % of the PL – Annual
Period
Commitment Federal
CDB/RDB, Stocks Others PL (in
agreements
securities Promissory
R$ billion
with TPFs,
portfolio
constant)
Notes,
state and
Dec/00
-
76.14
9.65
11.11
3.10
627.7
Dec/01
-
75.16
12.39
9.52
2.93
656.5
Dec/02
-
73.43
11.01
10.88
4.67
526.9
Dec/03
-
75.86
10.66
10.33
3.16
690.9
Dec/04
13.23
58.99
11.52
10.17
5.08
721.0
Dec/05
9.43
54.80
14.63
11.16
4.26
858.3
Dec/06
11.34
47.04
14.89
15.25
3.71
1 043.9
Dec/07
13.6
46.59
13.20
21.71
4.46
1 213.6
* Data of the Global Ranking of Administration of Resources of Third. The Global Ranking,
composed currently by 40 participating institutions, includes, beyond investment fund (including Off
Funds Shore), resources managed by Investment and Managed Portfolio Clubs. The Global
Ranking presents, from Nov/2004, the information of commitment agreements segregated
according to the type of collateral.
Source: Anbid
Liabilities and leverage
Leverage
R$ billion
1 800
10.2
1 440
10.0
1 080
9.8
720
9.6
360
9.4
0
9.2
Dec
2004
Dec
2005
Dec
2006
Other liabilities
Liabilities on loans and on-lending
Liabilities on commitment agreements
Deposits
Leverage
44 |
Aside from reflecting the interest rate decline, we should
stress the measures taken to stimulate the sector, including
Resolutions n. 3,005, dated August 2003, and n. 3,347,
dated January 2006. The first of these restricted the assets
considered for calculating the obligatory channeling of
savings account resources into real estate credits and adopted
a transition rule according to which 1/100 was excluded
from the calculation each month. The second increased this
rate to 1/36 per month. Aside from the regulatory incentive,
which reduced the virtual FCVS by R$26.7 billion between
December 2003 and December 2007, the calculation base
increased R$49.6 billion, creating a greater need for financial
institutions to target these resources.
Debentures
municipal
Dec
2003
that surpassed average growth of the loan portfolio in the
last two years. However, this was still insufficient to recoup
the participation level reached in 2003. Nonetheless, there
are signs that considerable growth potential remains, mainly
when one considers the levels reached by this loan modality
in other emerging countries.
|
May 2008
Dec
2007
Public securities issued by the Brazilian government
continued as the most important papers in the portfolios
of TVMs belonging to the banking system, though their
participation in the overall total tended downwards. Growth
in the participation of private securities occurred mainly at
small-scale banks, as fund quotas in this segment moved from
8.4% of PR in December 2003, 236.5% in December 2007.
Of the R$23.3 billion invested in fund quotas, R$8.9 billion
referred to Credit Receivable Funds (FIDCs), R$6.3 billion
to multi-markets and R$2.9 billion to stock funds.
The securities portfolio abroad in the amount of
R$40.8 billion was represented by securities issued by
the Brazilian government, with 8.6% being considered
as private securities according to the calculation in the
previous paragraph.
When viewed in the context of the current international
financial system situation, contrary to what has occurred
in the financial systems of other countries, exposure of the
Brazilian banking system to international markets in relation
to both assets and liabilities is quite low. At the same time,
exposure of assets to variable yield risk is also low.
Analysis of investments made by investment funds, most
of which are managed by banks, also demonstrates that
the major share of assets belonging to the fund system is
invested in federal government bonds. Despite having lost
participation in total administered assets, one perceives that
Leverage
Times
20
16
12
8
4
sovereign risk remains significant – 60.2% in December
2007, compared to 76.2% in December 2000, both in direct
terms and viewed through repo operations. Sharp growth
in the share allocated to variable yield investments tends
to alter the risk profile. Aside from increasing the volatility
of administered portfolios, this movement shows that the
behavior of our fund system is quite close to the average
for other countries.
0
Dec
2003
Dec
2004
Large
Small
Foreign
Domestic private
Dec
2005
Dec
Dec
2006
2007
Medium
Micro
Government owned
2.2.3 Liabilities
Main liabilities
100%
80%
60%
40%
20%
0%
Consolidated
Foreign
Government
owned
Domestic private
Demand deposits
Liabilities on loans and on-lending
Savings accounts
Liabilities on commitment agreements
Time deposits
Others
Main liabilities
% p.y.
R$ billion
1 200
50%
960
40%
720
30%
480
20%
240
10%
0
0%
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Investment funds (FIF)
Time deposits
Savings accounts
Annual rate of growth FIF
Annual rate of growth CD (Certificate of deposit)
Annual rate of growth savings accounts
Savings deposits – SBPE and Rural
R$ billion
200
160
120
80
40
0
Jun
2006
Dec
SBPE
Jun
2007
Dec
Though they have lost ground in terms of participation
since December 2005, deposits remained as the major
source of funding.
The ratio between third-party capital and capital belonging
to the institutions themselves or, in other words, leverage,
has remained approximately 9.5 times. This ratio is not
homogeneous among the various segments when viewed
in terms of their dimensions. More specifically, large banks
maintained a ratio more than 2.5 times that of the so-called
micro banks, thus reflecting the greater capillarity and
funding capacity of the large-scale banks.
Notwithstanding the reduction in leverage, public banks
continued making intensive use of third-party capital,
particularly through subordinate debt. Credit Assigns have
been another important source of financing, particularly to
smaller scale banks.
The liability structure differs significantly among the various
segments when viewed in terms of control. Foreign banks
have made greater utilization of time deposits and liabilities
for loans and onlending operations, while public banks have
led the way in savings deposits. In their turn, private banks
hold the largest volume of liabilities for repo operations. It is
important to note that this modality registered strong growth
in the recent past, mainly in operations carried out through
the use of securities issued by associate institutions.
If we consider the major investment options available to
account holders, this analysis demonstrates that the Financial
Investiment Funds (FIFs) have received more resources than
other types of interest-bearing deposits and have competed
on an equal footing with time deposits. Another modality that
has shown strong growth is savings deposits. In this case, the
growth rate has surpassed that of time deposits since 2006
and, in 2007, even outpaced the rate of FIF growth.
Rural
May 2008
|
| 45
Net profit and return on equity (ROE)
R$ billion
% p.y.
45
24
36
21
27
18
18
15
9
12
0
9
Dec
2003
Dec
2004
Annual profit
Dec
2005
Dec
2006
Dec
2007
Annual return on equity
Selic
Net interest revenue
% p.y.
R$ billion
110
6.5
94
6.2
78
5.9
62
5.6
46
5.3
30
The balance of savings deposits expanded 15.52% in
the half-year period, moving from R$203.6 billion in
June 2007 to R$235.2 billion in December 2007. Net
inflows in the half-year period totaled R$24.6 billion. The
balance of savings accounts registered by the Brazilian
System of Savings and Loans (SBPE), which channels
its resources into real estate credits, was R$187.8 billion
in December 2007, accounting for 79.85% of the total,
while rural savings ended the year with a balance of
R$47.4 billion, 20.15% of total deposits. Distribution of
deposits in December 2007 shows the highest concentration
of savers in the bracket of up to R$100, with a total of
44,169,598 depositors, accounting for 53.79% of the total.
2.2.4 Results
5.0
Dec
2003
Dec
2004
Dec
2005
Net interest revenue
Dec
2006
Dec
2007
Yield of interest earning assets
Evolution of revenues and rates of return on
loan and securities portfolio (TVM)
27%
23%
19%
15%
11%
7%
Dec
2003
However, this analysis should be viewed in relative terms
since part of the resources of large-scale clients channeled
into bank deposit certificates was shifted into repo operations,
since these generated lesser costs for the banks involved.
Dec
2004
Dec
2005
Dec
2006
Return of the TVM
Selic of the year
Dec
2007
Return of the loan
Cost of onerous liabilities
Returns on Net Worth (RSPL) of the banking system remains
one of the highest among the grouping of selected countries
and, despite the falloff in the Selic rate, surpassed the level
of previous years. This comparison is also valid for Returns
on Assets and Profitability of Financial Intermediation on
the average assets of the 10 largest banks (see charts at the
end of this section).
Since net income and RSPL have been sharply impacted
by such nonrecurring results as amortizations of premiums,
activations of tax credits and profits on investment transfers,
it is essential that one take due account of returns on financial
intermediation in order to evaluate not only the quantity but
also the quality of this profitability.
Net profitability of portfolios may not correspond to real
profitability, since part of the result of exchange variations
of funding instruments and financial investments is
not registered at Cosif as intermediation revenues or
expenditures, but rather as other operating revenues
and expenditures.
The ratio between service revenues and administrative
expenditures continues on an upward trend.
46 |
|
May 2008
The largest share of this result, commonly termed efficiency
gains, is generated by growth in the amount of service
revenues in total Adjusted Operating Revenues (RCO_A)36,
moving from 13.3% to 17.6%.
Administrative expenses and revenues from
services
R$ billion
%
60
100
56
80
52
60
48
40
44
20
40
0
Dec
2003
Dec
2004
Dec
2005
Dec
2006
Dec
2007
Administrative expenses (-) amortization expenses
Revenues from services
Coverage of adm. expenses (- amortization) with revenues from services
Breakdown of the annual result
Base Date: 2007
R$ billion
360
41% 4%
2%
300 RcIF
35
240
180
27%
11%101
151
56%
17% 15%
9%
16 20
RsIF
120
60
114
32
63
55
12%
96
RSO
A
B
C
D
E
F
G
H
I
39%
776%
20%
13
6
38
J
K
L
0
42%
37%
46
M
33%
9
8
5
44
N
O
P
Q
A = Revenues from loans
B = Revenues TVM/Commitment agreements
C = Revenues from leasing/Derivatives/Exchange
D = Borrowing expenses
E = Liabilities on loans, assignments and on-lending expenses
F = Leasing expenses
G = Allowance expenses
H = Revenues from services
I = Administrative expenses
J = Tax expenses
K = Revenues from participations
L = Other operating revenues
M = Other operating expenses
N = Non-operating income
O = Income taxes and contributions
P = Statutory participations
Q = Profit 2007
RcIF = Revenues of financial intermediation
RsIF = Result of financial intermediation
RsO = Operational result
An international comparison shows that Brazil still has a
high ratio between administrative expenditures and assets
at the 10 largest banks (see charts at end of this section),
despite constant improvement evident in the indicator of
adjusted coverage37.
A breakdown of the banking system result for 2007 indicates
the relevance of the major revenue and expenditure headings,
together with the evolution of each item in relation to the
2006 result. The highlights in that year were as follows:
1) the importance of credit income which has expanded
steadily in relation to income on TVMs, despite the fact
that its evolution (11%) did not accompany the pace of
growth of the portfolio (28%);
2) growth in TVM income (2%) has not accompanied
absolute growth in the portfolio (6%). Aside from the
effects of the reduction in the Selic rate, there was the
impact of the loss generated by marking to market of the
TVMs available for sale in the second half of 2007;
3) the reduction in outlays on deposits, keeping step with
the drop in the basic interest rate;
4) continued growth in outlays on liabilities for repo
operations, which have grown as a result of utilization
of this modality, particularly operations involving private
securities issued by associated institutions (already
mentioned previously);
5) the increase in outlays on loans and onlendings, which
have also kept step with growth in this modality;
6) the relevance of administrative expenditures and service
revenues, both of which increased sharply;
7) the relevance and pace of growth of other operating
revenues and expenditures, with alteration of its net
negative result (R$21 billion in 2007 against R$17 billion
in 2006); and
8) finally, growth in the non-operating result generated by
profits on transfers of investments and stockholdings.
36/ RCO_A = 7.1.0.0 0.00-8 Operating Revenues -7.1.5.30.00 - 4 Stockholding Income -7.1.5.80.00-9 Income on Derivative Operations -7.1.8.00.00-2 Income
on Stock Participation -7.1.9.20.00-9 Recovery of Credits Written off As Losses -7.1.9.30.00-6 Recovery of Charges and Expenditures -7.1.9.90.00-8
Reversion of Operating Provisions +8.1.1.50.20-9 (-) Third-Party Portfolio +8.1.1.50.40-5 (-) Freely Operated Portfolio +8.1.4.50.00-2 (-) Expenditures on
Rate Variations and Differences +8.1.5.80.10-9(-) Securities for Negotiation +8.1.5.80.20-2 (-) Securities Available for Sale +8.1.5.95.00-8 (-) Permanent
Losses +8.1.9.99.00-6 (-) Other Operating Expenditures.
37/ Coverage of administrative expenditures with service revenues, ignoring amortization outlays.
May 2008
|
| 47
Evolution of the factors (breakdown of RSPL)
Itemization
2003
2004
2005
2006
2007
1 – Impact tributary and of participation
(LL/LAIR)
75.9% 77.7% 74.4% 85.6% 85.0%
2 – Margin of profit before taxes
(LAIR/RCO_A)
10.3% 13.4% 15.2% 14.0% 16.5%
3 – Operating income by asset risk
(RCO_A/APR_A)
32.7% 27.2% 27.9% 25.3% 22.2%
4 – Index of asset risk
(APR_A/AT)
62.9% 66.4% 68.2% 70.4% 75.9%
5 – Financial leverage
(AT/PLA)
9.9
9.4
10.0
9.8
9.6
RSPL (LL/PL) = (1)x(2)x(3)x(4)x(5) 15.9% 17.7% 21.4% 20.9% 22.7%
LL = Net profit
LAIR = Profit before income tax
AT = Total assets
APR_A = Weighed assets for the risk (Adjusted)
PLA = Adjusted net worth
RCO_A = Adjusted operating income
Evolution of the profit margin breakdown
Itemization
2003
2004
2005
2006
2007
1 – Impact of the non-operating income
(LAIR/RSO)
91.8% 102.2% 100.9% 102.8% 121.6%
2 – Index of operational efficiency
(RSO/RSIF)
37.9% 37.6% 44.4%
40.0% 41.2%
3 – Margin of financial intermediation
(RSIF/RcIF)
38.8% 45.3% 45.1%
46.6% 48.0%
4 – Participation of financial intermediation income
(RcIF/RCO_A)
76.6% 77.2% 75.3%
73.2% 68.8%
(LAIR/RCO_A) = (1)x(2)x(3)x(4) 10.3% 13.4% 15.2%
14.0% 16.5%
Profit margin
RSO = Operational result
RSIF = Result of financial intermediation
RcIF = Income of financial intermediation
38/ APR_A equivalent to PRE/11%.
48 |
|
May 2008
Utilizing the RSPL breakdown and profit margins to analyze
profitability, the following should be pointed out:
1) improvement in the Operational Efficiency Index –
Operating Result over the Financial Intermediation Result,
demonstrating the increasing coverage of administrative
expenditures with service revenues;
2) growth in the Financial Intermediation Margin – Result
of Financial Intermediation over Financial Intermediation
Income –, mainly revealing growth in the difference
between returns on credit portfolios and liability costs;
3) growth in the Impact of the Non-Operating Result – Before
Tax Profits on Operating Results – mainly in 2007, as a
result of gains on transfers of investments;
4) reduction in the Participation of Financial Intermediation
Revenues – Financial Intermediation Income on Adjusted
Operating Revenues – which is consistent with the
reduction in the Selic rate;
5) increase in the Asset Risk Index – Assets Weighted by
Adjusted Risk on Total Risk38 – consistent with the
increase in the relevance of the credit portfolio;
6) falloff in Operational Profitability over Asset Risk –
Adjusted Operating Revenues over Adjusted Assets
Weighted by Risk – generated by the reduction in portfolio
returns, particularly TVM portfolios.
Basel capital ratio
Administrative expenses over adjusted total asset
%
Country
average top 10
% p.y.
2002 2003 2004 2005 2006 2007
Country
Argentina
nd
nd
nd
nd
nd
Australia
9.6
10.0
10.4
10.4
10.6
16.6
18.9
18.5
17.4
17.7
Chile
14.0
14.1
13.6
13.0
12.7
Brazil
Mexico
15.5
14.2
14.1
14.3
15.2
Spain
12.5
12.6
12.3
12.2
Canada
12.4
13.4
13.3
12.9
South Africa
12.6
12.2
13.3
12.3
Brazil
1/
2000 2001 2002 2003 2004 2005 2006 2007
Argentina
n/d
n/d
n/d
n/d
n/d
n/d
Australia
1.8
1.7
1.7
1.6
1.6
1.6
6.8
6.9
6.1
6.0
6.1
5.8
Chile
3.1
3.0
3.0
2.7
2.7
2.7
11.5
Mexico
5.1
4.7
4.8
4.6
4.3
4.6
12.6
Spain
1.7
1.7
1.7
1.6
1.4
1.1
12.4
Canada
2.7
2.7
2.7
2.7
2.7
2.6
17.2
1/
Source: Global Financial Stability Report – FMI
Source: Bankscope
1/ Source: Bacen
1/ Source: Bacen
Concentration
Return on equity
5.4
Participation of 5 biggest banks in total assets
% p.y.
banking-consolidated I
Country
%
Country
2002 2003 2004 2005 2006 2007
Argentina
-3.8
7.2
20.2
24.2
22.8
25.3
nd
20.8
15.9
17.7
21.4
20.9
14.4
16.7
16.7
17.9
18.4
Mexico
-10.4
14.2
13.0
19.5
25.0
17.5
61.3
59.5
40.1
Brazil
Australia
79.4
70.6
69.3
75.7
Chile
60.0
63.1
61.6
60.3
61.2
62.2
-59.2 -22.7
1/
52.7
1/
2002 2003 2004 2005 2006 2007
Australia
Argentina
Brazil
2/
14
Canada
82.8
81.1
79.7
81.6
Spain
12.1
13.2
14.1
16.9
Chile
71.2
71.4
69.9
69.6
Canada
9.3
14.7
16.7
14.9
20.9
Spain
46.3
45.4
43.5
44.6
South Africa
5.2
11.6
16.2
15.2
16.0
Mexico
83.6
82.0
80.4
79.6
Source: Bankscope
1/ Source: Bacen
5.2
22.7
1/ Source: Gross profit
2/ Source: Bacen
May 2008
|
| 49
Return on assets
Past due credits over total portfolio
% p.y.
%
Country
Country
2002 2003 2004 2005 2006 2007 Last
available
Argentina
Argentina
-8.9
-3.0
-0.5
0.9
1.4
1.6
1.5
1.8
nd
2.0
1.6
1.9
2.2
2.1
1.1
1.3
1.2
1.3
1.3
Mexico
-1.1
1.7
1.5
2.4
3.1
Mar
Spain
0.9
0.9
0.9
0.9
1.1
Dec
Canada
0.4
0.7
0.8
0.7
1.0
South Africa
0.4
0.8
1.3
1.2
1.2
1/
18.1
17.7
10.3
5.0
3.4
3.2
May
0.4
0.3
0.2
0.2
0.2
0.2
Mar
Brazil
4.2
3.9
3.1
3.6
3.8
3.2
Dec
Chile
Chile
1.8
1.6
1.2
0.9
0.8
0.8
May
Mexico
4.6
3.2
2.5
1.8
2.0
2.2
Spain
1.1
1.0
0.8
0.8
0.7
nd
Canada
1.6
1.2
0.7
0.5
0.4
nd
Sep
South Africa
2.8
2.4
1.8
1.5
1.2
1.1
Mar
1/
Australia
Brazil
2/
2002 2003 2004 2005 2006 2007
Australia
2/
1.7
2.4
1/ Source: Gross profit
1/ Past due credits exclude operations covered by guarantees.
2/ Source: Bacen
2/ Source: Bacen
Result of intermediation on average assets
Allowances on non-performing loans
%
Country
of the top 10 banks
% p.y.
2002 2003 2004 2005 2006 2007 Last
available
Country
2001 2002 2003 2004 2005 2006 2007
May
Argentina
3.3
5.4
0.7
1.7
3.1
nd
Mar
Australia
2.0
2.0
2.0
1.9
1.8
165.7 178.3 200.0 174.8 170.4 175.1
Dec
Brazil
3.8
4.7
6.3
6.4
6.1
Chile
128.1 130.8 165.5 177.6 200.4 191.1
May
Canada
2.2
2.4
2.3
2.2
2.0
Mexico
138.1 167.1 201.8 232.1 213.0 194.7
Spain
197.2 245.4 219.6 251.8
Argentina
Australia
Brazil
1/
73.8
79.2 102.9 124.6 128.5 132.3
106.2 131.8 182.9 203.0 204.5
Mar
Chile
4.9
5.6
3.1
4.1
4.2
nd
nd
Dec
Spain
2.7
2.4
2.4
2.1
1.5
Mexico
6.7
6.1
5.3
5.7
7.0
Canada
41.1
43.5
47.7
49.3
55.3
nd
Sep
South Africa
54.2
54.2
61.3
64.3
nd
nd
Mar
Source: Bankscope
1/ Fonte: Bacen
1/ Source: Bacen
50 |
1/
|
May 2008
5.5
5.5
2.3 Credit Guarantee Fund (FGC)39
Deposit Insurance Fund – FGC
Number of depositor and value of deposit in dec, 2007
Value band
Number of
%
R$ million
%
customers
0.01
5 000.00
122 603 413
90.9
51 796
5 000.01
10 000.00
4 861 535
3.6
34 711
4.7
10 000.01
15 000.00
2 143 760
1.6
26 318
3.6
15 000.01
20 000.00
1 188 738
0.9
20 661
2.8
20 000.01
25 000.00
796 181
0.6
17 818
2.4
25 000.01
30 000.00
533 095
0.4
14 624
2.0
30 000.01
35 000.00
405 997
0.3
13 155
1.8
35 000.01
40 000.00
298 857
0.2
11 186
1.5
40 000.01
45 000.00
243 531
0.2
10 329
1.4
45 000.01
50 000.00
190 391
0.1
9 028
1.2
50 000.01
60 000.00
300 017
0.2
16 406
2.2
60 000.00
1 263 949
0.9
514 105
69.5
134 829 464
100.0
740 137
100.0
Above
Total
7.0
Deposite insurance fund – FGC
R$ billion
800
The FGC provides full coverage to 99.1% of SFN depositors.
The percentage of total financial institution credits
guaranteed by the FGC remained stable between June and
December 2007, at a level of approximately 40.7%. The
overall volume of deposits in financial products guarantied
by the FGC was R$301.8 billion in December 2007,
distributed among demand deposits, savings deposits and
bank deposit certificates.
2.4 SFN operating limits
With the intention of adopting the best international
supervision practices, the Central Bank of Brazil follows
the recommendations of the Basel Committee in that which
concerns definition of the operational limits to be observed
by SFN member institutions. Among these limits, the two
most important are: the Basel Capital Ratio and the Fixed
Asset Ratio.
640
480
320
160
0
Jun
2006
Dec
Credits
Jun
2007
Dec
Insured credits
The Basel Capital Ratio is obtained by the ratio between PR
and Required Base Capital (PRE) of financial institutions,
since they must maintain a PR value compatible with the
degree of risk of their asset structure, as determined by
Resolution n. 3,444/2007, Resolution n. 2,099/1994, and
later alterations.
The Fixed Asset Ratio is obtained on the basis of the
ratio between the balance of Permanent Assets (AP) and
Adjusted Base Capital for calculating the fixed asset ratio
(PRimob) of financial institutions. The resulting figure must
be less than 50% as required by Resolution n. 3,444/2007,
Resolution n. 2,669/1999 and Resolution n. 2,283/1996, and
later alterations.
2.4.1 Basel Capital Ratio40
Capital allocation has the objective of ensuring that
institutions maintain volumes of their own resources that are
sufficient to protect them against relevant and unexpected
losses of assets, in order to minimize risk to their depositors
39/ See box “Concepts and Methodologies – Credit Guarantee Fund”.
40/ Although this ratio does not exist formally in the regulations, the Brazilian rule can be easily converted to the international standard. See calculation in
the box “Concepts and Methodologies – General”.
May 2008
|
| 51
and creditors. In the case of Brazilian banks, the Basel capital
ratio must be higher than 11%41.
Basel capital ratio
SFN
%
19.5
19.1
18.7
This topic presents an analysis on the situation of SFN
institutions and segments in relation to the Basel Capital
Ratio, in light of the behavior of PR and PRE.
18.3
17.9
17.5
Dec
2005
Mar
2006
Jun
Sep
Dec
Mar
2007
Jun
Sep
2.4.1.1 Evolution
Dec
Basel Capital Ratio – small variations in the 24 previous
months between 17.5% in May 2006 and 19.4% in
September 2006. In the last two years, this ratio expanded
0.7 p.p. and, in the half-year period, diminished from 19.2%
to 18.8%, closing with leeway of 7.8 p.p. in relation to the
minimum required limit in Brazil.
Evolution
PR, PRE and BCR
%
R$ billion
19.5
350
19.2
280
18.9
210
18.6
140
18.3
70
18.0
0
Dec
2005
Jun
2006
Dec
PR
Jun
2007
PRE
Dec
PR – in December 2007, PR totaled R$309.6 billion, for
growth of R$114.2 billion (58%) in the last two years and
R$22.5 billion in the half-year period (7.8%).
The increase in PR can be explained basically by retention
of bank profits, thus raising Tier I Capital. Parallel to this,
there was an increase in Tier II Capital, which expanded from
R$53 billion to R$76.5 billion, a shift of 44% in 2007.
Basel capital ratio
In the half-year period, increases of 8.9% in Tier I Capital
and 6.2% in Tier II Capital were observed.
Evolution of capital base and required net worth1/
R$ million
Itemization
2007
Half-year
Jun
Capital base
Dec
change
Value
%
Value
%
%
287 135
100.0
309 592
100.0
Tier I
215 368
75.0
234 465
75.7
8.9
Tier II
72 024
25.1
76 493
24.7
6.2
- 257
-0.1
-1 366
-0.4
431.6
Deductions
Required net worth
7.8
164 020
100.0
181 308
100.0
10.5
146 057
89.0
163 250
90.0
11.8
Interest rate
5 369
3.3
6 140
3.4
14.4
Exchange rate
8 736
5.3
8 350
4.6
-4.4
Swap
3 857
2.4
3 568
2.0
-7.5
Assets
1/ The required net worth represents the minimum capital base demanded by
the Banco Central do Brasil.
These increases occurred already considering the effects of
the new criteria for calculating PR specified by Resolution
n. 3,444, dated February 26, 2007. In general lines,
participation in financial institutions located abroad, excess
immobilizations, balances of stockholdings or investments
in funding instruments included in the PR of institutions
authorized to operate by the Central Bank of Brazil were
deducted from PR. These adjustments totaled 0.5% of SFN
PR in December 2007.
PRE – in December 2007, PRE totaled R$181.3 billion, up
R$62.3 billion in the last two years and R$17.3 billion in
the half-year period (10.5%).
With respect to PRE components, Assets Weighted by Risk
(APR) posted growth of 11.8% and Interest-Pre registered
14.4%, while exchange and swap components showed
41/ Single credit unions not associated to central unions must have a Basel Capital Ratio of more than 15%, while development agencies must register above
30%. Nonetheless, the participation of these institutions is quite small in the PR and PRE of the overall SFN.
52 |
|
May 2008
reductions of 4.4% and 7.5%, respectively, compared to the
previous half-year period.
Following the example of recent half-year periods, the
greatest contribution to PRE growth was assets weighted
at 100%, while increases in the volume of credit operations
and of goods for leasing were the major headings.
2.4.1.2 Concentration
Capital base and required net worth – Concentration1/
December, 2007
%
Itemization
Capital base
Number of financial institutiions
5
10
20
50
92.4
56.8
75.1
83.6
Tier I
51.6
68.8
78.9
89.8
Tier II
75.3
93.9
98.2
99.8
57.6
78.9
87.3
94.6
Assets
57.7
79.2
87.4
94.6
Interest rate
55.9
73.4
84.1
95.1
Exchange rate
91.8
96.7
98.9
100.0
Swap
60.5
80.8
94.5
99.9
Required net worth
1/ Participation of the financial institutions in the total of the SFN.
In analyzing the concentration of PR and PRE components
in the SFN, institutions were organized in decreasing order
according to the values registered in each PR and PRE
component. Participation levels were then accumulated
and segregated among the five, ten, twenty and fifty
institutions that registered the highest values in each one of
the components.
Following the example of previous half-year periods, capital
concentration in December 2007 in the 50 largest institutions
remained above 90% in all PR and PRE components, with
discreet alterations when compared to the previous half-year
period in all of the different brackets. Here, it is important
to stress the following:
2.4.1.3 Analysis by segments
In this topic, an analysis of the composition of PR and PRE
in December 2007 is presented, highlighting the significant
changes that occurred in relation to June 2007 for each
segmentation of the market. PR is broken down into Tier I
Capital, Tier II Capital and Deductions from PR, while PRE is
broken down into APR, Interest-Pre, Exchange and Swaps.
Consolidated Banking Segment I – composed of 97
institutions responsible for 78.5% of PR and 85.7% of
the PRE of the SFN, with a Basel Capital Ratio of 17.2%,
corresponding to a reduction of 0.3 p.p., of which 0.1 p.p.
refers to the share of Deductions from PR. This segment was
analyzed separately by type of control:
a) Public banks – composed of 11 institutions responsible
for 20.6% of PR and 20.6% of the PRE of the SFN, with
a Basel Capital Ratio of 18.8%, down 1.1 p.p.
• PR – expanded 7.0%, with 10.7% under Tier I Capital,
equivalent to R$4.2 billion, and a 1% under Tier II
Capital, equivalent to R$197 million.
May 2008
|
| 53
• PRE – increased 13.1%, 12.5% under APR, equivalent
to R$3.8 AP and, 27.4% under Interest-Pre, equivalent
to R$457 million and 4.3% under Exchange.
b) Private national banks – composed of 53 institutions
responsible for 41.7% of PR and 46% of the PRE of the
SFN, with a Basel Capital Ratio of 17%, down 0.5 p.p.
• PR – expanded 10.3%, with 12.1% in Tier I Capital,
equivalent to R$10.8 billion, and 5.5% in Tier II
Capital, equivalent to R$1.5 billion.
• PRE – expanded 15.4%, with 16.5% in APR, equivalent
to R$10.3 billion, 7.6% in Interest-Pre, equivalent to
R$148.5 million and 9.5% in Exchange, equivalent to
R$635 million. Parallel to this, there was a reduction
of 0.6% in the swap component, equivalent to
R$6.9 million.
c) Foreign banks – composed of 33 institutions responsible
for 16.2% of PR and 19.2% of the PRE of the SFN, with
a Basel Capital Ratio of 15.8%, down 0.6 p.p.
• PR – expanded 3.9%, with 1.6% under Tier I Capital,
equivalent to R$671.6 million, and 23.8% under Tier
II Capital, equivalent to R$1.6 billion.
• PRE – expanded 0.05%, with an increase of 4.4%
under APR, equivalent to R$1.3 billion, up 2.3% in
Interest-Pre, equivalent to R$32.6 million, and a
reduction of 52.5% under Exchange, equivalent to
R$1 billion, and a reduction of 14.2% in the swap
component, equivalent to R$296 million.
Consolidated banking segment II – composed of 31
institutions responsible for 16.8% of PR and 11.8% of
down 0.7 p.p.
Consolidated banking segment III – composed of 1400
institutions and responsible for 2.5% of PR and 1.5% of
down 3.4 p.p.
Consolidated non-banking segment – composed of 245
institutions and responsible for 2.3% of PR and 1% of the
PRE of the SFN, with a Basel Capital Ratio of 44.5%, up
4.1 p.p. One should highlight strong growth in the Exchangerelated PRE component, with 443%, reaching R$40 million,
despite representing only 0.02% of the PRE of the SFN.
54 |
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May 2008
2.4.1.4 Noncompliance with Basel limits
Capital base – Components
December, 2007
R$ million
Itemization
No.
Capital base
Total
BCR
Tier I
Tier II
1/
Deductions
Total of the SFN 1 773 309 592 234 465 76 493
-1 366
18.8
97 243 158 186 401 57 689
- 932
17.2
11
- 226
18.8
Banking
In December 2007, 62 small-scale institutions from an
overall total of 1773 SFN member institutions were deemed
noncompliant. The capital required to offset the deficiency
in Basel Capital Limits totaled R$585.1 million, equivalent
to 0.3% of the PRE of the SFN.
consolidated I
Banks
a) Consolidated banking segments I and II – no noncompliant
institutions;
government
owned
63 874
43 901 20 199
domestic
private
53 129 162 100 463 28 979
- 280
17.0
33
50 122
42 037
- 426
15.8
consolidated II
31
52 087
33 482 18 611
-5
26.8
consolidated III
1 400
7 302
7 600
72
- 370
29.4
Non-banking
245
7 045
6 983
121
- 59
44.5
foreign
8 511
b) Consolidated banking segment III – 53 noncompliant
credit unions, compared to 45 in December 2006.
The capital required to offset the deficiency was
R$189.8 million in capital injections, corresponding to
0.1% of the PRE of the SFN;
c) Consolidated nonbanking segment – 9 institutions
considered noncompliant. Capital required to offset the
deficiency totaled R$395.5 million, or 0.2% of the PRE
of the SFN.
1/ Basel capital ratio.
Required net worth – Components
December, 2007
R$ million
Itemization
Total
AWR1/
Interest Exchange Swap
rate
Total of the SFN
2.4.2 Fixed Asset Limit
rate
181 308
163 250
6 140
8 350
3 568
155 457
138 156
5 672
8 225
3 404
37 298
34 775
2 125
0
398
The two main objectives of this limit are to ensure that
third-party resources are not invested in fixed assets and
that institutions operate with a minimum percentage of their
own capital.
Banking
consolidated I
Banks
government
owned
Resolution n. 2,669/1999 determined that institutions may
commit a maximum of 50% of PRimob in relation to AP.
domestic
private
83 360
72 733
2 103
7 300
1 224
34 799
30 648
1 444
925
1 782
consolidated II
21 375
20 892
237
85
161
consolidated III
2 733
2 549
184
0
0
1 743
1 654
47
40
2
foreign
Non-banking
This topic presents an analysis of the adequacy of the various
SFN institutions and segments to the Fixed Asset Limit,
while discussing the behavior of AP and PRA.
2.4.2.1 Evolution
Fixed assets to equity ratio
SFN
%
28.2
26.6
25.0
23.4
21.8
20.2
Dec
2005
Mar
2006
Jun
Sep
Dec
Mar
2007
Jun
Sep
Fixed Asset Ratio – 2006 was marked by relative stability,
fluctuating between 28% in January and 25.5% in April. The
period from February to December 2007 registered a sharp
6.2 p.p. drop, closing at 20.9%, well within the regulatory
limit of 29.1%. The reduction in the ratio is explained by
growth in the PRimob and by AP reductions, evident mainly
in the early months of 2007.
Dec
May 2008
|
| 55
2.4.2.2 Analysis by segment
Evolution
ACB, FA and FAER
%
R$ billion
28.0
350
26.4
280
24.8
210
23.2
140
21.6
70
20.0
0
Dec
2005
Jun
2006
Dec
ACB
Jun
2007
FA
Dec
Fixed assets to equity ratio
This topic discusses analyses of PRimob and of AP in
December 2007, highlighting the significant changes that
occurred in relation to June 2007 for each segment of
the market.
Consolidated banking segment I – Fixed Asset Ratio of
21.8%, down 0.6 p.p. The segment was responsible for
78.6% of total PRimob and 81.9% of the SFN’s AP. This
segment was analyzed separately by type of control:
a) Public banks – Fixed Asset Ratio of 13.1%, down 1.2 p.p.
The value of PRimob reached R$63.9 billion, for growth
of 7.1%, and the value of AP closed at R$8.4 billion, down
1.6%.
b) Private national banks – Fixed Asset Ratio of 28.5%,
reduction of 1.3 p.p. The value of PRimob reached
R$129 billion, for growth of 10.6%, and the value of AP
climbed to R$36.8 billion, for an increase of 5.7%.
c) Foreign banks – Fixed Asset Ratio of 15.5%, an
increase of 1.3 p.p., with the value of PRimob reaching
R$50.3 billion, up 5.5%, and the value of AP closing at
R$7.8 billion, for growth of 15.3%.
Consolidated Banking Segment II – registered a Fixed Asset
Ratio of 20.5%, down 2.1 p.p. The value of PRimob closed
at R$52.1 billion, for growth of 5.9%, and the value of AP
diminished to R$10.7 billion, for a reduction of 4%.
Adjusted capital base and fixed assets
Itemization
Amount
Jun
Total of the SFN
ACB
Dec
1 803 1 773
1/
FA
Jun Dec
2/
3/
II
Jun Dec
Jun Dec
285 309
62
65
21.8 20.9
224 243
50
53
22.4 21.8
64
9
8
14.3 13.1
117 129
Banking
consolidated I
102
97
12
11
Banks
government
owned
60
domestic
private
foreign
consolidated II
consolidated III
Non-banking
55
53
35
37
29.8 28.5
35
33
48
50
7
8
14.2 15.5
32
31
49
52
11
11
1 419 1 400
7
7
1
1
12.1
9.0
5
7
0
0
4.6
5.4
250
245
2/ Fixed assets – R$ billion.
3/ Fixed assets to equity ratio (%) – Max. 50%.
|
Consolidated Nonbanking Segment – Fixed Asset Ratio of
5.4%, representing growth of 0.8 p.p. The value of PRimob
reached R$6.8 billion, corresponding to growth of 32%, and
the value of AP closed at R$0.4 billion, up 53.7%.
2.4.2.3 Noncompliance with Fixed
Asset Limit
In December 2007, 61 of the 1773 SFN institutions analyzed
had AP of more than 50% of PRimob or, in other words,
were noncompliant. To offset the total deficiencies of these
1/ Adjusted capital base – R$ billion.
56 |
22.6 20.5
Consolidated Banking Segment III – Fixed Asset Ratio of
9%, reduction of the 3.1 p.p. The value of PRimob totaled
R$7.3 billion, for growth of 5.4%, and the value of AP
reached R$0.7 billion, down 21.5%.
May 2008
institutions, R$1.1 billion in capital injections, or 0.36% of
the SFN PRimob, was required.
a) Consolidated banking segment I – three noncompliant
institutions, requiring R$661.9 million in capital, or 0.21%
of the SFN’s PRimob.
b) Consolidated banking segment III – 46 noncompliant
institutions, requiring R$52.7 million in capital,
corresponding to 0.02% of the SFN’s PRimob.
c) Consolidated nonbanking segment – two noncompliant
institutions, requiring R$393.3 million in capital
injections, or 0.13% of the SFN’s PRimob.
2.5 Risks
2.5.1 Loan operations
Credit operations – Domestic and abroad
December, 2007
R$ million
Itemization
Total of the SFN
Banking
consolidated I
Consolidated Abroad
Domestic
Financial
credit
credit
credit
interme-
operations
operations operations diaries
990 045
44 036
946 009
11 151
982 527
44 036
938 492
10 795
851 342
44 036
807 307
9 637
Banks
government
245 565
11 352
234 213
82
domestic private
owned
421 329
26 996
394 333
8 235
foreign
184 449
5 687
178 761
1 321
consolidated II
115 287
0
115 287
1 158
consolidated III
15 898
0
15 898
0
7 518
0
7 518
356
Non-banking
The volume of loan operations42 granted by financial
institutions in the country totaled R$946 billion at the end
of December 2007, corresponding to 17% growth compared
to the balance for the first half of the year. In terms of
participation in GDP, total SFN loans reached 35.2%, against
32.4% in June 2007 (excluding credit operations granted
to financial intermediaries43, these percentages dropped to
34.7% and 32%, respectively). When one adds this volume
to the credits of foreign branches and subsidiaries of financial
institutions headquartered in Brazil, the overall volume
of credits reached R$990 billion, 16.5% more than the
R$849.5 billion in the previous half year period.
Distribution of SFN credits by types of financial institutions
remained quite similar to the situation in the first half of
2007. The banking system44 accounted for 99.2% of total
SFN credit operations, while the consolidated nonbanking
system accounted for the remainder. The participation of
consolidated banking segment I, which includes financial
conglomerates and institutions that have at least one
commercial bank or multiple bank with a trade portfolio,
reached 86% of the banking system, 0.2 p.p. more than
in June 2007. Consolidated banking segments II and III
were responsible for 12.3% and 1.7%, respectively, of total
banking system credits.
42/ As defined in the box “Concepts and Methodologies – Loan Operations” (Methodology – item “b”).
43/ As defined in the item “Concepts and Methodologies – Loan Operations” (Concepts – item “f”).
44/ As defined in the item “Concepts and Methodologies – Loan Operations” (Concepts – item “a”).
May 2008
|
| 57
Credit operations – Total
Consolidated I by control type
R$ billion
400
340
280
220
160
100
Jun
2006
Dec
Jun
2007
Government owned banks
Dec
Domestic private banks
Foreign private banks
Top conglomerates/banks
Participation in the credit of the banking-consolidated I
%
Itemization
2006
2007
Jun
Dec
Jun
Dec
10 largest
84.0
85.2
84.6
84.7
20 largest
93.3
93.6
92.9
92.7
50 largest
99.0
99.1
99.0
99.0
Credit operations in value range
%
Range (R$)
Banking
Non-
consolidated I
consolidated II consolidated III banking
2007
Jun
Dec
Individual borrower
49.9 48.8
Under 5 thousand
17.4 15.7
5 to 20 thousand
14.8 14.3
Jun
Dec
15.4 14.8
2.3
2.1
Jun
Dec
Jun
Dec
82.2 81.9
45.6 45.0
20.9 19.4
20.0 18.6
3.5
3.3
24.5 23.8
7.9
8.1
20 to 50 thousand
9.0
9.8
3.7
4.0
16.0 16.1
3.9
4.3
50 to 100 thousand
3.9
4.1
1.9
1.9
9.5
9.8
3.5
3.8
100 to 200 thousand
2.2
2.3
1.5
1.3
5.4
6.6
4.7
4.7
Over 200 thousand
2.6
2.5
2.6
2.1
5.8
6.3
5.6
5.5
Corporate borrower
50.1 51.2
Under 100 thousand
10.9 10.5
100 to 1 million
1 to 5 million
84.6 85.2
17.8 18.1
10.3 10.4
54.4 55.0
4.6
4.3
4.9
4.7
10.3 10.6
6.5
6.7
5.6
5.8
24.2 24.6
10.0
9.9
6.6
6.5
1.6
1.5
13.6 13.4
5 to 10 millions
4.6
4.7
4.9
5.0
0.4
0.4
3.9
4.1
10 to 50 millions
8.8
9.4
22.0 22.4
0.0
0.0
5.7
4.9
Over 50 millions
5.6
6.0
40.0 40.3
0.0
0.0
2.1
3.3
Contrary to the behavior of the previous half-year period,
corporate entities accounted for more than a proportional
share of the increase in SFN loans (60%) in the second half
of 2007, compared to the segment of individual borrowers. In
this framework, working capital loans granted to the business
sector deserve highlighting, having registered strong
growth in the asset portfolio balance45, which shifted from
R$71.6 billion in June 2007 to R$101.5 billion last December.
Parallel to these operations, mention should be made of
strong growth in credits targeted to vehicle purchases in
the segment of individual borrowers, particularly through
leasing operations. In this case, the asset portfolio expanded
64.6% in the half-year period, moving from R$24.9 billion
to R$41 billion. One should further mention the impact
of depreciation of the United States dollar against the real
(-8.0% in the half-year period) on the balance of credit
operations referenced to that currency. In December 2007,
the stock of these operations totaled R$67.3 billion.
With regard to the segmentation of credits according to
capital control of financial institutions, the stock of credit
operations granted by private national banks reached
R$394.3 billion in December 2007, for growth of 21.3%
compared to the month of June. This amount corresponded
to 48.8% of the total credits of consolidated banking segment
I. The volume of credits held by foreign banks increased
16.4% in the half-year period, moving to R$178.8 billion,
accounting for 22.1% of the total credits of banking segment
I. The volume of credits granted by public banks expanded
at a lesser pace, with 11.9% and a total of R$234.2 billion,
accounting for 29.0% of consolidated banking segment I.
The level of concentration of credit operations in the grouping
of the 10 largest conglomerates and financial institutions
included in consolidated banking segment I remained stable
between June and December 2007, moving from 84.6% to
84.7% of total credits of the consolidated segment. Private
national banks accounted for 49.3% and foreign banks for
20.4%. In June 2007, these participation levels stood at
respective percentages of 48.0%, 31.7% and 20.3%.
Based on data drawn from the Central Bank of Brazil Credit
Information System (SCR), the participation of individual
borrowers in total SFN credits dropped from 46.1% to
45.2% in the period extending from June to December 2007.
This performance reversed the tendency toward increasing
participation of this segment that had marked previous
half-year periods. In consolidated banking segment I, the
45/ Balance of credit operations in themselves (excluding losses) registered in the SCR.
58 |
|
May 2008
Credit operations in value range
%
Range (R$)
Government
Private
owned
domestic
foreign
2007
Jun
Dec
Jun
Dec
Jun
Dec
Individual borrower
57.8
56.4
43.8
43.6
51.8
50.2
Under 5 thousand
16.5
14.9
16.1
14.6
21.4
19.4
5 to 20 thousand
14.7
14.1
14.9
14.6
14.7
14.1
20 to 50 thousand
12.2
12.4
7.4
8.7
7.9
8.7
50 to 100 thousand
6.5
7.0
2.6
2.8
3.1
3.2
100 to 200 thousand
3.6
3.8
1.3
1.6
1.9
2.0
Over 200 thousand
4.2
4.2
1.5
1.4
2.7
2.8
Corporate borrower
42.2
43.6
56.2
56.4
48.2
49.8
Under 100 thousand
13.6
13.4
10.1
9.6
8.8
8.5
6.8
7.1
12.9
12.7
9.6
10.7
10.3
100 thousand to 1 million
1 to 5 millions
6.2
6.4
12.2
11.9
10.4
5 to 10 millions
2.8
2.7
5.5
5.6
5.3
5.5
10 to 50 millions
6.2
6.3
10.3
10.8
9.3
10.4
Over 50 millions
6.8
7.6
5.2
5.8
4.7
4.4
Average term of the credit operations
Accumulated monthly grantings
Months
Type of loan
2006
2007
Jun
Dec
Jun
Dec
Individual borrower
Payroll guaranteed credit
38
41
44
50
Non-payroll guaranteed
23
23
24
29
Automobile
36
38
39
42
Leasing
47
42
51
54
Housing
153
188
183
215
30
36
25
31
Agriculture
Corporate borrower
Overdraft
Working capital
5
6
5
3
11
11
12
14
Project finance
49
52
54
54
BNDES (direct line)
30
49
37
91
Agriculture
8
10
11
15
Foreign trade
3
4
4
5
Debtors identified – SFN
Thousand
Debtors
Total of the SFN
Individuals
Corporate entities
2006
2007
Jun
Dec
Jun
Dec
12 646
13 765
14 863
16 642
11 438
12 510
13 523
15 178
1 208
1 255
1 341
1 464
most significant in the entire financial system, individual
borrowers accounted for 48.8% of total loans in December
2007, against 49.9% last June. As a consequence of sharper
growth in credits targeted to corporate entities over the
course of the second half of the year, these entities increased
their participation in the group’s total from 50.1% to 51.2%.
Also in relation to consolidated banking segment I, public
banks showed the highest concentration in operations
with individual borrowers in December 2007, with 56.4%
compared to 43.6% on the part of private national banks and
50.2% for foreign banks.
Growth in credits targeted to individuals in recent years
substantially altered the distribution of loan operations in
the different SFN brackets, due mainly to the fact of the
increasingly greater utilization of payroll-deducted loans
and auto loans. At the end of December 2007, consolidated
banking segment I, which concentrates 85.3% of total SFN
credits, held 24.1% of operations with individual borrowers
in the value bracket from R$5,000 to R$50,000. Two years
ago, this participation stood at 21.4%. In contrast, operations
of less than R$5,000 have been gradually decreasing in
terms of participation. In December 2007, operations of
consolidated banking segment I with individual persons
in the bracket below R$5,000 accounted for 15.7%,
compared to 18.9% two years ago. With regard to corporate
entities, mention should be made of the strong variations
that occurred in the participation of the brackets from
R$10 million to R$50 million in national private banks
(0.5 p.p.) and foreign banks (1.1 p.p.), and above R$50 million
in public banks (0.8 p.p.).
In consolidated banking segment II there was a high level
of concentration in operations with corporate entities
(85.2%), particularly in the brackets from R$10 million to
R$50 million (22.4%) and above R$50 million (40.3%).
In this case, it is important to note that, in December
2007, direct BNDES financing accounted for 67.3% of
the segment’s total. In the contrary sense, consolidated
banking segment III, which is composed of credit unions,
concentrated its operations in loans to individual persons
(81.9%), and more specifically in the brackets from
R$5,000 to R$20,000 (23.8%) and below R$5,000 (19.4%).
In the non-banking system, though distribution of credits
was practically proportional among individual borrowers
and corporate borrowers, the most important value brackets
were that ranging from R$100,000 to R$1 million in the
corporate segment (24.6%) and operations in amounts of up
to R$5,000 with individual borrowers (18.6%).
May 2008
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| 59
Write-offs – SFN
R$ million
Itemization
Write-offs
Total of the SFN
Write-offs from
within 12 months
13 to 48 months
2007
2007
Jun
Dec
Jun
Dec
24 487
24 258
33 973
35 461
21 807
22 689
29 161
30 462
Banking
consolidated I
Banks
government
7 345
7 320
9 517
10 912
domestic private
owned
8 708
9 845
12 139
12 575
foreign
5 755
5 525
7 505
6 975
consolidated II
1 928
768
3 705
3 792
consolidated III
269
309
403
388
483
491
704
819
3.0%
2.6%
4.2%
3.7%
Non-banking
1/
Percentage
The average term46 of some credit modalities has been
systematically increasing in recent years. In this context,
mention should be made of the strong increase in the average
term of real estate financing contracts with individual
borrowers. In December 2007, these contracts reached terms
of 215 months (18 years). Just a year and a half ago, the
average term of these operations was 153 months (13 years).
Furthermore, it is important to stress the evolution of the
average term of payroll deducted loans, which moved from
38 months in June 2006 to 50 months in December 2007.
With regard to the segment of corporate borrowers, the
sharpest growth occurred under direct BNDES financing,
as the average term shifted from 30 months to 91 months
between June 2006 and December 2007. In this segment,
one should also mention the sharp growth that occurred in
the cases of rural and agribusiness financing and export
and import financing, as the average term increased from
eight months to 15 months and from three months to five
months, respectively.
1/ Percentage of write-offs in relation to the SFN's credit operations.
Joint liabilities – SFN
R$ million
Itemization
Endorsements
Joint liabilities due
and sureties
credit garanteed
2007
Total of the SFN
2007
Jun
Dec
Jun
Dec
93 144
115 129
18 089
19 145
91 042
112 963
16 862
17 415
Banking
consolidated I
Banks
government
owned
16 037
17 947
456
484
domestic private
47 972
63 483
16 134
16 350
foreign
27 033
31 533
272
581
consolidated II
1 003
940
207
291
consolidated III
1 077
1 208
17
10
21
18
1 003
1 429
Non-banking
1/
Percentage
Total clients identified47 reached 16.6 million in December
2007, reflecting growth of 12% compared to the number
registered in June of the same year. Individual borrowers
continued with the same level of participation as in the
previous half-year period, with 91.2% of total debtors
identified in the SCR.
11.5%
12.2%
2.2%
2.0%
2.5.1.1 Operations written-off as losses
The volume of credit operations written off as losses up to
48 months in the SFN moved from R$58.5 billion in June
2007 to R$59.7 billion in December, for growth of 2.1%.
The ratio between the stock of losses and the active credit
portfolio in the SFN dropped from 7.2% to 6.3% in the
half-year period. One should emphasize that the increase in
the balance of losses occurred exclusively in the brackets
of operations written off with terms from 13 to 48 months,
representing an increase of R$1,488 million, compared to a
decrease of R$229 million in the stock of operations written
off with terms of up to 12 months.
1/ Percentage of joint liabilities in relation to the SFN's credit operations.
46/ As defined in the box “Concepts and Methodologies – Credit Operations” (Concepts – item “g”; Methodologies – item “d”).
47/ Clients registered in the SCR, with total liabilities (active credit portfolio + joint liabilities + losses) in a single financial institution is equal to or greater
than R$5,000.
60 |
|
May 2008
2.5.1.2 Joint liabilities
Largest debtors – SFN
Banks by control type
R$ billion
Itemization
2007
Jun
Dec
1/
2/
Portfolio
1.000 largests
3/
Debt
1/
Average
Portfolio
2/
Debt
3/
Average
204.0
255.5
1.9
236.9
299.3
1.3
142.2
192.2
1.1
164.5
224.7
1.0
36.6
40.4
1.5
41.8
46.6
1.5
72.7
105.2
0.8
85.1
125.8
0.7
32.8
46.7
1.2
37.6
52.2
1.2
Banking
consolidated I
Following the example of what occurred under credit
operations, the volume of joint liabilities for guarantees
rendered 48 increased 23.6% in the half-year period,
moving from R$93.1 billion at the end of June 2007 to
R$115.1 billion in December. Taken together, private
national banks and foreign banks belonging to consolidated
banking segment I, accounted for 91.0% of this increase. The
joint liabilities assumed through credit assigns49 by financial
institutions evolved 5.5% in the same time span, moving
from R$18.1 billion to R$19.1 billion. Here, it is important
to stress strong growth in the stock of joint liabilities for
credit assigns in foreign banks belonging to consolidated
banking segment I, with 113.6%, reflecting growth of
R$309.0 million in the half-year period.
Banks
government
owned
2.5.1.3 Largest SFN debtors
domestic
private
foreign
consolidated II
58.5
59.5
4.1
69.1
70.7
2.1
consolidated III
0.05
0.05
0.4
0.1
0.1
0.4
3.2
3.7
0.7
3.2
3.9
0.7
Non-banking
1/ Loans and lease operations.
2/ Portfolio + joint liabilities + write-offs.
3/ Average provision – % (portfolio).
Largest debtors' share of SFN
%
Debtors
2007
Jun
Dec
1/
2/
Portfolio
Debt
1.000 largests
25.2
1º - 10º largest
2.5
3/
1/
2/
3/
Provision
Portfolio
Debt
Provision
26.6
1.9
25.0
26.7
1.3
2.9
0.2
2.5
2.7
0.2
11º - 50º largest
5.2
5.0
2.6
4.8
5.2
0.9
51º - 110º largest
3.5
4.1
0.4
3.6
3.9
0.4
4.0
4.1
2.4
3.9
4.1
1.5
5.6
5.8
1.9
5.7
5.9
2.0
501º - 1.000º largest
4.4
4.8
3.1
4.6
4.9
2.2
3/ Required provision (portfolio).
Based on the balances stated in the SCR active credit portfolio,
the position of the 1,000 largest SFN debtors50 reached
R$236.9 billion at the end of the second half of 2007,
compared to R$204 billion in June 2007, corresponding
to 16.1% growth, a level considered compatible with the
evolution of total SFN credits during the same period.
National private banks, a component of consolidated banking
segment I, concentrated 35.9% of the credit portfolio of the
1,000 largest debtors, followed by consolidated banking
segment II with 29.2% and strong BNDES participation.
These two segments accounted for 69.9% of the total
increase in the credit portfolio of the grouping under analysis.
The minimum provision required by current regulations for
these 1,000 debtors dropped 0.6 p.p., from 1.9% in June 2007
to 1.3% in December 2007. The reduction in the minimum
provision demanded for clients of banking segment II from
4.1% to 2.1% explains the major share of this decline.
The participation of the 1,000 largest clients in total SFN
credits remained stable between June and December 2007,
moving from 25.2% to 25%. This percentage has dropped
steadily in recent years. Just two years ago, the active credit
portfolio of the 1,000 largest debtors accounted for 28.2% of
48/ Guarantees rendered (bonds and guaranties) to individual persons, financial and nonfinancial corporations; joint liabilities with constitutional funds and
other joint liabilities.
49/ Joint liabilities assumed in assigns, securitization of credit or negotiation of certificates or bank credit bills to corporate financial entities
and individuals.
50/ Starting with this edition, the analysis of the largest debtors will be based on the 1000 largest active credit portfolios per client in the SFN.
May 2008
|
| 61
SFN credits. With average provisions of about 2% at the end
of December 2007, debtors classified as of the 201st position
showed a risk level greater than the average of other clients.
2.5.1.4 Sector of economic activity
Credit operations by economic activity sector
Corporate debtors – December, 2007
R$ billion
1/
Itemization
Portfolio
Manufacturing
2/
Debt
3/
Average
174.2
222.7
2.4
Mfr. of chemicals and chemical products
17.1
23.4
1.2
Mfr. of other food products
12.9
14.0
1.7
Mfr. of paper and paper products
11.4
13.7
2.1
Processing and preserving of meat
11.4
14.4
1.9
Wholesale and retail trade; repair
of motor vehicles and motorcycles
109.2
127.7
4.3
Retail sale via stalls and markets
13.6
15.7
4.7
Retail sale in non-specialized stores
13.3
16.2
2.5
Sale of motor vehicles
11.5
13.0
3.0
39.3
44.2
3.4
Transportation and storage
Transport via pipeline
15.5
16.2
3.6
Other land transport
8.1
8.7
2.4
Warehousing and support act. for transp.
5.8
7.1
2.2
37.9
47.5
0.8
Electricity, gas, steam and air
conditioning supply
Electric power gen., transm. and dist.
35.9
44.8
0.9
Construction
23.5
30.1
3.7
Financial and insurance act.
22.5
54.6
0.8
Information and communication
19.7
28.5
1.3
Telecommunications
14.4
22.2
0.5
Admin. and support service act.
12.8
14.8
4.5
Public administration and defence;
compulsory social security
10.9
11.0
5.6
Mining and quarrying
9.4
12.4
0.6
Mining of metal ores
7.3
9.4
0.2
8.8
10.3
5.6
7.5
8.6
4.4
5.6
6.1
3.3
Agriculture, forestry and fishing
Starting with this version of the Report, distribution of
credits by economic activity sector will be presented on
the basis of the totality of active credit operations of the
corporate clients identified in the SCR. The sectors utilized
are derived from the National Classification of Economic
Activity (CNAE 2.0), which is, therefore, aligned with
the international classification structure established by the
Uniform International Classification of Industrial Activity
(CIIU/ISIC rev. 4).
Of total active credit operations granted to corporate entities
and identified in the SCR at the end of December 2007,
the manufacturing sector accounted for 34.2%, equivalent
to R$174.2 billion, with emphasis on operations with
the sectors of chemical products (R$17.1 billion); sugar
manufacturing and refining (R$12.9 billion); manufacturing
of cellulose, paper and paper goods (R$11.4 billion);
an d an i m al s l au g h t ers an d m eat m an u fact u r i n g
(R$11.4 billion). Other sectors deserving of mention are those
of commerce, automotive vehicle and motorcycle repairs
(R$109.2 billion or 21.4% of credits granted to corporate
borrowers); electricity generation, transmission and
distribution (R$35.9 billion or 7.0%); and highway cargo
transportation (R$15.5 billion or 3.0%). The sector of lodging
and food was responsible for an active credit portfolio of
R$3.8 billion and proved to be the economic segment with
the highest risk level, requiring average provisions of 7.2%.
Crop and animal production, hunting
and related service act.
Human health and social work act.
Prof., scientific and technical act.
5.4
7.3
4.0
Education
4.2
4.6
4.4
Other service act.
3.8
4.2
5.4
Accommodation and Food service act.
3.8
4.5
7.2
Water supply; sewerage, waste
management and remediation act.
3.7
4.2
2.0
Real estate act.
3.1
5.0
1.9
Arts, entertainment and recreation
1.0
1.1
6.1
Act. of households as employers;
0.0
0.0
2.6
Act. of extraterritorial org. and bodies
0.0
0.0
0.3
11.0
11.0
2.6
No classification
3/ Average provision – % (portfolio).
62 |
|
May 2008
2.5.1.5 Classification of loan operations
Between June and December 2007, the risk classification
distribution of credit operations showed an increase in the
participation of levels A and AA, from 39.8% to 40.7%,
and from 24.8% to 25.1%, respectively, as against a falloff
in the representativeness of levels characterized by higher
risk, particularly levels C, with -0.5 p.p. and H, with
-0.3 p.p. With these variations, the minimum provision
required of financial institutions for credit purposes, as
defined in the National Monetary Council (CMN) Resolution
n. 2,682/1999, dropped from 5.5% to 4.9%. Over the course
of the period under analysis, extending from June 2006 to
Credit operations by levels of risk – SFN
%
Levels of risk
2006
2007
Jun
Dec
Jun
Dec
AA
24.6
25.1
24.8
25.1
A
37.3
39.3
39.8
40.7
B
17.4
17.2
17.5
17.6
C
10.3
9.1
9.2
8.7
D
3.4
2.8
2.5
2.4
E
1.5
1.4
1.3
1.3
F
1.0
0.9
0.9
0.7
G
1.0
0.8
0.7
0.6
H
3.5
3.4
3.2
2.9
100.0
100.0
100
100.0
Total
December 2007, the greatest variation occurred under level
A, from 37.3% to 40.7%, partly explained by accelerated
growth in the volume of loans (new operations tend to be
classified at lower risk levels).
With regard to credits granted by agencies and subsidiaries
abroad, the volume came to R$44 billion in December 2007,
with operations classified under level AA accounting for
58.7% of total resources made available; credits classified
under levels A to C corresponded to 40.6% of the same
total. The minimum provision required for these operations
was 0.8%.
May 2008
|
| 63
Credit Classification Migration Matrix
The Credit Classification Migration Matrix indicates movements in the classifications of the identified credits –
debtors with liabilities equal to or greater than R$5,000.00 in a single financial institution – as notified to the SCR.
This is a tool that makes it possible to analyze risk level variations in operations over periods of twelve months,
the consistency of the classifications of financial institution credit operations and, consequently, their respective
internal classification models.
The Credit Classification Migration Matrix is constructed according to migrated value, taking due account of
the value of the operation (consolidated by debtor, comparing the value on the initial base date with that of the
final base date). Thus, the percentages shown horizontally at each risk level represented the value that migrated
from one risk level to the other. The percentages in boldface, shown diagonally, represent the amounts remaining
in the respective original risk levels.
Risk Level Transition Matrix
Percentage
Risk level
2007
Total
R$ million
December
Loans and
lease
G
H
Write-offs
Reductions1/
operations
AA
A
B
C
D
E
F
AA
66.8
11.1
2.5
0.7
0.4
0.3
0.2
0.1
0.1
-
17.9
31.9
207 165
A
14.0
49.0
11.6
2.9
1.5
0.7
0.5
0.5
0.6
0.1
18.8
34.0
220 905
B
5.0
23.5
39.8
7.8
3.0
1.5
0.9
1.1
0.9
0.5
15.9
18.0
117 182
C
4.4
14.7
18.3
27.6
7.2
2.4
1.8
2.1
2.2
2.5
16.9
6.7
43 603
D
2.0
7.0
7.4
14.2
24.3
6.0
3.1
3.5
3.9
8.6
19.9
3.4
22 036
E
3.2
4.6
2.8
3.2
11.1
22.9
5.5
3.9
4.8
16.4
21.7
1.8
11 905
F
1.1
3.5
2.3
2.2
3.4
9.7
13.6
7.5
7.2
24.4
25.0
1.2
7 532
G
0.4
1.8
1.1
2.7
1.6
4.8
6.0
16.5
10.3
38.1
16.8
1.3
8 539
10 858
Dec/2006
Dec/2006
H
Total
0.3
1.9
0.6
0.8
0.7
12.1
1.0
1.8
30.4
32.9
17.6
1.7
27.4
25.8
13.5
5.1
2.7
1.7
1.0
1.1
1.5
2.2
18.0
100.0
R$
Loans and
million
leases
178 029 167 711 87 535 33 134 17 838 11 315
operations
Dec/2007
6 232
1/ Represented by the liquidations of operations and concessions of credit.
2/ This value only includes identified credit operations whose debtors owe at lest R$5 thousand.
64 |
|
May 2008
6 884 9 726
14 575
116 745
0
2/
649 725
Analysis of the credit classification migration matrix indicates that of total credit operations identified and existent
in June 2006 in the amount of R$575.8 billion (87% of the SFN total), 45.6% remained at the same risk level as
in June 2007. When the 20.8% reductions (settlements and assigns) in the period are added to this percentage,
the result is 66.4% of total credits identified. Movements between risk levels indicate that 15.8% of the credits
diminished their risk level, while 15.4% increased their risk levels and 2.4% resulted in effective losses.
Those credits in which classifications showed the greatest deterioration in relative terms were concentrated
under levels E, F and G, with migration to levels of greater risk, including losses. In percentage terms, these
migrations represented 33.2%, 36.4% and 41.8%. Of the resources originally classified at level H, 33.2% were
written-off as losses, corresponding to 1.4% of total SFN credits at the start of the period under analysis.
In nominal terms, credits classified under levels AA, A and B showed the most significant migrations. At level AA,
13.6% of the credits were downgraded, mostly to level A. In the case of level A, 18.4% of the credits migrated
to levels of greater risk, mostly to level B, and 12.7% to level AA. In the case of level B, 15.9% of the initial
balance migrated to levels of greater risk, mostly involving levels C and D, and 31.5% to levels A and AA.
Analysis of the credit classification migration matrix showed natural deterioration in the quality of credit
operations. In this case, emphasis should be given to the 1.7 p.p. difference between average provisions defined
in June 2006 (4.9%) and the amount calculated in June 2007 (6.6%). When compared to previous periods, the
indicator of discrepancy between the minimum provision at the start and at the end of the period remained relatively
stable, revealing a certain degree of stability in the credit classification system of financial institutions.
Transition in the risk level classification – SFN
From December/2006 to December/2007
R$ million
Risk
Remained at the same level
Transferred to
Total
level
Remained
Reductions
Total
a higher
a lower
level
level
AA
138 264
37 050
175 313
A
108 147
41 493
149 641
30 899
40 390
B
46 597
18 615
65 212
33 367
C
12 024
7 362
19 386
16 293
D
5 350
4 381
9 731
E
2 724
2 581
F
1 023
1 881
G
1 408
H
Total
-
write-offs
31 875
207 188
221
221 150
17 796
585
116 961
6 840
1 089
43 608
6 737
3 633
1 893
21 994
5 305
2 962
1 689
1 951
11 907
2 905
1 671
1 106
1 836
7 518
1 433
2 841
1 570
879
3 250
8 540
3 298
1 909
5 207
2 083
-
3 569
10 860
318 834
116 707
435 541
95 581
14 395
649 725
104 207
May 2008
|
| 65
Transition in the risk level classification and difference of provision
%
Period
Remained at the same level Transferred to
Remained
66 |
2005
2006
Dec
Dec
2006
2007
Jun
Jun
2006
2007
Dec
Dec
|
Reductions
a higher level
a lower level write-offs
Initial
Final
Dife-
provision
provision
rence
46.4
19.3
14.5
17.7
2.2
4.3
6.2
1.9
45.6
20.8
15.8
15.4
2.4
4.9
6.6
1.7
49.1
18.0
14.7
16.0
2.2
4.6
6.2
1.6
May 2008
2.5.1.6 Delinquency
Default/credit operations
%
5.5
5.0
4.5
4.0
3.5
3.0
Jun
2006
Dec
Jun
2007
Dec
More important type of loan – Individual borrower
Credit expansion in the second half of 2007, particularly in
the corporate segment, coupled with adoption of longer terms
has, among other factors, made an important contribution
to reducing the delinquency rate in SFN credit operations.
In the period extending from June to December 2007, the
delinquency indicator51 dropped from 3.8% to 3.4%, the
lowest level of recent years. Despite this decline, the volume
of delinquent credits reached R$32.5 billion at the end of
2007, corresponding to growth of 6.2% compared to the
June 2007 balance. It is important to stress that the SFN
delinquency rate registered across-the-board declines in the
second half of 2007, particularly among the non-banking
institutions. In this case, the indicator dropped from 10.8%
to 9.6% in the half-year period.
%
Type of loan
2006
2007
Jun
Individual borrower – Total
Overdraft
Dec
Jun
Dec
7.2
6.6
6.3
6.1
10.8
13.3
11.2
12.6
3.2
2.6
2.8
2.8
Payroll guaranteed credit
Non-Payroll guaranteed
10.0
9.7
9.4
9.7
Credit card
22.5
24.9
24.2
23.9
Automobile
4.0
4.0
4.2
4.2
Leasing
3.0
2.7
3.1
3.1
Housing
5.9
4.6
4.0
2.9
Agriculture
4.3
3.0
2.4
2.5
12.8
11.7
11.8
11.0
Other types of credit
More important type of loan – Corporate borrower
%
Type of loan
2006
2007
Jun
Dec
Jun
Dec
Corporate borrower – Total
1.9
1.9
1.7
1.3
Overdraft
3.1
3.7
3.2
2.7
Working capital
2.2
2.0
1.7
1.6
Discount factoring
4.0
3.5
3.2
2.6
Automobile
3.3
3.0
2.2
1.9
Project finance
1.3
1.0
0.8
0.5
BNDES (direct line)
0.6
0.9
0.2
0.1
Leasing
1.6
1.5
1.4
1.1
Housing
2.2
1.8
1.5
0.9
Agriculture
1.1
1.4
1.3
1.0
Foreign trade
0.6
0.4
0.5
0.2
Other types of credits
2.4
2.7
2.7
2.2
When segregated according to type of client, one can
observe a reduction in the delinquency rate in all of the
various credit modalities targeted to the segment of corporate
borrowers, particularly under real estate financing lines
(-0.7 p.p.), discounting of checks and securities (-0.6 p.p.)
and guarantied overdraft accounts (-0.5 p.p.). Though the
delinquency rate among individual borrowers has dropped
from 6.3% in June 2007 to 6.1% in December, the rate in
the modality of special overdraft checks has risen from
11.2% to 12.6%. When the period of analysis is expanded
to June 2006, it becomes obvious that the largest reduction
in delinquency rates was registered in the financing of real
estate for individual borrowers, dropping from 5.9% in June
2006 to 2.9% in December 2007. In the segment of corporate
borrowers, one should highlight the discounting of checks
and securities, with a reduction from 4.0% to 2.6%, and
real estate financing, with a drop from 2.2% to 0.9%. At the
same time, it is important to emphasize that the delinquency
indicator of auto loans in operations with individual buyers
stabilized at a level of 4.0%. However, just two years ago,
this index stood at 2.7%.
2.5.1.7 Provisions
The provisions set aside by financial institutions to cover
bad loans kept pace with the decline in the delinquency
rate and closed December 2007 at 5.8% of total SFN credit
operations, compared to 6.3% last June. Despite this, the
balance set aside to cover SFN credits expanded in absolute
51/ In this item, the concept of delinquency follows the international standard and is defined in the box “Concepts and Methodologies – Credit Operations”.
May 2008
|
| 67
Provision/credit operations
Consolidated I by control type
%
10.0
8.8
7.6
6.4
5.2
4.0
Jun
2006
Dec
Jun
2007
Dec
Default versus constituted provision1/
%
Itemization
2007
Jun
Dec
Default Provision
Default Provision
constituted
Total of the SFN
constituted
3.8
6.3
3.4
5.8
4.2
6.5
3.8
5.9
Banking
consolidated I
Banks
government
owned
domestic private
foreign
3.9
8.0
3.5
7.5
4.3
6.2
3.7
5.4
4.4
5.1
4.3
5.0
consolidated II
0.9
4.8
0.9
4.8
consolidated III
2.6
5.0
2.2
4.7
8.4
10.8
7.6
9.6
Non-banking
1/ Comparison between default percentage and constituted provision percentage.
terms, moving from R$51.2 billion to R$54.5 billion at
the end of the period. The coverage index, which is the
coefficient between the percentage of provisions constituted
and the SFN delinquency indicator, remained stable during
the half year period, showing that the volume of provisions
set aside at the end of December 2007 was 68.0% greater
than total delinquent credits. In this context, consolidated
banking segment II showed the highest coverage index of
the SFN in the half-year period, with 443.9%, followed by
consolidated banking segment III, with coverage of 117.5%.
Foreign banks belonging to consolidated banking segment
I reported a lower coverage index of 16.8%.
2.5.1.8 Provisions set aside/minimum
provision
The ratio between provisions set aside by financial
institutions and the minimum required provision based
on the classification of credit operations indicated that the
volume of provisions effectively set aside in the SFN at the
end of the second half of 2007 was 16.5% greater than the
minimum provision required. This ratio expanded 0.9 p.p.
in the half-year period. Special mention should be made of
consolidated segment II, in which provisions were 49.4%
greater than the required minimum, compared to 13.5% in
the previous half-year period. Following the example of
the previous half-year period, foreign banks registered the
smallest margin of provisions in the SFN, with just 0.6%.
2.5.2 Exposure in foreign currencies
and gold
Excluding BNDES, the evolution of Net Exposure52 in the
basket of currencies of SFN institutions is shown below for
the period extending from July to December 2007. The data
are treated in aggregate form and grouped by segment.
With alteration of the intervals between collection of details on
exchange exposure from daily to monthly, the data presented
refer to the final business day of each month, except in the
case of currency rates in which daily rates are utilized.
The highlights of the period were as follows:
52/ See box “Concepts and Methodologies – Exchange Exposure”, pages 86 and 87.
68 |
|
May 2008
Constituted provision versus required provision1/
%
Itemization
2007
Jun
Dec
Provision
Provision
constituted required2/
constituted required2/
Total of the SFN
6.3
5.5
5.8
4.9
6.5
5.6
5.9
5.2
8.0
7.1
7.5
6.8
Banking
consolidated I
Banks
government
owned
domestic private
6.2
4.9
5.4
4.3
foreign
5.1
5.1
5.0
5.0
consolidated II
4.8
4.2
4.8
3.2
consolidated III
5.0
4.7
4.7
4.3
10.8
10.2
9.6
9.2
Non-banking
percentage.
2/ By classification (Res. 2.682/99-Bacen).
Net exposure – Currencies of currency basket
Billion
0
-8
-16
-24
-32
-40
4.30
6.29
8.31
10.31
R$
12.31
2.29
2008
US$
Net exposure – Long and short in currency
basket
b) increased net short exposure of the segment led by private
national banks;
c) continued downward movement in dollar rates against
the real and stability in the euro rate;
d) based on the new model used in detailing information
on current exchange exposure as of September 2007,
derivatives are more representative in exchange exposure
than other financial instruments.
2.5.2.1 Net exposure in the basket
of currencies
1/ Comparison between constituted provision percentage and required provision
2.28
2007
a) significant increase in net short exposure in the basket
of currencies of the institutions included in the banking
system, with continued preponderance of exposure in
United States dollars;
US$ billion
5
-1
-7
Expressed in real, net exposure in the basket of currencies
involving all banking system institutions remained in a short
position during the entire half-year period. This exposure
registered an average value of R$20.4 billion and surpassed
the average of R$14.0 billion posted in the previous
half-year period, also classified as a short position. The
currency with the greatest average net participation in the
basket was the United States dollar, with 90.1%. In this case,
net short exposure stated in United States dollars came to an
average of US$10.4 billion in the second half of 2007 and
US$7.9 billion in the first-half.
In November 2007, net short exposure dropped momentarily,
but moved upward once again in December and, on
base date January 2008, reached its maximum value of
US$22.1 billion. The reduction in net short exposure by the
segment of private national banks was the most significant
in reducing net short exposure in November 2007.
Continuing this trend, the rate of exchange in real against
the United States dollar remained on a downward curve. It
opened the half-year period with a rate of R$1.91 and ended
at R$1.78, corresponding to a 6.8% reduction. In this same
time span, volatility of the exchange rate increased from
7.4% to 7.9%.
-13
-19
-25
2.28
2007
4.30
6.29
Short
8.31
10.31
12.31
Long
2.29
2008
The rate of exchange of real against the euro remained stable
during the period, at R$2.61. Contrary to what occurred
with the dollar, the euro rate diminished its volatility from
7.2% to 5.6%.
May 2008
|
| 69
Exchange rate for dollar and euro
R$/US$
2.5.2.2 Volume of long and short positions
in the basket of currencies
3.00
2.70
2.40
The second half of 2007 was marked by significant variations
in both long and short volumes, though the latter were always
greater than long volumes.
2.10
1.80
1.50
1.11
2007
2.22
4.3
5.15
6.25
8.2
9.12
10.23
Dollar
12.4
1.16
2008
2.29
2.5.2.3 Net exposure of the basket
of currencies
Euro
Volume of currency basket's positions
US$ billion
310
290
270
250
230
No significant changes occurred in the percentage
composition of currencies in net exposures within the
currency basket. At the end of the half-year period, the
dollar continued as the most representative currency in these
exposures, accounting for 90.1%, followed by the euro, with
5.3%, and the yen, 4.1%. One should note growth of 2.8 p.p.
in the participation of the yen and a reduction of 3.3 p.p. in
the participation of the euro in composition of the basket. The
other currencies in the basket, including the pound sterling,
French franc and gold have very limited importance.
210
2.28
2007
4.30
6.29
8.31
10.31
12.31
Long
2.29
2008
Short
Currency basket´s composition – Comparison of the two
last semesters
%
st
Currencies
Average 1
Accrued
nd
Average 2
semester
semester
of 2007
of 2007
Accrued
Euro
8.4
8.4
5.3
5.3
Dollar
88.9
97.3
90.1
95.4
Yen
1.7
99.0
4.1
99.6
Pound
0.5
99.5
0.2
99.8
Franc
0.1
99.6
0.0
99.8
Gold
0.4
100.0
0.2
100.0
In value terms, the volume of net exposure in dollars
expanded from a short position of US$7.3 billion to a short
position of US$17.4 billion. At the same time, the euro
volume varied from net long exposure of US$170 million
to US$712 million in long exposure.
A separate analysis of the dollar and the euro, the two
most important currencies in terms of exposure, as well
as the long exposures of institutions in net terms and the
net short exposures in each one of these currencies, the
conclusion is that the most relevant variation occurred among
institutions in a net short position in dollars, increasing from
an average of US$8.8 billion in the first half of 2007 to
US$11.6 billion in the first half of this year, reaching
an average of US$18.5 billion between January and
February 2008.
Net exposure – Currencies of currency basket
US$ billion
5
2.5.2.4 Net exposure in the basket
by segment
0
-5
-10
-15
-20
2.28
2007
4.30
Dollar
70 |
6.29
Euro
8.31
10.31
Yen
Pound
|
May 2008
12.31
Gold
2.29
2008
Franc
The segment of public banks and private foreign banks
maintained net exposure at a stable level or quite close to
zero, with very little fluctuation during the half-year period.
As a result, the segment of private national banks accounted
for the major share of the alterations that occurred.
Net exposure – Long and short dollar and euro
positions
US$ billion
3
-2
-7
-12
In the second half of 2007, the segment of national private
banks registered average net short exposure in the basket
in the amount of US$10.8 billion, sharply higher than the
US$5.8 billion average of the previous half-year period. This
upward tendency was reaffirmed in the first two months of
2008. The increase in the short position was even greater in
September 2007 and January 2008.
-17
-22
2.28
2007
4.30
6.29
8.31
10.31
12.31
Dollar – Long
Euro – Long
2.29
2008
Dollar – Short
Euro – Short
The segment of foreign banks initiated the half-year period
in a short position of US$616 million, moving into a
slightly long position at the end of the half-year period, with
US$273 million. In the following months, January and
February 2008, the net exposure of the segment posted a
short position, with an average of US$1.5 billion.
Net exposure by segment
US$ billion
2
-2
Net exposure of the public bank segment turned in a
performance that was similar to that of foreign banks, with
net short exposure in February 2008.
-6
-10
-14
2.5.2.5 Volume of long and short positions
in the basket by segment
-18
2.28
2007
4.30
6.29
8.31
Government owned
10.31
12.31
Domestic private
2.29
2008
Foreign
Volume of positions by segment
US$ billion
160
The trend toward high volumes of gross long and short
positions in relation to net value continued. The percentage
of net exposure in relation to the gross volumes of short
positions is more relevant in the segment of private national
banks. In the second half of 2007, the average percentage of
net exposure in relation to gross short positions was 9.7%
for the segment of private national banks and less than 1%
in the other two segments.
128
96
64
32
0
2.28
2007
4.30
6.29
8.31
10.31
12.31
2.29
2008
Foreign – Long
Foreign – Short
Domestic private – Long
Domestic private – Short
Government owned – Long
Government owned – Short
2.5.2.6 SFN concentration
Average volumes by segment
US$ billion
Itemization
st
1 semester of 2007
Long
Foreign
Although the segment of foreign banks registered larger
absolute volumes in their exchange positions than the other
segments, there was considerable equilibrium between
long and short positions, resulting in low net exposure.
However, although it registered lesser gross volumes than
foreign banks, the segment of private banks posted greater
net exposure. This situation defined the net long position of
the grouping of all institutions.
Short
nd
2
semester of 2007
Long
Short
108.2
109.1
144.8
145.0
Domestic private
93.3
99.4
100.6
111.4
Government owned
38.0
38.1
20.0
20.2
The percentage of institutions that registered net short
exposure in relation to the total number of institutions
that provided the Central Bank with information on their
exposure levels was greater at the start of the second half
than at the end of the year. In July 2007, the figure came to
46%, compared to 31% in December 2007. Even with this
May 2008
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Net long exposure by segment
US$ billion
1.30
1.04
0.78
0.52
0.26
0.00
2.28
2007
4.30
6.29
8.31
Government owned
10.31
12.31
Domestic private
2.29
2008
lesser number, the institutions with net short exposure had
a greater total net value.
Concentration in institutions with net short exposure began
the half-year period in a strong position, which became
further accentuated toward the end of the period. On June
29, 2007, five institutions were responsible for 87% of net
short exposures. At the end of the period, on February 29,
2008, five institutions concentrated 93% of these exposures.
The volume of net long exposures concentrated 66% in
five institutions and 90% in 15 institutions on December
31, 2007. Similar concentration existed at the start of the
six-month period.
Foreign
Short net exposure by segment
US$ million
2.28
2007
4.30
6.29
8.31
10.31
12.31
2.29
2008
2.6 Stress tests53
0
-3 600
-7 200
-10 800
-14 400
-18 000
Domestic private
Foreign
Government owned
Concentration of financial institutions with
short net exposure
%
100.0
95.6
91.2
86.8
82.4
Upward and downward stress scenarios were constructed for
purposes of analyzing adequacy to the Basel Capital Ratio
and impact on PR. These scenarios consider fluctuations
in fixed interest rates and exchange rates (market risk) and
downgrading in the risk classification of credit operations
(credit risk). Upward stress scenarios consider an increase in
credit risk (Scenario I), growth in interest and exchange rates
(Scenario II) and higher rates of interest, exchange and credit
risk (Scenario III). The downward stress scenario considers
a reduction in interest and exchange rates (Scenario IV).
In the case of shocks on interest rates, for each new foreword
structure generated, new regulatory parameters for capital
requirements are calculated and, within them, standard
volatility is that which, in normal situations, behaves in a
relatively stable manner over time. However, in the stress
scenarios, this volatility reaches much higher values, which
in turn potentialize the impacts of interest rate variations on
capital requirements and, consequently, on PRE.
78.0
2.28
2007
4.30
5 FIs
6.29
10 FIs
8.31
10.31
15 FIs
12.31
20 FIs
2.29
2008
25 FIs
In the temporal analysis for the period extending from
January 2004 to December 2007, the worst scenario obtained
for the period in question was utilized and was applied
repeatedly to the positions of all of the months analyzed.
53/ See box “Concepts and Methodologies – Stress Tests” for the methodology of selecting the parameters to be utilized in the stress scenarios and in calculating
impact on capital.
72 |
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May 2008
2.6.1 Universe analyzed
Concentration of financial institutions with long
net exposure
%
100
92
84
Banking institutions included in consolidated banking
segments I and II, which possessed information on at least one
of the factors analyzed (credit, exchange and/or interest-pre)
were selected for application of the stress tests.
76
68
60
2.28
2007
4.30
6.29
5 FIs
8.31
10 FIs
10.31
20 FIs
12.31
30 FIs
2.29
2008
50 FIs
Stress scenario – Dec/2007
Scenarios
Market risk
Credit
risk
Scenario I
- 2 levels
Scenario II
Scenario III
Interest rate (vertices)
Exchange
rate
21 to 126
252
504, 756
-
-
-
-
R$0.262/US$ +4.24 p.p. +4.41 p.p. +4.16 p.p.
- 2 levels
Scenario IV
2.6.1.1 Initial situation
In December 2007, the 133 selected institutions had PR of
R$300.9 billion and PRE of R$180.2 billion, with a Basel
Capital Ratio of 18.4%.
On that base date, only one institution in the universe
analyzed had a ratio below the regulatory limit of 11% and
would have required a total injection of R$7.5 million in
capital in order to comply with the minimum limit required
by the Basel Capital Ratio, corresponding to 0.004% of the
PRE of the SFN.
R$0.262/US$ +4.24 p.p. +4.41 p.p. +4.16 p.p.
-R$0.208/US$ -2.49 p.p. -2.45 p.p. -2.81 p.p.
2.6.2 Upward stress scenarios
2.6.2.1 Scenario I: increased credit risk
Stress test – Initial situation
Itemization
Based on data for the month of December 2007, analysis
shows that the increase in the credit risk would reduce the
Basel Capital Ratio of these institutions to 15.9%, as a result
of a reduction of R$40.6 billion in PR, which would close with
a value of R$260.4 billion, and an increase of R$135.3 million
in PRE, which would close with a value of R$180.4 billion.
Basel capital ratio ranges
Lower than 11 Higher than 11
Total
Banking
consolidated I
Banks
government owned
Number of institutions
-
12
12
Basel capital ratio (%)
-
18.8
18.8
domestic private
1
53
54
10.0
17.0
17.0
foreign
-
35
35
-
16.1
16.1
consolidated II
-
32
32
-
26.8
26.8
Total
1
132
133
10.0
18.4
18.4
No institutions were technically insolvent. Nonetheless, 18
institutions were noncompliant and would require a total of
R$1.2 billion in capital in order to comply with the minimum
limit of 11% demanded in the Basel Capital Ratio, which
corresponds to 0.7% of total PRE prior to the simulation.
In the simulation of the previous half-year period, base date
June 2007, 23 institutions were found to be noncompliant.
2.6.2.2 Scenario II: increased interest and
exchange rates
Based on the month of December 2007, the increase in
interest and exchange rates would reduce the Basel Capital
Ratio to a level of 14.3%, as a result of a reduction in PR to
a level of R$286.5 billion, with a variation of R$14.5 billion,
May 2008
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and an increase in PRE to R$220.6 billion, for growth of
R$40.3 billion.
Credit risk stress test
Increase in the credit risk
Itemization
A
1/
Total
Banking
consolidated I
Banks
government owned
2
10
-
12
10.1
14.5
-
14.5
In this scenario, no institutions were found to be technically
insolvent. However, 23 were noncompliant and would
require R$6.1 billion in capital in order to comply with the
minimum limit of the 11% required by the Basel Capital
Ratio, corresponding to 3.4% of PRE prior to the simulation.
In the simulation for the previous half-year period, base date
June 2007, 19 institutions were classified as noncompliant.
domestic private
7
45
2
54
9.8
15.1
87.3
15.0
3
30
2
35
5.4
14.3
34.8
14.3
6
21
5
32
8.4
26.4
44.1
24.6
foreign
consolidated II
Total
18
106
9
133
8.4
16.0
41.8
15.9
1/ Number of institutions not included in the stress test.
Higher interest and foreign exchange rates stress test
Itemization
A
1/
Total
Banking
consolidated I
Banks
2.6.2.3 Scenario III: increased interest rates
exchange rates and credit risk
Utilizing data drawn from the month of December 2007,
the increase in interest and exchange rates and credit risk
would reduce the Basel Capital Ratio to 12.3%, as a result
of a reduction in PR to a level of R$245.9 billion, equivalent
to R$55.1 billion, and growth in PRE to R$220.7 billion,
equivalent to R$40.5 billion.
In this scenario, no institution would be classified as
technically insolvent. However, 38 would be noncompliant
and would require R$22.2 billion in capital in order to
become compliant with the minimum limit of 11% demanded
by the Basel Capital Ratio, corresponding to 12.3% of PRE
prior to the simulation. In the simulation of the previous
half-year period, base date June 2007, 47 institutions were
considered noncompliant.
government owned
4
8
-
12
5.8
13.3
-
12.6
domestic private
9
30
15
54
8.3
13.5
54.6
13.7
foreign
7
22
6
35
10.0
15.9
30.4
12.6
consolidated II
3
13
16
32
9.7
25.2
22.0
23.7
Total
23
73
37
133
9.2
15.1
35.5
14.3
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May 2008
2.6.3 Downward stress scenario
Downward movement in interest and exchange rates would
reduce the Basel Capital Ratio to 16.6%, as a result of growth
in PR to R$311.4 billion, equivalent to R$10.5 billion,
and an increase in PRE to R$206.7 billion, equivalent to
R$26.4 billion.
In this scenario, no institution would be considered
technically insolvent. Nonetheless, five institutions would
be noncompliant and would require R$149.0 million in
capital in order to comply with the minimum limit of the
11% demanded by the Basel Capital Ratio, corresponding
to 0.08% of PRE prior to the simulation. In the simulation
of the previous half-year period, base date June 2007, eight
institutions were considered noncompliant.
2.6.4 Temporal analysis
Higher interest and foreign exchange rates and credit
risk stress test
Itemization
2.6.4.1 Scenario I: increased credit risk
A
1/
Total
Banking
consolidated I
Banks
government owned
5
7.6
7
13.8
-
12
-
9.4
domestic private
14
38
2
54
10.1
13.5
86.1
12.0
foreign
11
23
1
35
9.3
19.9
42.7
11.1
consolidated II
8
21
3
32
7.2
24.5
174.8
21.8
Total
38
89
6
133
9.0
16.4
86.5
12.3
Lower interest and foreign exchange rates stress test
Itemization
A
1/
Total
Banking
consolidated I
Banks
government owned
2
10
-
12
10.7
16.2
-
15.7
domestic private
3
36
15
54
10.2
15.6
54.7
16.0
foreign
-
29
6
35
-
14.3
30.4
14.4
-
16
16
32
-
24.8
22.0
24.6
consolidated II
Total
5
91
37
133
10.6
16.5
35.6
16.6
The temporal analysis of the impact of an increase in credit
risk on the Basel Capital Ratio demonstrates relative stability
in consolidated banking segments I and II over the course
of the period extending from January 2004 to December
2007. It is interesting to observe that this stability occurred
despite the classified portfolio having expanded more than
PR in the same period, with 120% and 89%, respectively.
This fact can be attributed to improvement in the quality of
the credit portfolio, particularly in light of 129% expansion
in operations classified from AA to C and growth of 47% in
those classified under levels D to H. Evolution of the impact
on PR over time indicates a reduction in the vulnerability of
the institutions involved, a factor that can also be attributed
to improvement in the quality of the credit portfolio.
2.6.4.2 Scenario II: increased interest and
exchange rates
Evolution of the impact on the Basel Capital Ratio over time
indicates an increase in the vulnerability of institutions to
increases in fixed interest rates and exchange rates. This
growth can be attributed as much to any increase in net
exposure as to lengthening of positions from January 2004
to December 2007. In the period in question, net exposure to
fixed interest in nominal terms increased to 176%, compared
to 85% growth in assets. Aside from this, in December 2007,
net positions were shown to be long for all of the vertices and
in amounts higher than those registered in January 2004.
2.6.4.3 Scenario III: increased interest and
exchange rates and credit risk
The combination of the three shocks reflected increased
exposure to credit risk and to greater vulnerability to growth
in fixed interest rates. In this scenario, one observes that the
Basel Capital Ratio of consolidated banking segments I and
II was below the regulatory minimum of 11% during most
of the period. More recently it had registered a tendency
toward improvement, impacted mainly by the component
of fixed interest rates.
May 2008
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2.6.4.4 Scenario IV: reduction in interest
and exchange rates
Greatest relative variations – Jan/2004 to Dec/2007
Scenarios
Market risk
Credit risk
Interest rate (vertices)
Exchange
rate
Scenario I
- 2 levels
Scenario II
Scenario III
- 2 levels
Scenario IV
21 to 126
252
504, 756
-
-
-
-
95.8%
44.9%
41.8%
40.0%
95.8%
44.9%
41.8%
40.0%
-97.1%
-23.3%
-22.5%
-23.3%
In a manner that symmetrical to what occurs in the upward
scenario of interest and exchange, a reduction in the value of
these variables would cause an increase in PR. Justification
would be the fact that, on average, these institutions are
in long positions in risk-pre. The Basel Capital Ratio of
consolidated banking segments I and II of the period is
greater than the regulatory minimum of 11%.
Basel capital ratio – Stress scenario I
Banking-consolidated I and II
%
20
18
16
14
12
10
Jan May
2004
Sep
Jan May
2005
Sep
Jan May
2006
Sep
11% limit
Jan May
2007
Sep
Dec
Original basel capital ratio
Stressed basel capital ratio
Basel capital ratio – Stress scenario II
%
20.0
17.6
15.2
12.8
10.4
8.0
Jan May
2004
Sep
Jan May
2005
Sep
Jan May
2006
Sep
11% limit
Jan May
2007
Sep
Dec
Vertices net position
R$ billion
2.6.5 Sensitivity analysis
The objective of the sensitivity analysis is to assess the
impact of the Basel Capital Ratio on consolidated banking
segments I and II, in light of incremental variations in the
level of provisioning, in interest and exchange rates, without
considering the economic rationality of these variations and,
in the extreme case, without verifying which scenarios would
cause insolvency of the institutions involved. The analysis
uses data from the end of December 2007 as its basis.
In the case of credit risk, increases of 10% over the level of
provisioning of each institution are applied, with variations
from 10% to 250% of the original value. For the rate of
exchange, the increases have a magnitude of R$0.18, the
equivalent of approximately 10% of the rate of exchange
in effect on 12/31/2007. As a result, the rate varies from
R$0.08 to R$3.68. In the case of fixed interest rates, parallel
shifts are applied to the forward structure equivalent to
approximately 100 basis points, in such a way as to obtain
variations of -1000 basis points to +1000 basis points of the
original structure. For each forward structure of the interest
rate obtained, new parameters associated to the calculation
of VaR are worked out.
2.6.5.1 Credit risk
100
80
60
40
20
0
21
42
63
126
252
504
756
-20
-40
Jan/2004
76 |
Dec/2007
|
May 2008
The increase in the level of provisions at intervals of
10% generated a reduction from 18.4% in the average
Basel Capital Ratio of financial institutions in the original
situation to a level of 11.3%, in the situation of a 250%
increase in the individual provision. For increases in the
level of provisioning above 200%, it is noted that some
institutions became insolvent. For purposes of comparison,
the downgrading of two levels in credit classifications
corresponds to an increase of 117% in provisions.
2.6.5.2 Market risk – rate of exchange
Fixed interest rate risk
R$ billion
1 200
960
720
480
240
0
Jan May
2004
Sep
Jan May
2005
Sep
Jan May
2006
Sep
Long position
Jan May
2007
Sep
Financial institutions are not particularly sensitive to
exchange-rate variations, as is evident in the only slight
variation registered by the Basel Capital Ratio for the
entire spectrum of values. Aside from this, one notes the
low representativeness of noncompliant and insolvent
institutions, even considering extreme variations in the rate
of exchange, much higher than those that have occurred
since January 2004, when the rate of exchange varied almost
R$0.40 in a period of just 10 days.
Net exposure
Basel capital ratio – Stress scenario III
2.6.5.3 Market risk – interest rate
%
20
17
14
11
8
5
Jan May
2004
Sep
Jan May
2005
Sep
Jan May
2006
11% limit
Sep
Jan May
2007
Sep
Dec
Basel capital ratio – Stress scenario IV
%
Interest rate variations did not lead any institutions into
insolvency, though a significant group of institutions became
noncompliant. Furthermore, it was noted that positive and
negative variations in interest rates seem to affect the Basel
Capital Ratio of institutions in a similar manner. This is due
to utilization of a VaR calculation methodology for capital
requirements for fixed interest rate risk, in which standard
volatility is affected in the same way, whether it be caused by
a positive or negative shock on the rate of interest. However,
the fact that, on average, the institutions are in long positions
in terms of fixed interest rates leads to a situation in which
an increase in the rate of interest has a greater impact on the
capital of institutions.
20
18
16
2.7 Conclusion
14
12
10
Jan May
2004
Sep
Jan May
2005
Sep
Jan May
2006
11% limit
Sep
Jan May
2007
Sep
Dec
Sensitivity analysis – Provision
%
100
80
60
40
20
0
0%
50%
100%
150%
200%
Average provision
Significance of banks in Insolvency
Basel capital ratio
Significance of noncompliant banks
250%
The stress scenarios constructed had the objective of
estimating losses resulting from increased credit risk
and from fluctuations in interest and exchange rates.
The results demonstrate that the levels of capital and
net worth of consolidated banking segments I and II are
sufficient to withstand possible fluctuations in stress
parameters. Moreover, no important institution would
be involved in a situation of technical insolvency for
the four scenarios constructed. Capital needs required
to move institutions into a situation of compliance with
the minimum required limit are not relevant in terms of
the total PRE of the institutions.
The temporal analysis of the impact on the Basel Capital
Ratio showed that only the combination of the three shocks
(Scenario III) would have a significant impact on the capital
of these institutions, shifting the Basel Capital Ratio of the
May 2008
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Sensitivity analysis – Exchange rate
%
20
16
12
grouping of institutions belonging to consolidated banking
segments I and II to levels below the minimum limit of 11%.
Parallel to this, in relation to January 2004, it was seen that
a significant increase in the impact on PR also occurred and
was caused mainly by an increase in the vulnerability of
institutions to interest rate shocks.
8
4
0
0.08
0.44
0.80
1.16
1.52
1.88
2.24
2.60
2.96
3.32
3.68
Exchange rate
Significance of banks in insolvency
Basel capital ratio
Sensitivity analysis – Interest rate
%
70
56
42
28
14
0
-1000
-800
-600
-400
-200
0
200
400
600
Interest rate curve shift (b.p.)
Significance of banks in insolvency
Basel capital ratio
78 |
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May 2008
800
1000
Finally, the sensitivity analysis indicated that only extreme
situations, far above the variations observed in the level of
provisioning, interest rates and exchange rates, were capable
of making these institutions insolvent or noncompliant.
Concepts and Methodologies
Concepts
a)
Cosif: Accounting Plan of SFN institutions.
b)
National Financial System: for the purposes of this report, this concept is restricted to institutions authorized
to operate by Banco Central do Brasil – with the exception of group purchasing pool administrators –
independently of whether they are or are not grouped into conglomerates.
c)
Banking system: encompasses banking conglomerates and independent banking institutions, as
defined below.
d)
Nonbanking system: includes leasing companies, stock and security brokerage companies, credit, finance
and investment companies, financial conglomerates, real estate credit companies and savings and loan
associations, security distribution companies and mortgage companies.
e)
Independent banking institutions I: financial institutions that operate as commercial banks, multiple banks
with commercial portfolios or savings banks that are not part of conglomerates, referring to Cosif documents
4010 and 4016.
f)
Independent banking institutions II: financial institutions of the multiple bank type without commercial
portfolios, investment banks and development banks that are not part of conglomerates.
g)
Independent nonbanking institutions: other financial institutions, except those classified as independent
banking institutions I or II and credit unions.
h)
Banking conglomerate: grouping of financial institutions that consolidate their financial statements, utilizing
Cosif documents 4040 and 4046.
i)
Banking conglomerate I: conglomerate in which at least one institution is a commercial bank or multiple
bank with a commercial portfolio.
j)
Banking conglomerate II: conglomerate in which there are no commercial banks and multiple banks with
commercial portfolios, but that have at least one institution of the multiple bank type without a commercial
portfolio, investment bank and development bank.
k)
Nonbanking conglomerate: conglomerate of financial institutions not classified within the concepts of
banking conglomerate I or II.
May 2008
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l)
Consolidated SFN: corresponds to the aggregation of all the documents considered. Should not be confused
with or compared to other statistics published by Banco Central do Brasil, which deal with information
on each institution in the different SFN segments.
m) Consolidated banking segment I: grouping of the accounting positions of the banking institutions of the
type banking conglomerate I and independent banking institutions I.
n)
Consolidated banking segment II: grouping of the accounting positions of the banking institutions of the
type banking conglomerate II and independent banking institutions II.
o)
Consolidated banking segment III: grouping of the accounting positions of credit unions.
p)
Non-banking consolidated: grouping of the accounting positions of non-banking conglomerates or nonindependent banking.
q)
Type of control: identifies the origin of the capital control of banking conglomerates or independent banking
institutions. Subdivided into the following segments:
1. public;
2. national private;
3. foreign.
r)
Base Capital (PR): for purposes of calculating operational limits, this concept is defined as the sum total
of Net Worth and asset and liability accounts as itemized below:
1. Tier I Capital – arithmetic result of the balances of the accounting headings: net worth, credit or
income accounts, debtor income accounts. For final calculation purposes, the following should also be
excluded: revaluation reserves, contingency reserves and special profit reserves related to obligatory
non distributed dividends, deducting the amounts referring to noncumulative preferred shares and
redeemable preferred shares;
2. Tier II Capital – arithmetic result of the balances of the following accounting headings: revaluation
reserve, contingency reserve, special profit reserves for all obligatory non distributed dividends,
noncumulative preferred shares and redeemable preferred shares; eligible subordinate debts and hybrid
capital and debt instruments limited to the volume of Tier I, among other restrictions.
s)
Adjusted Capital Base (PRA): defined as the PR used for purposes of calculating the Fixed Asset Ratio,
as defined in letter l, subitem I.
t)
Required Net Worth (PLE): calculated on the basis of credit and market risks (exchange and preset interest)
and swap operations, as described in item “c” of the methodology. Represents the minimum amount required
for PR, with the objective of withstanding the risks existent in the capital structure.
u)
Basel Capital Ratio: concept defined by the Basel Committee which recommends a minimum ratio of 8%
between PR and total assets weighted by risk, as demanded by current regulations. In Brazil, the minimum
required ratio as of December 2002 is 11% for central credit unions and single credit unions affiliated to
central credit unions, 15% for all other credit unions, 30% for development agencies and 11% for all other
financial institutions.
80 |
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May 2008
Methodologies
a)
The analyses are developed on the basis of accounting data remitted monthly by institutions to Banco
Central. When the financial statements for the base date under analysis are not available, the immediately
previous statement is used.
b)
The Basil Capital Ratio and Fixed Asset Ratio are based on the accounting data of financial conglomerates
or institutions. The accounting statements of banks and financial conglomerates are used when these
institutions opt for the system of consolidated calculation. In the case of conglomerates that do not make
this option, the ratios are calculated for each institution as if they were independent.
c)
PLE is calculated through utilization of the data recorded by financial institutions in their asset and liability
accounts and clearing accounts referring to capital requirements for Assets Weighted by Risk, Swap
Credit Risk, Exchange Exposure Risk and Interest Rate Risk. In more simple terms, the PLE formula is
described below:
PLE = F . (Assets Weighted by Risk) + Swap Credit Risk + Exchange Exposure Risk + Interest Rate Risk.
Factor F = Factor applicable to assets weighted by risk, stipulated at 0.11 for central credit unions and
independent credit unions associated to central credit unions; 0.15 for other credit unions; 0.30 for
development agencies; and 0.11 for other financial institutions.
d)
Assets Weighted by Risk = total of the heading of Current Assets and Long-Term Assets multiplied by
the corresponding risk factors + Joint Liabilities and Risks in Guarantees Rendered multiplied by the
corresponding risk factors.
e)
Capital Requirements for Swap Credit Risk =
F’ = factor applicable to the credit risk of swap operations, equal to 0.20 (twenty hundredths);
n1 = number of swap operations registered under Cosif account 3.0.6.10.60-4;
RCDi= credit risk of the i-th swap operation registered under Cosif account 3.0.6.10.60-4, consistent in the
weighting of the reference value of the operation at the moment of the respective VNi by the corresponding
potential risk factor, taking due account of the term to elapse.
f)
, in which:
Capital Requirements for Interest Rate Risk =
F’’ = factor applicable to operations with gold and assets and liabilities referenced to exchange, including
those carried out on derivative markets, equal to 0.5;
n2 = number of net positions in each currency and in gold;
= sum total of the absolute values of the net position in each currency and in gold;
k = 0.05 (five hundredths) for
k = 0 for
g)
/PR less than or equal to 0.05 (five hundredths);
/PR greater than 0.05 hundredths).
Capital Requirements for Interest Rate Risk =
, in which:
May 2008
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| 81
n3 = number of shares representative of the value of PLE for coverage of interest rate market risk in a specific
currency/basis of earnings;
ECi = Share representative of the value of PLE for coverage of interest rate market risk in a specific currency/
basis of earnings.
.
h)
Basel Capital Ratio =
i)
The values presented in the texts and tables have been rounded off. However, their percentage changes
reflect the original figures, considering all of the decimal places.
j)
The Fixed Assets Limit indicates the percentage of commitment of PRA in relation to Permanent Assets.
The maximum limit permitted is 50%.
k)
The following formula is used to obtain the Fixed Assets Ratio:
Fixed Assets Ratio =
I.
For calculation of the PRA:
Tier I Capital
(+) Tier II Capital
(-) Stock Exchange Capital Securities
(-) Commodities and Futures Market Capital Securities
(-) Cetip Capital Securities
(-) Stocks and Quotas of Clearing and Custody Companies linked to Exchanges
(-) (-) Provision for Losses in Stocks and Quotas of Clearing and Custody Companies Linked to Exchange
(-) (-) Provisions for Losses in Capital Securities*
(-) Capital Securities – Others*
(-)Premiums in Acquisitions of Capital Securities*
(=) PRA
II. For calculation of Fixed Assets:
Fixed
(-) Fixed Assets Leased
(-) Losses in Leasings to be Paid
(-)(-)Accumulated Amortizations of Deferred – Losses in Leasings to be Paid
(-) Stock Exchange Capital Securities
(-) Commodities and Futures Exchange Capital Securities
(-) Cetip Capital Securities
(-) Stocks and Quotas of Clearing and Custody Companies Linked to Exchanges
(-)(-) Provision for Losses in Stocks and Quotas of Clearing and Custody Companies Linked to Exchange
(-)(-) Provision for Losses in Capital Securities*
(-) Capital Securities – Others*
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(-) Premiums in Acquisitions of Capital Securities*
(=) Fixed Assets to Fixed Assets Ratio
All references to Fixed Assets in this paper concern Fixed Assets to Fixed Assets Ratio.
* Since the “Provision for Losses in Capital Securities” refers to all the headings of fixed capital, as well as premiums, it was determined that it would only
be included in calculations of Adjusted PR and Fixed Assets – Investment when its absolute value exceeds the sum of the headings “Capital Securities
– Others” and “Premiums in Acquisitions of Capital Securities”. In these cases, the value of the provision to be considered is limited to the amount that
exceeds the sum total of the balance of “Capital Securities – Others”, with the balance of “Premiums in Acquisitions of Capital Securities”.
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Concepts and Methodologies – Credit Operations
Credit Operations
Concepts
a)
The banking system: encompasses independent banking institutions and banking conglomerates and is
broken down into the categories of consolidated banking segment I, consolidated banking segment II and
consolidated banking segment III, in the manner defined in items “e” to “j” and “n” to “q” on pages 79
and 80 of this Report.
b)
Non-banking system: composed of leasing companies, credit finance and investment companies,
among others, that do not belong to financial conglomerates in which the lead institution is a banking
institution.
c)
Minimum provision: provision calculated according to the minimum parameters defined by Resolution
n. 2,682, dated December 22, 1999.
d)
Delinquency: concept based on the international standard of nonperforming loans, encompassing credits
matured for more than ninety days.
e)
Constituted provision: the stock of provisions stated in financial institution balance sheets.
Methodologies
a)
The volumes of SFN credit operations were calculated on the basis of documents (balance sheets and
information drawn from the Central Bank Credit Information System), grouped according to institutions
included in financial conglomerates, as well as documents belonging to independent financial institutions.
b)
The volume of credit granted to economic agents in Brazil by the SFN does not include amounts granted
by branches and subsidiaries of Brazilian banks located abroad. Credit operations registered in the name
of financial intermediaries, defined as public or private sector companies active in financial intermediation,
were considered for purposes of calculating the volume of SFN credits. This inclusion of loans to financial
intermediaries distinguishes this methodology from that applied in other documents of the Central Bank
of Brazil.
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c)
Calculation of the delinquency index is based on Credit Information System – SCR data, documents 3020
(individualized credit risk data) and 3030 (aggregate credit risk data). Operations are considered in default
(delinquency) when at least one installment is overdue for more than ninety days.
Default = Σ All operations with installments in arrears for more than 90 days in the SCR
Σ All operations in SCR
The value of the operations is equal to the sum total of all overdue installments and installments still to mature
in the SCR (active portfolio), for both delinquent operations and for calculating the operation total. Since
operations of the same client in amounts of less than R$5,000.00 are consolidated by common characteristics
(nature, modality, risk classification, type of client, etc.), thus making it impossible to identify the client and the
operation, a different criterion was adopted for calculating these operations in order to overcome this limitation.
All operations with risk classifications equal to or greater than “E” for debtors with total liabilities of less than
R$5,000.00 were considered in default, allowing for the risk classification by approximation only for reasons
of arrears, considering that: (a) risk level “E” is the minimum classification to be attributed to operations with
installments in arrears for periods between 91 and 120 days (article 4, item I, of Resolution n. 2,682/1999) and
(b) the classification of credit operations contracted with clients holding total liabilities of less than R$50,000.00
may be revised automatically only as a result of the cited arrears (article 5 of Resolution n. 2,682/1999).
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Concepts and Methodologies – Exchange Exposure
Exchange exposure
According to current rules, exchange exposure is defined as the net value resulting from positions held in assets
and liabilities1 referenced to variations in the value of exchange and gold assumed by financial institutions and
their directly and indirectly controlled entities, including positions on derivative markets and the exchange
market itself. Exchange exposure is calculated separately in each currency and converted into reals.
Derivative markets include positions in futures, forward operations, options, swaps and commodities in which
the value of the contract is subject to changes in foreign currency or gold values. The determination of assets
and liabilities is not clearly defined for these instruments, making it necessary to accompany them through the
use of extra-accounting documents.
The exchange market is the environment in which the foreign currencies used to back the other items referenced to
them are negotiated. The institutions are duly authorized by Banco Central do Brasil and must comply with specific
limits that are not discussed in this chapter. Purchases and sales of foreign currency require accounting records
under specific headings in the Cosif which are also taken into consideration in calculating exchange exposure.
Definitions
Long exposure: the sum total of the assets exposed to exchange risk that increase in national currency value
and of the liabilities that decrease in value as a result of devaluation of the national currency in relation to other
currencies.
Short exposure: the sum total of the assets exposed to exchange risk that decrease in national currency value
and of the liabilities that increase in value as a result of devaluation of the national currency in relation to other
currencies. (Definitions: Circular n. 2,894/1999).
Exposure limit: the net exposure of the institutions as defined above and may not be greater than 30% of PR –
Circular n. 3,156/2002.
The exchange exposure of the institution is obtained through the sum total of exchange exposure in each
currency in the module:
1/ All of the asset and liability statement items in some way related to the value of the foreign currency or gold are considered, such as credit operations,
securities, investments abroad, credit lines utilized abroad and others.
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Exchange Exposure =
.
In which i = currency
Circular n. 3,217 dated December 23, 2003, later substituted by Circular n. 3,229, dated March 25, 2004, instituted
the concept of “basket of currencies”, making it possible to offset contrary positions in United States dollars,
euros, pounds sterling, yen, Swiss francs and gold, in the place of the sum total of the modules of each one.
According to current rules, the share of foreign capital included in the Base Capital of financial institutions
may, on the basis of a request submitted to Banco Central do Brasil, be considered as an institution’s exchange
exposure and is designated the PLA-V. However, this provision was not adopted in this Report, since the
objective is to demonstrate the real exposure of the institutions defined as Net Exposure, which is calculated
through the following formula:
.
Net Exposure =
Calculation of the participation of net exposures of the currencies in the basket
In order to avoid distortions, calculation of the participation in the basket of currencies of each one of the
currencies included in it is done through utilization of its module, as shown below:
Net exposure module of each currency in the basket/ ∑ Module of the net exposures of the currencies of
the basket.
This formula results in the daily participation of the net exposure of each currency included in the basket, which
is the basis for the final average of the period.
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Concepts and Methodologies – Stress Scenarios
Stress scenarios
For purposes of credit risk stress, the classification of all clients of financial institutions are downgraded two
levels, based on balance sheet data – ranked portfolio. A new provision requirement is obtained as a result of
the new classification. Real provisions are subtracted from this result in order to determine the required increase
in provisions. After that, the impact of the increased provision on PLE and PR is calculated, thus revealing the
impact on the Basel capital ratio.
For purposes of identifying the parameters used in market risk stress scenarios (preset interest and exchange
rates), we utilized the largest value obtained through application of the two models: VaR and Hybrid. With regard
to VaR the basic methodology is the RiskMetrics methodology which operates on the basis of the hypothesis
of normal behavior for the algorithm of the returns of the variables under analysis. In its turn, the hybrid model
utilizes historic data but does not draw hypotheses on the distribution of the returns of the variables analyzed,
making use of the technique of exponential smoothing – combining several characteristics of the VaR, of
RiskMetrics – and of the historic simulation methods.
For these two models, the confidence level of 99.6% (equivalent to one error per year) and a period of position
maintenance of ten business days are utilized. With regard to the technique of exponential smoothing, which
has the purpose of attributing greater weight to more recent observations, diverse factors of decline between 0.9
and one were utilized. Basically, these factors generate equal weights for all the days of the series, noting that
only decline factors between 0.9 and 1 were used for the rate reductions scenarios. On each date on which the
calculation is made, a series of data encompassing the first business day of January 1999 to the business day
immediately prior to the calculation date is used, and the exponential decline chosen is that which generates
the largest result.
In applying market risk stress to the PLE, the results of fluctuations in the rates were considered only in the
amount of the requirement for market risk (interest + exchange), without altering APR. In PR, the financial impact
of exchange variations on net exposure and of changes in interest rates on financial flows of the institutions
were considered.
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Riskmetrics Methodology to Calculating Value-at-Risk
The RiskMetrics methodology (1994) was developed by the J.P. Morgan financial institution and proposes that
VaR be calculated through the following equation:
, in which
VMTM is the value of the assets marked-to-market on date t;
z is the quantile of the normal distribution equivalent to the degree of confidence of the estimate of VaR;
ht is the conditional volatility on date t for the asset;
t is the time interval chosen for calculating VaR.
Principal underlying hypothesis is that of log-normality of asset pricesl.
In order to estimate conditional volatility, RiskMetrics recommends utilization of the EWMA, as shown in the
equation below:
, in which
rt is the return of the asset for period t, defined as rt=ln(Pt/Pt-1), in which Pt price of  asset in t;
 is the decline factor, so that 0 <  < 1.
The most commonly used EWMA formulation in financial series allows for the hypothesis that the average of
the l daily returns of the assets is equal to zero2.
With respect to the decline factor, RiskMetrics suggests  = 0.94 for daily data. However, models exist for the
choice of optimum , such as the maximum verisimilitude and the principle of average squares. The value of
 close to one reproduces the stylized fact of the volatility being highly persistent.
In the forecast of EWMA, the conditional variants of the returns is composed of two terms. The first [ht-1] is
composed of a self-regressive term that expresses the temporal dependence of the return variance, the stylized
fact present in financial series. The second [(1-)] represents the contribution of the most recent observation
(innovation) for the estimated variance.
1/ It should also be noted that to utilize the time root to convert from one VaR calculation horizon to another, it is admitted that the prices are log-normally
distributed and follow a Markov process.
2/ RiskMetrics also presents the equation in which a median of return different from zero is admitted.
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The calculation of the VaR of the portfolio is given by:
, in which
VaR is the vector n x l containing the VaR of each asset in the portfolio, and n is the number of instruments in
the portfolio;
VaR’ is the vector l x n, vector transposed from vector VaR;
 is the matrix n x n containing the correlations among the assets included in the portfolio.
The correlation on day t among the assets i and j is calculated through the following formula:
, in which
h(i,j),t denotes the conditional covariance i and j on date t, which possesses the same principle of conditional
variance calculation, and is obtained by the formula:
.
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Hybrid Approach to Calculating Value-at-Risk
This box synthesizes the work of Boudoukh et al., published in the Resenha BM&F 122/1998, utilized to
calculate value-at-risk in interest and exchange rate stress scenarios. Classified as the hybrid model, this
approach consists in recognizing the existent trade-offs in the different methods utilized to calculate value-atrisk and combine these methodologies in such a way as to optimize these trade-offs, while seeking to preserve
their respective advantages.
The best known and most commonly used methodologies for calculating value-at-risk consist of the technique
of exponential smoothing (the classic example is the RiskMetrics methodology) which uses decreasing weights
for past returns, making it possible to perceive the behavior of volatility and historic simulation which ignores
hypotheses on the distribution of the returns and utilizes the empirical percentages of the historic distribution
of the returns.
The hybrid approach combines these two approaches. The approach of historic simulation uses equal weights
to calculate conditional distribution. The proposal is that of using declining weights for past data with these
weightings being calculated in a manner similar to the method of exponential smoothing.
On making this combination, two undesirable properties of the traditional methods are put aside. On the one
hand, the approach of exponential smoothing assumes a multivaried normality, which causes problems as a result
of the heavy tails that are found in most financial assets. The historic simulation approach neglects hypotheses
on distribution but assumes constant weights for observations of the sampling. The latter hypothesis is quite
unrealistic, since the information contained in the returns on current distribution diminishes over time.
In this way, the hybrid approach consists of applying decreasing weights to past returns and encountering the
appropriate percentage of this weighted empirical distribution in time. Boudoukh et al. tested the hybrid model
for the rate of exchange of the German mark per United States dollar, the spot price of Brent type petroleum,
S&P 500 index and a generic index of Brady Bonds (J.P. Morgan Brady Bond Index) and concluded that the
empirical results show that the hybrid model is superior to the other two, principally in the case of data with
heavy tails such as those of the series of petroleum prices and Brady bonds.
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3
Brazilian Payments System – SPB
3.1 Introduction
A national payments system is composed of the institutional
and infrastructural arrangements used by economic agents in
general to transfer monetary claims they hold against central
banks or commercial banks54, with the purpose of settling
their mutual liabilities. The corresponding payments are
generally channeled through financial institutions, mainly
banks, participating directly in these arrangements. The
operational or financial problems of one institution may
have an adverse impact on other participants in a given
arrangement or even on institutions operating within other
arrangements. Consequently, such events are considered
potential sources of systemic risk. For this reason, national
payments systems are generally subject to the oversight
of their respective central banks, in order to guarantee the
smooth and continuous operation that is a key element to
financial stability.
In Brazil, Central Bank oversight focuses on settlement
systems considered systemically important55, but also
extends to retail payments systems and, consequently, to the
corresponding payment instruments and access channels.
According to the Central Bank of Brazil, the Brazilian
payments system, which includes all interbank fund
transfer systems, clearing and settlement systems involving
operations with securities, stocks, derivatives and foreign
54/ Based on the definition used in the BIS/CPSS report entitled “General Guidance for Payment System Development”. Monetary claims are represented
by money issued by the Central Bank and, principally, deposits held at the Central Bank (central bank money) and at commercial banks (commercial
bank money). Based on the definition used in the BIS/CPSS report entitled “General Guidance for Payment System Development”. Monetary claims
are represented by money issued by the Central Bank and, principally, deposits held at the Central Bank (central bank money) and at commercial banks
(commercial bank money).
55/ Considered as those that, in light of their nature or the value of the operations processed through them, can potentially jeopardize the national financial
system. According to legislation, the Central Bank of Brazil is in charge of designating systemically important systems. Currently, these include all
systems that settle operations involving securities, derivatives, foreign currency and any other financial instruments, as well as fund transfers in which
daily operations surpass predetermined reference values either individually or cumulatively.
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currencies, operated satisfactorily in the second half of 2007,
registering no events that would in any way jeopardize its
smooth and normal functioning. Overall available liquidity
continued well above the needs of the financial institutions
participating in the clearing and settlement systems,
especially regarding to the Reserve Transfer System (STR),
which for all practical purposes is the central settlement
system. On the other hand, aside from alterations in the
distribution of payments and in the processing capacity of
some systems, those targeted to retail payments registered
growth in daily financial turnover without, however,
generating any systemic risk.
Following an international trend, the São Paulo Stock
Exchange (Bovespa) and the Brazilian Mercantile & Futures
Exchange (BM&F), the two most important institutions
operating on stock, security and derivatives markets,
opened their capital and separated their structures56. This
subject is discussed in the next topic. Finally, statistics on
volume, quantity, concentration and the netting rate of the
major clearing and settlement systems in the country will
be analyzed.
3.2 Major developments in the
second half of 2007
The highlights of the second half of 2007 were structural
changes in the stock, securities and derivatives market,
opening of the capital of Bovespa and BM&F, with
implications in the corresponding settlement systems.
Bovespa, which controls the Brazilian Clearing and
Depository Corporation (CBLC), made an Initial Public
Offering (IPO) on October 26, 2007. During that process,
alterations in the CBLC bylaws with respect to distribution
of risks among the participants were approved, in order to
allow them to adjust to the new structure, particularly in that
which concerns the new rules governing constitution and
utilization of the settlement fund. Though the regulations call
for financial contributions on the part of participants, in the
past the fund was composed wholly of resources belonging
to the clearinghouse itself. This arrangement made sense at
the time since the participants themselves were the owners of
the clearinghouse. In order to adjust to the new stockholding
56/ Basically, the separation of structures involves a process of alteration in the control structure of the exchange, resulting in separation between access
rights to business environments and property rights.
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structure, the fund came to include resources provided by the
participants, with the following two types of contributions: (i)
a fixed amount required of each participant, varying from one
participant category to another; and (ii) aside from this, the
clearing agents are required to put up resources proportionally
to the risk of the operations under their responsibility.
Changes also occurred in the respective order in which
settlement fund resources are used. Previously, when a
participant defaulted and its own resources were executed,
resources related to the CBLC contribution would be used.
Only at that point were the contributions of other clearing
agents used. In the new arrangement, the order of utilization
of the final two shares was switched. With this, once the
individual resources have been dealt with, the resources of
the other participants are accessed and, finally, those derived
from the CBLC contribution.
With regard to the BM&F, separation of the entity’s structure
was approved on September 20, 2007, to take effect as of
September 1, 2007. In this context, the BM&F made an IPO
on November 30, 2007. Prior to the IPO of BM&F, the CME
Group, which operates the Chicago Commodities Exchange,
had acquired approximately 10% of the entity’s capital in
exchange for BM&F participation of approximately 2% in
the CME Group. At the same time, a letter of intent was
signed between the two parties with the purpose of taking
advantage of joint business opportunities.
In March 2008, Bovespa and BM&F announced their
intention of merging the two entities. This process is now
underway. The New Exchange, as the new entity has been
temporarily dubbed, will be the third largest exchange in the
world in terms of market value, estimated at R$31 billion.
3.3 Performance of settlement
systems
3.3.1 Fund Transfer Systems
3.3.1.1 Reserves Transfer System – STR
The STR is operated by the Central Bank of Brazil and
settles gross interbank fund transfers in real time. Settlement
is based on funds maintained in reserve accounts (Central
Bank money) and is irrevocable and unconditional.
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Settlements in the STR mainly involve: (i) operations with
public securities in the framework of the Special System
of Settlement and Custody (Selic), including monetary
policy operations and those related to Central Bank of
Brazil intraday credits; (ii) national currency payments of
interbank exchange operations settled directly between the
contracting parties57; (iii) interbank fund transfers related to
other settlement and clearing systems (multilateral results
or, when the case arises, bilateral results) that process fund
transfers or operations involving securities, derivatives and
foreign currency58; (iv) interbank fund transfers related
to gross settlement through security systems operated by
market entities; (v) other interbank fund transfers carried
out by participants in their own or their clients’ names – the
Electronic Funds Trasnfers (TEDs); (vi) National Treasuryrelated fund transfers; and (vii) other operations involving
the Central Bank of Brazil.
The system operated normally on all business days in the
second half of 2007, registering an availability index of
99.8% during the entire year of 200759.
The following tables contain a detailed presentation of the
evolution of total fund transfers through the STR in the
second half of 2007, in terms of both value and quantity.
These transfers totaled R$55.5 trillion, for a daily average
of R$444 billion, meaning that the system processes an
amount equivalent to one GDP every 5.9 days60. In nominal
terms, the system’s turnover increased 2.7% compared to the
previous half-year period.
In value terms, gross settlements of operations involving
public securities, including Central Bank of Brazil intraday
credit operations, continued accounting for the major
share of fund transfers (87.1%). The increase came to 1%
compared to the previous half-year period and 19% when
viewed against the second half of 2006.
Growth was concentrated mainly in repo operations,
considered to be mostly money market operations. The major
factor underlying this growth was increased Central Bank of
57/ Operations involving United States dollars can be settled alternatively through the BM&F-Foreign Exchange.
58/ The results of the systems considered systemically important are settled necessarily through the STR. If the system is not considered systemically important,
settlement through STR is optional.
59/ According to article 10 of the Regulations appended to Circular n. 3,057, dated August 31, 2001, which disciplines operation of the systems operated
by clearinghouses and by settlement and clearing service providers included in the payments system in systemically important systems, the availability
index must be equal to or greater than 99.8%.
60/ In 2006, Brazil’s Gross Domestic Product closed at R$ 2.6 trillion.
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Brazil involvement in open market operations. The increased
volatility registered on the international financial market was
due mainly to the crisis that occurred in the United States
real estate sector, resulting in net public security redemptions
totaling R$50.4 billion, coupled with reductions in average
maturities of the public security portfolio. The external sector
was another important factor accounting for monetary base
growth, registering an accumulated flow of reserves in the
amount of R$39.5 billion. Consequently, the Central Bank
of Brazil had to assume a more active role through repo
operations on the money market.
In residual terms, greater demand for operations with federal
public securities reveals increased liquidity demand for
payment purposes. Part of this demand can be attributed to
increased wariness, though the Effective Liquidity Needs of
the system did expand marginally for some institutions.
The overall value of transfers related to multilateral security
settlements expanded 35% compared to the previous
six-month period, and 30% when viewed against the second
half of 2006.
STR
Funds transfers – Value – Details
R$ billion
Transaction
2007
Accumulated
st
nd
1 semester
Value
2
%
1/
semester
Value
%
1/
Settlement systems
Securities
Multilateral
2/
Gross
1 766.4
3.3
2 386.4
4.3
4 152.8
47 844.1
88.5
48 342.4
87.1
96 186.5
88.6
0.2
176.0
0.3
264.6
459.9
0.9
401.3
0.7
861.2
1 085.6
2.0
1 206.2
2.2
2 291.7
752.6
1.4
877.7
1.6
1 630.3
1 327.6
2.5
1 356.9
2.4
2 684.5
750.5
1.4
783.6
1.4
1 534.1
Derivatives
Multilateral
Foreing exchange
Multilateral
Payments
Multilateral
TED on behalf
of customers
TED on behalf
of FI
Government
Total
54 075.2
55 530.4
109 605.7
Source: Bacen
1/ As a percentage of total settlement.
2/ Includes organized over-the-counter derivatives transactions, and Banco
Central do Brasil's intraday and overnight repos.
In terms of the settled value, among the group of institutions
that perform multilateral clearing of transactions involving
stocks and securities, derivatives and foreign currency,
the BM&F-Foreign Exchange Clearinghouse (BM&FForeign Exchange) was the only clearinghouse with
multilateral settlements that did not register growth. The
largest increases were registered at the BM&F-Derivatives
Clearinghouse (BM&F-Derivatives), 98%, the BM&FSecurities Clearinghouse (BM&F-Securities), 54%, and
CBLC, with 42%. These three clearinghouses showed
relative participation of 6%, 36% and 5% of the total
financial volume settled at the STR, respectively, in the
context of this grouping.
The reduction in the volume settled by the BM&F-Foreign
Exchange occurred in a half-year period in which the
United States dollar registered cumulative devaluation of
approximately 8%. Growth in the volume settled through the
CBLC account corresponds to a period of 17.5% valuation
in the Bovespa index, which is the major São Paulo Stock
Exchange Index. With respect to BM&F-Derivatives, the
increase in the settled financial volume – both gross and
net – was due to greater variations in the major primary
risk factors, mainly the dollar and Ibovespa. The contracted
notional value dropped 11.5%, as will be seen below.
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In terms of quantity, TEDs continued with strong participation
(70.6%) in the quantity of fund transfers settled, though they
accounted for only 4% of the overall value settled.
There was a reduction of 5% in the number of TEDs on
behalf of financial institutions, compared to the previous
half-year period, and a 2% increase when viewed against
the second half of 2006. Just the opposite occurred in the
number of TEDs per client account, which increased 6%
compared to the previous half-year period.
With regard to bilateral settlement of checks61, the number of
checks settled increased 9.1% between the first and second
halves of 2007. In quantity terms, it rose 14.4%.
STR
Funds transfers – Volume – Details
Thousand
Transaction
2007
Accumulated
st
nd
1 semester
2
Volume %1/
Volume %1/
semester
Settlement systems
Securities
Multilateral
2/
Gross
38.5
0.7
49.8
860.0 15.7
0.9
88.3
859.5 15.7
1 719.5
Derivatives
Multilateral
5.5
0.1
5.3
0.1
10.8
5.5
0.1
5.4
0.1
10.9
107.4
2.0
107.3
2.0
214.7
1 679.4 30.7
1 775.4 32.5
3 454.7
2 186.7 39.9
2 080.2 38.1
4 266.9
592.9 10.8
575.3 10.5
1 168.2
Foreing exchange
Multilateral
Payments
Multilateral
TED on behalf
of customers
TED on behalf
of FI
Government
Total
5 475.9
5 458.2
10 934.1
Source: Bacen
1/ As a percentage of total settlement.
2/ Includes organized over-the-counter derivatives transactions, and Banco
Central do Brasil's intraday and overnight repos.
In the case of intraday fund transfers, an analysis of the
system’s liquidity needs shows that banks anticipated
sending of fund transfer orders to the system, compared to
the previous half-year period62. With regard to the average
financial turnover settled daily, the cumulative amount
settled up to 9:00 a.m. showed a relative increase of 1.5%,
compared to a 1.1% reduction in the cumulative value settled
after 1:30 p.m.
In the morning period, the greatest concentration occurred
between 8:30 a.m. and 10:00 a.m., with 23.8% of the total
movement. This concentration is mainly a result of repo
operations processed through Selic, particularly with regard
to repo-return-operations. This period also concentrates
demand for Central Bank of Brazil’s intraday discount
window operations, thus implying the carrying out of repo
operations in the Selic framework.
In terms of quantity, there are two periods of concentration,
as it is clear in intraday distribution: the first in the morning
(up to 8:30 a.m.) and the other between 4:30 p.m. and 5:30
p.m., during which 18.8% and 26.5% of fund transfer orders
were processed, respectively, in terms of daily averages.
In the previous half-year period, these percentages were
21.2% and 24.3%, respectively. Anticipation and dilution
of settlements over the course of the day reflect the low
cost of intraday liquidity for the system and reduce the
potential repercussions of a possible operational problem
in the system.
61/ Bilateral check settlements in individual amounts equal to or greater than R$250,000 are processed through the STR.
62/ Dispersion of the amounts among the different days, represented by the brackets around the average in the graph, shows a constant pattern of distribution
of payments over the course of the day.
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STR
Funds transfers – Value – Intraday profile –
2nd semester 2007
% accumulated
%
12.0
100
9.6
80
7.2
60
4.8
40
2.4
20
0
0.0
6:30
8:00
9:30
11:00
12:30
14:00
15:30
17:00
18:30
20:00
Range: average - standard deviation; average + standard deviation
Average percentage
Accumulated average percentage
STR
Funds transfers – Volume – Intraday profile –
nd
2
semester 2007
% accumulated
%
18.0
100
14.4
80
10.8
60
7.2
40
3.6
20
0.0
0
6:30
8:00
9:30
11:00
12:30
14:00
15:30
17:00
18:30
20:00
Range: average - standard deviation; average + standard deviation
Average percentage
Accumulated average percentage
The settlement peak was 22,000 fund transfer orders per
hour, in September 2007, corresponding to 55% of the
system’s installed capacity, which is 40,000 orders per hour63.
Aside from the balance in the settlement account (Banking
Reserve account), which involves reserve requirements
on demand deposits, financial institutions also have other
sources of liquidity that can be freely and readily utilized
over the course of the day in order to make their fund
transfers. These include the following: (i) other reserve
requirements in cash held at the Central Bank of Brazil; (ii)
reserve requirements in federal public securities; and (iii)
intraday credits of the Central Bank of Brazil, granted in the
form of repo operations with federal public securities and
without any financial cost for the participant holding the
Banking Reserve account64. If the participating institution
still does not have sufficient liquidity, its fund transfer orders
are placed in queue.
Due to the ample availability of liquidity in the system, the
financial volume of fund transfer orders in the queue came
to only R$5.9 billion or, in other words, 0.01% of the volume
settled in the STR in the period. These fund transfer orders
spent an average of 14 minutes and 49 seconds in the queue.
The Central Bank of Brazil analyzes the following indicators
in order to monitor liquidity in the STR framework:
• intraday liquidity, which corresponds to the Reserve
account balance plus the balance of other reserve
requirements in cash not related to demand deposits, and
the value of federal public securities that can be used in
operations with the Central Bank of Brazil65; and
• the participant’s effective need for intraday liquidity,
corresponding to the difference between the final balance
63/ Measurement of STR processing capacity is currently underestimated. In 2007, the principal computer of the system was changed. However, the objective
tests required to measure the new processing capacity have not yet been carried out. Non-structured observations of daily processing rates indicate a
reduction in the average processing time of the messages to less than half of the previous figure. Consequently, expectations point to a considerable
increase in processing capacity. Taking a conservative approach in this Report, we have used the processing capacity indicator that resulted from the most
recent tests, carried out on the previous computer.
64/ In both cases, the participant’s request is submitted electronically and the funds are immediately credited to its reserve account.
65/ LI = RB + RC + TF
in which:
LI → Intraday Liquidity;
RB → Reserve account balance;
RC → Balance of other reserve requirements in cash, aside from those on demand resources; and
TF → Value of the federal public securities that may be used as collateral in operations with the Banco Central do Brasil.
May 2008
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| 99
Liquidity effective need
R$ billion
500
400
300
200
100
0
Jan
2007
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Federal public securities requeriments in the Central Bank
Federal public securities
Reserve requirements
Reserves in the beginning of day
Liquidity effective need
Source: Bacen
STR
Liquitidy effective need
Percentage of the liquidity
2007
effective need in relation to
1 semester
the total liquidity avaiable
st
Nº of FIs
nd
2
%
1/
semester
Nº of FIs
%
1/
0% to 10%
12
42.1
12
44.2
10% to 20%
14
33.4
7
22.8
20% to 30%
14
10.6
10
13.5
30% to 40%
24
4.8
19
6.6
40% to 50%
22
2.0
14
4.4
50% to 60%
9
3.0
15
4.0
60% to 70%
7
1.3
8
1.4
70% to 80%
5
0.7
11
0.5
80% to 90%
1
0.1
8
2.1
90% to 100%
1
2.1
1
0.5
109
100.0
105
100.0
Total
Source: Bacen
1/ Percentual participation of the payments made by the institutions
in this category in relation to the total turnover.
66/ NELi= LIif - PSi ,
in which:
NELi → Effective liquidity needs of institution “i”;
LIif → Final intraday liquidity balance of institution “i”;
PSi → Lowest balance of institution “i” over the course of the day.
67/ NELA =
NELi ,
in which:
NELA → Aggregate effective liquidity demand of the system;
NELi → Effective liquidity demand of institution “i”.
100 |
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May 2008
of intraday liquidity and the lowest balance registered
by that institution in the course of the day66; and
• aggregate liquidity demand of the system, which is the
sum of the maximum needs of each participant67.
In the second half of 2007, effective system demand remained
at an average level of 2.2% of available intraday liquidity,
slightly more the previous half-year period’s result (2.1%)
and equal to the figure for the same half-year period of the
previous year. These indicators demonstrate that liquidity
available to the system is sufficient to ensure settlement of
fund transfer orders, with no occurrences of gridlock during
the period under analysis.
Compared to the previous half-year period, there was a
reduction in the number of institutions that required up to
50% of their intraday liquidity in order to effect payments,
coupled with a corresponding increase in those institutions
that utilized between 50% and 90% of their intraday liquidity.
Fifty-four conglomerates required more liquidity than in
the previous half-year period, while ten required less in
order to honor their payments. The liquidity potential of
the banks that utilized more liquidity over the course of
the day in the first half of the year showed no significant
changes, compared to the previous half-year period. The
increase in the intraday liquidity demand of these institutions
is closely connected to increased turnover in the system,
transactions with securities settled in gross terms. However,
compared to total payments carried out through the system,
the participation of institutions that required more intraday
liquidity is relatively small. Approximately 87% of payments
were made by institutions that required up to 40% of
their intraday liquidity to effect payments. The number of
institutions that use more than 50% of their liquidity stock
over the course of the day increased from 23 to 43, and their
participation in terms of payments moved from 7.2% to
8.5%. Despite alterations in distribution regarding utilization
of intraday liquidity, the liquidity available in the system is
sufficient to ensure the payments flow.
3.3.1.2 Funds Transfer System – Sitraf
Operated by the Interbank Payment Clearinghouse
(CIP), Sitraf is a systemically important system with the
characteristics of DNS and Real Time Gross Settlement
Systems (RTGS). It is, therefore, considered a hybrid system.
If the participant’s account to be debited has a sufficient
balance at the moment in which the order is received,
settlement is done in gross terms. If the opposite occurs,
the transfer enters a queue for multilateral processing with
utilization of an optimization algorithm.
Risk management mechanisms are identical to those of the
RTGS systems and settlement is carried out irrevocably and
unconditionally during the course of the day. The system
focuses on settlement of client-issued TEDs, mostly in
intermediate amounts between those of transactions settled
through the Deferred Settlement System (Siloc), which is
also operated by CIP, and transactions settled through the
STR. Approximately three quarters of fund transfer orders
had individual values of up to R$25,000 and less than 2%
of orders had unit values of more than R$500,000.
At the start of the day, participating banks transfer funds from
their reserve accounts to the Sitraf-related CIP settlement
account at Central Bank of Brazil, thus constituting what
are known as pre-deposits. CIP credits the internal account
of the participant in its system, allowing that participant
to process its payments through that environment. At any
moment whatsoever, the participant may make deposits
additionally to the pre-deposits made at the start of the day,
as well as release funds available in the system and remit
them back to its reserve account.
CIP-Sitraf
Turnover – Value – Details
R$ billion
Transaction
2007
Accumulated
st
nd
1 semester
Value
2
%
1/
semester
Value
%
1/
TED on behalf
of clients
1 673.5 88.6
1 932.1 88.2
3 605.6
215.9 11.4
258.1 11.8
474.0
TED on behalf
of FI
Source: Bacen
1/ As a percentage of total turnover.
Sitraf operated normally on all business days in the first half
of 2007, with an availability index of 99.8% for all of 2007.
In the half-year period, the peak time in processing occurred
in December, with the settlement of 60.2 thousand fund
transfer orders, corresponding to 66.9% of the maximum
capacity of the system (90,000 transfer orders per hour).
Regarding daily processing, the peak was 313.5 thousand
fund transfer orders.
In the period under consideration, the major share of fund
transfers – 96% in quantity and 56% in value – was settled
in the LBTR environment. The percentages remained stable
compared to the previous half-year period. For fund transfer
orders settled with multilateral clearing, the average time
in the queue was approximately 12 minutes, that represents
33% less than the average in the previous half-year period.
May 2008
|
| 101
CIP-Sitraf
Turnover – Volume – Details
Million
Transaction
2007
Accumulated
st
nd
1 semester
Volume
2
%
1/
semester
Volume
%
1/
The daily average financial turnover was R$17.4 billion,
corresponding to 220,000 fund transfer orders, reflecting
significant growth compared to the previous half-year
period, which had registered daily respective averages of
R$15.4 billion and 197,000.
TED on behalf
of clients
19.0 78.0
21.3 77.6
40.3
5.3 22.0
6.2 22.4
11.5
TED on behalf
of FI
Source: Bacen
CIP-Siloc
Turnover – Value – Details
R$ billion
Transaction
2007
Accumulated
st
nd
1 semester
Value
DOC
2/
2
%
1/
semester
Value
%
3/
The Siloc is considered not systemically important and is
used to process credit transfers related to “Bloquetos de
Cobrança” in individual amounts of less than R$5,00068, to
Credit Documents (DOCs)69 and Special Credit Transfers
(TEC). Interbank settlement is done through multilateral
clearing in D+1, with the exception of the TEC, which is
settled in D0. In cases of default, the participant is excluded
from the settlement session and multilateral results are
recalculated.
1/
65.2
19.1
75.2
19.7
140.4
276.3
80.9
307.1
80.3
583.4
Bloqueto
de cobrança
3.3.1.3 Deferred Settlement System for
Interbank Credit Orders – Siloc
Source: Bacen
The average daily financial turnover settled in Siloc and the
quantity of transactions in the second half of 2007 totaled
R$3.1 billion and 6 million, respectively compared to
R$2.8 billion and 5.5 million, of the first half of 2007.
2/ Credit transfer at T + 1.
3/ Bar-coded standardized document that allows bills to be paid in any bank.
CIP-Siloc
Turnover – Volume – Details
Million
Transaction
2007
Accumulated
st
nd
1 semester
Volume
DOC
2/
2
%
1/
semester
Volume
%
1/
64.7
9.5
75.1
10.1
139.7
615.7
90.5
668.4
89.9
1 284.1
Bloqueto
3/
de cobrança
Source: Bacen
3.3.1.4 Centralizer Clearance for Checks
and Other Documents – Compe
Considered not systemically important, Centralizer
Clearance for Checks and Other Documents (Compe)
processes interbank settlements of checks in unit values
of less than R$250,00070. Settlement on D+1 is done at
multilateral net value. In cases of default, the participant is
excluded from the settlement session and net multilateral
positions are recalculated.
In the second half of 2007, Compe settled an average daily
financial volume of R$4.12 billion, R$102 million more
than in the first half of the year. The average value of each
check cleared through Compe was R$664.
2/ Credit transfer at T + 1.
3/ Bar-coded standardized document that allows bills to be paid in any bank.
68/ Settlement of “Bloquetos de Cobrança” in unit values equal to or greater than R$ 5,000 is done bilaterally at aggregate value through the STR. Settlement
of these payments is found in the STR transfer charts, included under the item “TED on behalf of FI”.
69/ The DOC has a maximum value of R$ 4,999.99.
70/ Settlement of checks in individual amounts equal to or greater than R$ 250,000.00 is done bilaterally at aggregate value through the STR. Settlement of
these payments is shown in the charts on STR transfers, under the item “TED on behalf of FI”.
102 |
|
May 2008
3.3.2 Securities, derivatives and FX interbank
clearing and settlement systems
3.3.2.1 Special System of Settlement and
Custody – Selic
Operated by the Central Bank of Brazil, Selic is a federal
public securities settlement system that also operates as
central depository. Aside from typical secondary market
outright or repo operations, the system settles primary
placements, open market operations and Central Bank of
Brazil discount window operations.
Turnover at Compe – Volume and value
R$ billion
Transaction
2007
Accumulated
st
1 semester
1/
2
semester
0.8
0.8
1.5
494.2
515.0
1 009.2
Volume
Value
nd
Source: Bacen
1/ Billion.
Therefore, this is considered a systemically important
system that uses the delivery-versus-payment model in
order to minimize settlement risks. In this way, settlement
of the financial leg and settlement of the securities leg,
which are mutually conditioned, are done on a transactionby-transaction basis in real time. When the operation
involves different settlement banks, financial settlement
is processed through the STR in reserve accounts (Central
Bank money).
In the second half of 2007, all daily settlement cycles took
place normally, with no significant delays.
Selic – Operations
Daily average
Thousand
R$ billion
750
6.5
600
6.1
450
5.7
300
5.3
150
4.9
0
4.5
Jan Feb
2007
Mar
Value
Quantity
Sources: Bacen and Selic
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Value – Book transfers
Quantity – Book transfers
Considering repo and outright operations, Selic settled an
average of 11,000 operations per day in an overall value of
approximately R$650.7 billion, with 54% of the quantity and
38% of the value corresponding to interbank operations or,
in other words, with no financial settlement in the reserve
account balance.
In the period under analysis, the daily average volume of
Selic operations increased 3.4% compared to the previous
half-year period and 27% compared to the same six-month
period of the previous year. The major cause of this increase
were operations without utilization of the reserve account,
which rose 10.2% compared to the previous half-year period
and 44% when viewed against the same six-month period
of the preceding year.
Repo operations, which accounted for approximately 72%
of total operations registered growth of 9.7%, compared
to the previous half-year period. In the period under
consideration, the market was more liquid as a consequence
of R$50.4 billion in National Treasury redemptions and
R$39.5 billion in international reserve inflows. As a
result, the Central Bank of Brazil increased the level of its
operations on the open market.
May 2008
|
| 103
3.3.2.2 Clearinghouse for Custody and
Settlement – Cetip
Cetip settles mainly private security operations, while also
acting as central depository. The entity does not operate as
central counterparty71. Depending on the type of operation,
settlement occurs on D0 or D+1. Since there is no settlement
guarantee in the Cetip environment and in light of pertinent
legal and regulatory provisions72, multilateral clearing
is used only on the primary market, in which issuer risk
predominates. Secondary market operations with securities
are settled in real time gross settlement systems, while
bilateral clearing is used in derivative operations.
Cetip – Clearinghouse
Turnover – Daily average
Thousand
R$ billion
28.0
15
22.4
12
16.8
9
11.2
6
5.6
3
0.0
0
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Value DNS
Value RTGS
Quantity DNS
Quantity RTGS
Sources: Cetip and Bacen
The system operated continuously, with only very small
and brief delays in the period under consideration. These
occurrences had no adverse impacts on conclusion of daily
settlement cycles.
In the period analyzed, operations settled in the multilateral
modality (primary market operations) registered total
daily average value of R$10.1 billion. The average
netting rate was 54%, representing daily average liquidity
savings of approximately R$5.5 billion. Daily average
operations settled in the gross or bilateral modalities totaled
R$10.1 billion for 1,700 operations.
3.3.2.3 Brazilian Clearing and Depository
Corporation – CBLC
CBLC – Clearinghouse
Net financial risk
FR
(R$ million)
NFR
(R$ million)
45
9 000
36
7 200
27
5 400
18
3 600
9
1 800
0
0
7.2 7.18
2007
8.2
8.17
9.3
9.19
10.4 10.22 11.7 11.26 12.11 12.28
Net financial risk
Financial risk
The CBLC operates what is a systemically important
settlement system focused on private securities, mostly
involving stocks and some derivative contracts. Normally,
settlement occurs at net value and in deferred time (DNS)
and, in some situations such as in the case of primary
and secondary public stock offers, interest and dividend
payments,public stock buyback offers and operations with
some private fixed-rate securities, RTGS is used. The entity
also operates as central depository of the stock market and
other assets that are settled through its systems. Settlement
of spot market operations occurs on D+3, while liabilities
related to the options market are settled on D+1.
Sources: CBLC and Bacen
71/ The CPC assumes various types of risks inherent to operations, the most important of which, among others, is credit risk, which can be subdivided into
principal risk and replacement risk, and liquidity risk. The systems operated by them have a safeguard mechanism that allows them to ensure settlement
of the operations accepted by them.
72/ The settlement guarantee is mandatory in systems considered systemically important, except with regard to issuer risk.
104 |
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May 2008
Funds by securities1/
%
Discrimination
2007
Jul
Aug
Sep
Oct
Nov
Dec
Stocks
29.2
28.7
32.0
36.3
37.0
35.4
Government bonds
63.0
65.3
63.3
57.6
57.2
58.4
International bonds
3.6
2.8
2.0
2.5
3.0
3.5
Letters guarantee
0.8
1.2
0.8
0.7
0.8
0.8
2/
1.8
1.2
1.2
1.1
1.0
1.2
Cash
1.4
0.7
0.6
1.6
0.8
0.4
Others
0.2
0.2
0.2
0.2
0.2
0.3
CD
Sources: CBLC Clearinghouse and Bacen
1/ Only linked funds are considered.
2/ Certificate of deposit.
R$ billion
Thousand
8
250
7
224
6
198
5
172
4
146
3
120
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Value DNS
Sep
Oct
Nov
Dec
Quantity DNS
Sources: CBLC and Bacen
BM&F – Securities Clearinghouse
Financial risk and net financial risk
NFR
(R$ thousand)
FR
(R$ thousand)
0.10
2 200
0.08
1 760
0.06
1 320
0.04
880
0.02
440
0.00
0
7.5 7.20
2007
8.6
8.21
9.5
9.21 10.8 10.24 11.9 11.27 12.12 12.28
Net financial risk
In order to manage and control settlement risks, the CBLC,
which also acts as central counterparty, obeys the principle
of delivery-versus-payment and requires guarantees from
the original counterparties of each operation. The entity’s
protection mechanisms also include a security loan program,
liquidity assistance lines contracted with banking institutions
and a settlement fund composed of resources belonging to
the clearing house and its participants.
The system operated continuously and daily settlement
cycles were concluded opportunely.
According to backtesting analysis, the largest volume of
financial risk (FR)73 value found for the two participants
with the largest debtor positions on a single day was
R$8.7 billion. When the value of individual guarantees
is taken into account, the net financial risk value (NFR)74
reached a maximum of R$44million, corresponding to
15% of the additional safeguards available (average of
R$305 million available in the settlement). The guarantees
deposited at the clearinghouse are mainly composed of
stocks and public securities, representing 35.4% and 58.4%
of the overall total in December.
In the same time frame, the daily average financial turnover
was R$6.6 billion for 223,000 transactions. Financial
turnover showed growth of 49% compared to the previous
half-year period, and 142% when viewed against the same
six-month period of the previous year. The average netting
rate was 91%, representing a daily liquidity savings of
R$6 billion.
The financial volume of operations settled in gross terms
increased 58% compared to the previous six-month period.
The growth tendency in this type of operation was mainly due
to the larger number of primary and secondary stock offers,
resulting from the continued positive national economic
scenario in the period under consideration. The Ibovespa
showed valuation of 16% in the period, a performance partly
explained by the highly favorable economic scenario.
Financial risk
Sources: BM&F Securities Clearinghouse and Bacen
73/ For each day and based on real alterations in asset prices, FR measures the replacement risk of each one of the clearinghouse participants. For each day,
the two participants with which the clearinghouse has the most critical exposure in terms of risk are considered.
74/ In its turn, the NFR corresponds to the value of the FR calculated for each participant, deducted from the value of the guarantees constituted by that
participant. It represents the share of exposure to risk that is not covered by the individual guarantees of the participant in question. For each day, the two
participants with which the clearinghouse has the most critical exposure in terms of risk are considered or, in other words, the two participants with the
highest NFR value.
May 2008
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| 105
3.3.2.4 BM&F-Securities Clearinghouse –
BM&F-Securities
BM&F – Securities Clearinghouse
R$ billion
Quantity
105
120
84
100
63
80
42
60
21
40
0
The BM&F-Securities system, which is considered
systemically important, settles federal public security
outright or repo operations on the secondary market.
Settlement with multilateral clearing of liabilities normally
occurs on D+1. To attenuate settlement risks, BM&F,
which acts as central counterparty, operates according to
the delivery-versus-payment principle, demands guarantees
from participants and has a settlement fund, coupled with a
security loan program.
20
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Sep
Value
Oct
Nov
Dec
The system operated without interruption, with all daily
cycles being opportunely terminated. According to
backtesting results, the highest FR value found for the two
critical participants on each day was R$2.2 billion, while the
NFR value was null on all days analyzed. BM&F-Securities
had R$40 million in additional safeguards (guarantee
fund) to cover possible residual credit exposures. Public
securities account for the totality of guarantees deposited
by participants.
Quantity
Sources: BM&F Securities Clearinghouse and Bacen
BM&F – Derivatives Clearinghouse
Financial risk and net financial risk
FR
(R$ million)
NFR
(R$ million)
9.0
700
7.2
560
5.4
420
3.6
280
1.8
140
0.0
0
6.29 7.17
2007
8.1
8.16
8.31
9.18
In the period, the average value settled was R$57.4 billion,
corresponding to 57 operations per day. In value terms, the
half-year period registered an increase of 72% compared to
the previous six-month period, with growth of 49% when
viewed against the same half-year period of the previous
year. The increase in the volume of operations through
BM&F-Assets resulted mainly from a 106% growth
reduction in generic repo operations. These operations
accounted for 93% of total operations processed through
the clearinghouse.
10.3 10.19 11.7 11.26 12.11 12.28
Net financial risk
Financial risk
Sources: BM&F Derivatives Clearinghouse and Bacen
The average netting rate was 90%, resulting in daily liquidity
savings of approximately R$53 billion.
3.3.2.5 BM&F-Derivatives Clearinghouse –
BM&F-Derivatives
Considered systemically important, the BM&F-Derivatives
system settles derivative contracts, focused mainly on
interest rates, exchange rates and inflation indices, with
interest rate contracts accounting for the largest share of
total notional value. Settlement normally occurs on D+1,
with multilateral clearing of liabilities. In order to manage
and contain settlement risks, BM&F, which operates as
central counterparty, makes margin calls and maintains a
settlement fund.
106 |
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May 2008
Funds by securities
%
Discrimination
2007
Government bonds
Jul
Aug
Sep
Oct
Nov
Dec
87.1
87.4
87.5
87.4
87.8
87.3
Letters guarantee
4.3
5.3
5.0
5.4
5.3
5.4
CD
2.4
2.0
2.2
2.0
2.0
1.9
Stocks
5.4
4.5
4.6
4.5
4.2
4.5
Gold
0.3
0.3
0.3
0.4
0.4
0.3
Cash
0.3
0.3
0.3
0.3
0.3
0.4
Others
0.1
0.1
0.1
0.1
0.1
0.1
Turnover – Notional value – Daily average
R$ billion
Thousand
170
32
150
29
130
26
110
23
90
20
70
17
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Sep
Notional Value
Oct
Nov
Dec
Quantity
Turnover – Gross value – Daily average
R$ billion
Thousand
4.0
32
3.2
29
2.4
26
1.6
23
0.8
20
0.0
17
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Gross Value
Sep
Oct
Nov
Dec
The system operated without interruption, closing all
daily settlement cycles opportunely. Based on backtesting
results, the largest FR value found on a single day for the
two critical participants with the largest debt positions was
R$625 million. Considering the guarantees deposited by
the critical participants, the highest NFR value encountered
was R$7 million or 5% of the amount available in additional
safeguards (R$132 million available in the settlement
fund). High liquidity federal public securities account
for 87% of guarantees, a factor that facilitates prompt
monetization if necessary.
In the period under consideration, the average daily notional
value of operations was R$123 billion, corresponding to a
decline of 12% compared to the previous six-month period.
The average daily gross value, representing the sum of all
total amounts originating in negotiations, including daily
and periodical adjustments in derivative contracts, closed
at R$2.6 billion, 103% more than in the previous half-year
period and 180% higher than in the same half-year period of
the previous year. The average number of daily operations
increased 9.6% compared to the previous half-year period,
and 46% compared to the same six-month period of the
previous year.
The primary risk factors in derivative contracts showed
greater volatility. Strong 8% devaluation of the United
States dollar in the period reflected growing volatility on
the international scenario. In contrast, as already mentioned,
the Ibovespa rose sharply. Increased volatility of risk factors
resulted in a reduction in notional value, generated by
increased aversion to risk and generated growth in gross
value as a result of greater variations in these factors. The
risks faced by the clearinghouse accompanied the rising
volatility witnessed in primary risk factors, but were
adequately managed.
The average netting rate was 73%, representing an average
daily savings of R$1.8 billion.
Quantity
3.3.2.6 BM&F-Exchange Clearinghouse –
BM&F-Foreign Exchange
The BM&F-Exchange system is considered systemically
important and is charged with settling interbank exchange
operations. The system’s operating entity acts as central
75/ Dollar operations may also be carried out on D and D+1.
May 2008
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BM&F – FX Clearinghouse
Net financial risk
NFR
(R$ thousand)
FR
(R$ million)
0.5
40
0.4
32
0.3
24
0.2
16
0.1
8
0.0
0
6.27
2007
7.13
7.30
8.14
8.29
9.17
10.2 10.19 11.6 11.26 12.11 12.28
Net financial risk
Financial risk
Sources: BM&F FX Clearinghouse and Bacen
BM&F – Foreign Exchange Clearinghouse
Quantity
R$ billion
7.0
320
6.2
296
5.4
272
4.6
248
3.8
224
3.0
200
Jan Feb
2007
Mar
Apr
May
Jun
Jul
Aug
Sep
Value
Oct
Nov
Quantity
Sources: BM&F FX Clearinghouse and Bacen
Dec
counterparty and implements the principle of paymentversus-payment in order to curtail principal risk, while also
requiring guarantees on the part of participants in such a way
as to protect itself from possible exchange rate alterations up
to the date of contract settlement. Settlement is done through
multilateral clearing of liabilities, generally on D+275.
The system operated continuously, with all daily settlement
cycles being opportunely concluded. Backtesting analysis
indicates that the highest FR value for the two participants
with the largest debtor positions on a single day was
R$37 million, while the NFR value was nil on all of the
days in the period in question, meaning that the individual
guarantees of the critical participants would have been
sufficient to cover their operating risk in the case of default.
Federal public securities accounted for 99% of the guarantees
deposited in the period, while the remainder consisted of
dollar deposits.
The BM&F-Foreign Exchange has additional safeguards in
the form of a non-mutualized settlement fund or, in other
words, the resources constituted by one participant may only
be used to cover that participant’s default. In the period under
analysis, the fund had an average balance of R$2.6 billion.
The system settled approximately 80% of the financial
volume of interbank exchange operations76. The average
daily value of transactions reached R$5.6 billion, averaging
278 operations per day. The netting rate was 70%, producing
an average daily liquidity savings of R$3.9 billion.
The United States dollar devalued in the period under
consideration, as exchange market demand declined. Average
turnover of the BM&F-Exchange was 3.1% less than in the
previous half-year period. Nonetheless, increased volatility
impacted the expanding financial risk of the clearinghouse.
This situation was adequately dealt with and resulted in a
nil financial risk during the period.
3.4 Conclusion
The Central Bank of Brazil is charged with ensuring the
security and efficiency of the Brazilian payments system.
In this role, it oversees all clearing and settlement systems,
76/ Exchange contracts can be settled directly between the parties and, consequently, outside the BM&F framework. In this situation, settlement of the national
currency leg is processed through the STR.
108 |
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May 2008
particularly those classified as systemically important due
to their importance in terms of financial stability.
In the second half of 2007, all clearing and settlement
systems operated without interruption and with no
significant delays, while all daily settlement cycles were
opportunely concluded.
In the STR framework, available liquidity made it possible
to dilute and anticipate payments over the course of the day,
as evident in the fact that the major share was settled almost
immediately after receiving the corresponding order. Some
institutions showed a greater need for liquidity, without
generating any significant impacts on the system as a whole.
In the Sitraf framework, most fund transfer orders were
settled promptly, without formation of any important queues.
In the period, none of the retail payments systems showed
alterations that would justify re-evaluation of their
importance from the point of view of systemic risk.
In the context of stock and security, derivative and foreigncurrency settlement systems, the IPO of Bovespa and BM&F
has been closely monitored by the Central Bank of Brazil,
with particular attention on the possible effects of this
process on risk management and the governance structure
of the corresponding settlement systems.
Backtesting results reveal that risk management in the
various clearinghouses that act as central counterparties has
been adequate to guarantee settlement of their operations,
despite the increase in risks consequent upon greater
international market volatility. These results demonstrate that
the mechanisms used to manage and contain inherent risks
are adequate, and have contributed importantly to preserving
financial system stability.
May 2008
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General Overview of the Brazilian Payment System
General overview of the Brazilian Payment System – 2nd semester 2007
Payment system
Main settled
Turnover
operations
Daily average Daily average settlement rate
Turnover
3/
Type of
Netting Liquidity
savings
4/
value
Central
3/
Counterparty
Daily average
volume
Payment clearing
and settlement
systems
STR
Selic, clearing houses
440.7
-
-
-
-
0.8
2.6
-
0.9
3.7
-
RTGS
-
-
-
24.3
LDL
0.7
1.9
Yes
0.3
DNS
0.7
3.9
Yes
43.3
RTGS
17.4
218.0
Hybrid
3.1
5 947.7
DNS
4.1
6 075.0
DNS
375.8
5.0
2.6
5.6
-
1/
and other critic
payments
2/
CIP-Sitraf
TED
CIP-Siloc
DOC and "Bloqueto de
cobrança" with individual
value lower than R$5 thousand
Compe
Cheques with individual
value greater than R$250
thousand
Securities clearing
and settlement
systems
Selic
Federal government
securities
BM&FDerivatives
Commodities, Futures,
Clearing house
BM&F-Foreign
Options and Swaps
Interbank foreign
Exchange
exchange
Clearing house
Cetip
Swaps, Corporate
10.1
1.7
RTGS/
-
-
No
bonds, state and
10.1
12.9
DNS
0.5
5.5
No
municipal treasure
bills
CBLC
Stocks and corporate
bonds
BM&F-Securities Federal government
Clearing house
0.5
0.1
RTGS/
-
-
-
6.6
223.1
DNS
0.9
6.0
Yes
57.4
0.1
DNS
0.9
51.9
Yes
securities
Source: Bacen
1/ Including bilateral settlement of cheques with individual value of at least R$250 thousand and "bloquetos de cobrança" with individual value of
at least R$5 thousand.
2/ Electronic Funds Transfers on behalf of clients as well as of Financial Institutions.
3/ R$ billion.
4/ Thousand operations.
110 |
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4
Financial System Organization
4.1 Introduction
Confirming the trend that has marked recent half-year
periods, with positive growth in the major macroeconomic
variables – increased aggregate demand, driven basically by
the internal market, and expanded household consumption
and productive investments, generated by falling interest
rates, firmly controlled inflation and adequate monetary and
fiscal policies – continued economic growth in the second
half of 2007 also produced highly positive results in the
financial sector, mainly in terms of expanding credit.
This scenario was responsible for continuation of the
business strategies of institutions operating within the
National Financial System (SFN), as defined in previous
periods. Fundamentally, these strategies were targeted at
expanding operational scales as much through acquisitions
as through organic growth driven by expansion of the
networks of already existent institutions and creation of
new institutions.
Once again, the private sector credit market acted as the
major driving force underlying financial system growth,
while the outlook for expansion in terms of gross domestic
product77 is particularly bright. This is considered a natural
consequence of the performance of the economy and its
reflections on employment and income, coupled with a
gradual decline in interest rates78.
At the same time, despite the high degree of concentration
found in the past, this environment has had a healthy impact
on the economic agents involved in this sector, as is evident
in the number of institutions active in each one of its different
segments, including both retail and wholesale operations.
77/ According to data released by the Central Bank of Brazil, the volume of credit in the country increased from 32.1% to 34.7% in relation to the Gross
Domestic Product, between June and December 2007.
78/ The average rate of interest for individuals closed at the lowest level since 1994, according to Central Bank data. Average annual interest closed November
at 44.8%, dropping one percentage point compared to the previous month and 8.8 percentage points in the space of one year.
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Total amount of financial institutions
Type of Institution
2005
2006
2007
Dec
Dec
Jun
Dec
Encouraged by endogenous factors, the competitive
environment has been ensured by entry of new competitors
into the financial market, attracted by the profitability of both
foreign and domestic investments in that sector.
Banks
Multiples
138
137
135
135
81
80
78
77
8
9
9
10
Domestic
1/
without foreing participation
with foreing participation
Foreing
1/
under foreing control
Commercial
49
48
48
48
22
21
20
20
14
13
12
12
-
-
-
-
-
-
-
1
Domestic
without foreing participation
with foreing participation
Foreing
under foreing control
Foreing banks full branches
8
8
8
7
4
4
4
4
Investment
20
18
17
17
Saving banks
1
1
1
1
Development
Associations
Leasing
45
41
40
38
Consumer finance companies
50
51
51
52
Saving and loan companies and
2/
saving and loan associations
Securities brokers
Exchange brokerage companies
Securities dealers
Development agencies
Mortgage companies
Subtotal
Credit unions
Microentrepreneur credit companies
Subtotal
Consortium managers
Total
18
18
18
18
133
116
113
107
45
48
48
46
134
133
132
134
12
12
12
12
6
6
6
6
628
606
597
590
1 439
1 452
55
56
2 122
2 114
342
333
2 464
2 447
1 461 1 465
54
2 112 2 108
332
329
2 444 2 437
1/ Amount of july/2007 had been rectified, in reason of improper classification.
2/ Institutions that do not catch resources of the public.
53
4.2 Market strategies and the
quantity of SFN institutions
In the second half of 2007, the operational and organizational
strategies of financial institutions focused on consumer credit
and loans to the productive sector of the economy.
Strategies aimed at expanding operational scales prevailed
as a way of offsetting revenue losses caused by the gradual
decline in interest rates.
With respect to consumer financing, one should stress the
importance of payroll-deducted loans79, as strong competition
in this segment resulted in various acquisitions, such as the
purchase of Banco BMC S.A. by Banco Bradesco S.A.
Strong competition among the institutions involved in this
market, accompanied by the natural process of shifts among
the different positions in the rankings of these institutions,
tended to impact the rates charged in this modality of
operations. Though now nearing consolidation in the public
sector, the private sector system of payroll-deducted loans,
which now holds a relatively small share of the market, is
expected to expand sharply over the medium-term.
With respect to consumer financing, it is important to stress
that, in the period under consideration, real estate credit
operations80 expanded sharply, particularly in the housing
segment, together with loans for both new and used vehicles.
Growth in these operations was driven by rising income,
declining interest and longer amortization periods. In these
retail segments, performance of the different institutions
resulted from the strategies adopted for this sector. A good
example was the acquisition of Banco Cacique S.A. by
Banco Société Générale Brasil S.A., which had decided to
focus its operations on the used vehicle market.
At the same time, one should mention the dispute among
retail banks for the right to manage state and municipal
payrolls, not only in light of the volume of deposits involved,
79/ Central Bank data indicate that the modality of payroll-deducted loans accounted for 57.3% of total personal loans in December 2007.
80/ Housing credit operations expanded approximately 1122% between June and December 2007, according to data released by the Central Bank of Brazil.
112 |
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May 2008
but also the possibility of placing other financial products,
including payroll-deducted loans, financing, and others.
With regard to the different income levels of the population,
note should be taken of the fact that retail institutions began
disputing the accounts of the low income population.
Obviously, higher income clients already operated within
the financial system, and normally do not tend to shift from
one institution to another. Thus, business opportunities are
disputed more sharply for those segments of the population
virtually excluded from the banking system in the past. With
this in mind, financial institutions have designed alternative
strategies in order to incorporate these population groups
as clients.
As regards loans extended to the productive sector of the
economy, data released by the Central Bank of Brazil
indicate growth of 30.3% in credits granted to businesses
during the course of 2007. This clearly demonstrates the
very high level of demand for financing that existed within
all of the different operational modalities of the productive
sector, involving both the fixed and variable capital of
companies.
Organic movement on NFS – July to december 2007
Processes approved and published in the Official Daily
Government Newspaper
Events
BM BC BI CFI DTVM CTVM CC SAM SCM Coop.
Authorizations
1
-
-
-
4
-
-
-
1
19
Cancelations
-
-
-
1
1
1
1
2
2
8
Transfers
of control
1
-
-
-
-
-
-
-
-
-
Acquisitions
2
-
-
1
1
3
1
-
-
8
Splits
1
-
-
-
1
-
-
1
-
-
- input
1
-
-
2
1
-
-
-
-
-
- input
-
-
-
-
1
1
-
1
1
-
-
-
-
-
-
-
-
-
-
1
Changes of
business
objective
Ordinary
liquidation
process
Source: Official Daily Government Newspaper
Note - About Credit Unions (Coop.), 20 of them had changed their types,
to free admission of members credit unions, this semester.
With regard to funding inflows in the second half of 2007,
the movement that began in previous half-year periods
among small and medium scale banks seeking resources
to finance their operations through shares issued on stock
exchanges continued. In the period under consideration,
Banco Indusval S.A., Banco ABC Brasil S.A., Banco
Industrial e Comercial S.A. and Banco Panamericano S.A.
all opened their capital.
Despite market dynamics, business opportunities in most
segments and the consequent repercussions on the strategies
of institutions operating on the market, the number of SFN
institutions did not change in any significant way in the
second half of 2007. However, this does not mean that
there were no significant organic shifts in the period. The
chart showing these organic shifts in the SFN between July
and December 2007 indicates the alterations that occurred
within the system.
Registration of one institution in the segment of foreign
controlled commercial banks in the second half of 2007
reflects no more than a correction in Central Bank records
made in order to eliminate a mistake included in previous
reports. The reduction in the number of multiple banks
was offset in the final half-year period by entry of a new
institution into this segment, as a result of an alteration in
May 2008
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the business objective of the Companhia Itauleasing de
Arrendamento Mercantil, which was transformed into a
multiple bank with investment and leasing portfolios. This
institution is now known as Banco Itauleasing S.A.
One should also mention that changes in the segments of
stock and security distribution companies and stock and
security brokerage companies have followed the same
tendency that has marked recent years. These alterations have
been based on shifts in operational strategies and focus, even
reflecting the profound alterations that have taken place on
stock markets and exchanges during that period of time.
Banking participation in the main financial aggregates
of the Mandatory Chart of Accounts of the Brazilian
Financial System – June, 2007
%
Itemization
Amount Equity
Total
Deposits Credit
5/
operations
assets
1/
Banking
Government
2/
owned
Private
Domestic
13
16.9
28.9
34.6
32.6
143
83.1
71.1
65.4
67.4
78
47.2
30.2
28.7
24.0
9
17.8
18.6
18.0
18.6
48
17.7
21.5
18.6
24.5
8
0.4
0.8
0.1
0.3
156
100.0
100.0
100.0
100.0
As far as credit unions are concerned, it is important to
stress that, in the period under analysis, twenty institutions
introduced modifications into their structures, moving
from the group with restricted membership to that allowed
to freely accept members. This also reflects regulatory
alterations introduced as of 2003, with the objective of
better structuring this segment of the SFN and, in this way,
making its institutions more competitive, with a broader
range of operations.
Domestic with
foreign
3/
participation
Domestic with
foreign
4/
ownership
Foreign banks
full branches
Total
Repeating the profile that marked the first half of 2007,
participation of banking segment financial institutions in the
major financial aggregates of Accounting Plan of National
Financial System Institutions (Cosif) – net worth, total assets,
total deposits and credit operations – remained practically
unchanged. The small shift in the percentage levels of their
respective shares of total SFN Net Worth between national
private banks and national private banks subject to foreign
control has not altered the ranking of relative participation
of the different groups of institutions included in the banking
segment in the past several half-year periods. Any changes
that did take place were no more than marginal.
1/ Includes multiple, commercial bank and Caixa Econômica Federal.
2/ Includes Caixa Econômica Federal.
3/ Foreign participation equal to or greater then 10% and lower than 50%.
4/ Multiple and commercial banks with foreing control.
5/ It is not diminished by the brokerage.
Distribution of the banking system sorted by
capital origin – June, 2007
5.1%
8.3%
30.8%
50.0%
5.8%
Government owned
Domestic
Domestic with foreign participation
Domestic under foreign control
Foreign banks full branches
114 |
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May 2008
4.3 Reorganization processes,
capital structure and SFN
operational dynamics and
concentration levels
In much the same way, the capital structure of the different
groups included in the banking segment and broken down
by origin, as illustrated in the Graphs referring to June and
December 2007, showed no significant modifications in
the period.
Banking participation in the main financial aggregates
of the Mandatory Chart of Accounts of the Brazilian
Financial System – December, 2007
%
Itemization
Amount Equity
Total
Deposits Credit
5/
operations
assets
1/
Banking
Government
2/
owned
Private
Domestic
13
16.1
28.4
33.7
32.8
143
83.9
71.6
66.3
67.2
77
50.2
31.4
27.9
24.1
10
17.6
19.7
19.1
19.7
49
15.7
20.0
19.2
23.2
7
0.4
0.5
0.1
0.2
156
100.0
100.0
100.0
100.0
Domestic with
foreign
3/
participation
Domestic with
foreign
4/
ownership
Foreign banks
full branches
Total
1/ Includes multiple, commercial bank and Caixa Econômica Federal.
2/ Includes Caixa Econômica Federal.
3/ Foreign participation equal to or greater then 10% and lower than 50%.
4/ Multiple and commercial banks with foreing control.
5/ It is not diminished by the brokerage.
Distribution of the banking system sorted by
capital origin – December, 2007
4.5%
8.3%
49.4%
Government owned
Domestic
Domestic with foreign participation
Domestic under foreign control
Foreign banks full branches
Coupled with economic growth and its expansionary
impacts on credit, this environment has attracted new foreign
investments into the SFN, including, for example, Société
Générale (France) and Banco Azteca (Mexico), through
purchases of already existing institutions (in the first case)
or through constitution of new institutions (in the second
case). Though these movements did contribute to enhancing
competition within the sector, they did not alter current levels
of relative participation.
The operations cited above indicate renewed foreign capital
interest in the SFN. Not only does this confirm the degree of
the system’s financial stability, this interest also represents
an additional factor that will further enhance competition
and, with no doubt whatsoever, will contribute to raising the
productivity of these institutions with positive impacts on
cost reductions and, therefore, on the fees charged to clients.
31.4%
6.4%
In both distributions, the scenario of stability in the respective
relative participation levels can be explained by a high
degree of competitiveness in this segment, since changes
in relative positions require investments and acquisitions
of market shares among the different groups. In the recent
past, some national banks acquired market shares from
competing institutions that had foreign capital participation,
as in the case of Bradesco’s purchase of BBVA and Banco
Itaú’s acquisition of Bank Boston. However, more recently,
operations of this type have involved competitors within
the same groups or, in other words, among national banks
or among foreign institutions. This tendency has helped to
maintain stable levels of participation within each group,
both with regard to financial aggregates and capital origin.
As already stressed, concentration levels within the SFN
do not point to any significant risk to competition among
the involved institutions, even when one considers that the
degree of concentration has increased in recent years as
a result of acquisition processes. When one measures the
level of concentration of total SFN assets by the Herfindahl
Hirschman Index (IHH)81, the final result is situated within
the interval of low concentration, between 0 and 0.1, as
shown in the following graph.
Also measured by the IHH, credit operations showed
moderate concentration, just slightly above the border
between low and moderate. As already emphasized, there
81/ The IHH is utilized by national and international antitrust authorities as an accessory instrument for evaluating economic concentration levels. According
to this index, concentration levels between 0 and 0.1 are considered low; between 0.1 and 0.18, moderate; and the above 0.18, high. The IHH is a pain to
buy the sum total of the square of the participation at each financial institution in the market considered: IHH = (IF1)2 + (IF2)2 + … + (IFn)2.
May 2008
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| 115
Total assets
Evolution of Herfindahl-Hirschman Index – HHI
HHI
0.10
0.09
0.08
0.07
0.06
0.05
Jun
1995
Dec
1997
Jun
2000
Dec
2002
Jun
2005
Dec
2007
Credit Operations
IHH
0.140
0.126
0.112
0.098
0.084
0.070
Jun
1995
Dec
1997
Jun
2000
Dec
2002
Jun
2005
Dec
2007
Deposits
IHH
0.130
0.122
0.114
0.106
0.098
0.090
Jun
1995
Dec
1997
Jun
2000
Jun
2005
Dec
2002
Dec
2007
Sight deposits earmarked to microcredit
%
69.6
70
64.6
66
62
58
56.1
54
54.1
53.3
50
Dec Feb
2005 2006
116 |
Apr
Jun
Aug
Oct
Dec
Feb
2007
|
Apr
Jun
May 2008
Aug
Oct
Dec
is intense competition among institutions that offer credit
on the different financial product markets, thus ensuring an
adequate level of overall competitiveness.
Measured by the IHH, the level of concentration of the
system’s total deposits stands at slightly higher than the
lower limit of the moderate concentration interval or, in
other words, between 0.1 and 0.18. This demonstrates that
concentration also does not exist in the framework of funding
operations. Competitiveness in this area is also considered
adequate. It is worth recalling here that the measures adopted
by the Central Bank with the objective of making it easier for
clients to shift from one institution to another have created
an added incentive to competition.
The monitoring carried out by the Central Bank of Brazil
with regard to the evolution of SFN concentration levels
utilizes not only the IHH but such other indicators as the
ratios of concentration of the 4 (RC4) and 10 (RC10)
largest competitors in each financial services and products
market. In other words, the cumulative shares of financial
product and service markets held by the four and ten largest
competitors in each one of those markets, together with
the Domination Index (ID), which indicates the individual
weight of each competitor in the IHH or, in other words, its
contribution to a specific level of concentration.
In each purchase and sale operation involving SFN
institutions or, in other words, each act of concentration, the
Central Bank simulates its impact on the relevant markets
affected, measuring the levels of concentration before and
after the operation is carried out. In the same way, it evaluates
impacts on competition among institutions operating on
the relevant markets affected, so as to avoid situations of
unilateral influence or price-fixing among competitors
(exercise of market power). The indicators above are
accessory elements of analysis and are considered to be
relative, but never absolute.
4.4 Microfinance
Confirming the tendency evident in previous half-year
periods, the volume of resources originating in demand
deposits and invested in microfinance operations targeted
to consumption or productive activity remained on a
downward curve in the second half of 2007. However, the
curve represented on the graph of demand deposits targeted
to microfinancing operations demonstrates that reductions in
the volume of these operations have diminished in intensity
Microcredit – Resources earmarked from consumption
and to microentrepreneur
Itemization
Year
Month
Portfolio
Amount
Average Average
balance
of
value
(R$ thousand) contracts (R$)
term
(months)
Consumption 2004 Jan
249 047
314 288
284.38
10.92
Dec
655 987
639 885
163.57
8.47
2005 Jun
1016 909
765 736
121.83
7.55
Dec
921 102
617 754
48.23
5.03
2006 Jun
816 668
782 381
93.95
7.60
Dec
812 027
691 680
73.45
6.92
2007 Jun
898 456
760 121
120.92
8.44
Dec
941 204
721 637
79.24
7.45
7.89
Micro-
2004 Jun
72 853
92 858
837.82
entre-
Dec
133 734
40 979
646.95
3.20
2005 Jun
130 592
91 657
840.21
6.43
preneur
Dec
197 384
49 914
678.10
4.12
2006 Jun
184 144
69 431
610.45
5.66
from one half-year period to the next, with a tendency toward
stabilization over the medium-term.
The falloff in the volume of demand resources targeted to
microfinance operations earmarked to consumption and
production did not affect the growth of these portfolios. As
a matter of fact, the chart on investment of resources during
the second half of 2007 demonstrates that their respective
volumes of investment expanded in the two modalities
earmarked to microfinance operations. More specifically,
growth came to 4.8%, moving to R$941,204.40 in activities
involving the financing of consumption, and 14.4%, to
R$304,047.10, in operations targeted to microentrepreneurs.
The increase in the volume lent can be explained partially by
growth in the number of contracts formalized in that period
of time, which evolved to 721,637 and 95,921, respectively,
with average values of R$79.24 and R$997.90.
Dec
210 813
72 016
929.53
4.03
2007 Jun
265 652
78 035
862.25
5.00
Dec
304 047
95 921
997.90
5.31
4.4.1 Credit unions
Amount
In the second half of 2007, the segment of credit unions
continued expanding, both in terms of the number of
institutions involved as a result of reorganization processes,
and the volume of operations.
Credit unions
1 500
1 400
1 300
1 200
1 100
1 000
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Jun Dec
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2007
As regards reorganization processes, these have been a
consequence of the incentives provided by the regulatory
review begun in 2003, with the primary end of allowing
for creation of credit unions permitted to freely accept
members, while authorizing them to expand the array
of services provided to their members. As demonstrated
in other reports, this approach had the objective of
strengthening this market segment, while providing it with
greater operational capacity.
In response to this incentive, the segment has been immersed
in a process of reorganization since that time, involving
mergers of various credit unions and their simultaneous
transformation into new types of institutions. This is
corroborated by the large number of institutions (20) that
switched to the modality allowed to freely admit members
during the period under consideration. As a result, the
number of these institutions moved up from 1,461 to
1,465 credit unions in the period extending from June to
December 2007.
Despite this evolution, the participation levels of credit
unions in the major financial aggregates of the banking
sector remained practically unchanged.
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Credit union participation in the main financial aggregates
of Mandatory Chart of Accounts of the Brazilian Financial
System1/
%
Period
Amount
Equity
Total
Deposits
Credit
assets
operations
1997 Dec
1 120
1.6
0.4
0.5
0.7
1998 Dec
1 198
1.6
0.5
0.6
0.9
1999 Dec
1 253
1.8
0.7
0.8
1.1
2000 Dec
1 311
2.0
0.8
1.0
1.2
2001 Dec
1 379
2.0
0.9
1.3
1.6
2002 Dec
1 430
2.2
1.0
1.5
1.8
2003 Dec
1 454
2.2
1.3
1.8
2.1
2004 Dec
1 436
2.6
1.4
1.4
2.3
2005 Dec
1 439
2.9
1.5
1.4
2.3
2006 Dec
1 452
2.6
1.5
1.4
2.3
2007 Jun
1 461
2.6
1.5
1.5
2.3
2007 Dec
1 465
2.6
1.5
1.4
2.4
1/ Includes multiple banks, commercial banks, Caixa Econômica Federal
and credit union.
Targeting of non-earmarked resources for credit operations
R$ billions
Segments
2004
2005
Dec
Dec
Dec
35
39
43
40
42
673
846
1,009
1,095
1,268
235
331
432
438
534
59
57
54
54
56
11.7
14.6
18.4
20.8
22.9
6.9
8.3
10.0
11.3
12.9
NFS (%)
2006
2006
Jun
Dec
Non-earmarked
1/
resources
2/
Loans net
Credit Unions(%)
Non-earmarked
1/
resources
2/
Loans net
1/ Considered deposits plus working capital.
2/ On-lending excluded, this occurs because these operations possess defined
source of funding of resources.
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On the other hand, the volume of nonearmarked resources
invested in credit operations by the institutions belonging
to this segment expanded sharply.
5
National Financial System regulation
5.1 Required Base Capital (PRE)
Based on the recommendations put forward in the document
“International Convergence on Capital Measurement and
Capital Standards”, known as “Basel II”, the National
Monetary Council (CMN) issued Resolution n. 3,490,
dated August 29, 2007, for the purpose of improving the
regulatory structure of the capital to be maintained by
financial institutions and other institutions authorized to
operate by the Central Bank of Brazil. Previously termed
Required Net Worth (PLE), this capital requirement is now
designated Required Base Capital (PRE) and consists of the
following components:
• that referring to exposures weighted by the risk weighting
factor attributed to such exposures (PEPR);
• that referring to the risk of exposures in gold, foreign currency
and operations subject to exchange variations (PCAM);
• that referring to the risk of operations subject to exchange
rate variations and classified in the trading book (PJUR);
• that referring to the risk of operations subject to commodity
price variations (PCOM);
• that referring to the risk of operations subject to variations
in stock prices and classified in the trading book (PACS);
• that referring to operational risk (POPR).
Introduction of PCOM and PACS concludes implementation
of “Amendment 1996” to the 1988 Basel Accord in Brazil,
together with the other components of capital requirements
for coverage of market risk. Calculation of PRE is done in a
consolidated manner, taking due account of the component
parts of financial conglomerates and their consolidated
economic-financial statements, including those referring to
offices abroad. Small-scale cooperatives that do not have
exchange exposure are permitted to calculate PRE based
solely on PEPR and POPR.
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Resolution n. 3,490/2007 authorizes the Central Bank of
Brazil to require that a specific institution reduce the degree
of risk of its exposures and increase the value of its PRE.
July 1, 2008 is defined as the date for such provisions to go
into effect and the Central Bank of Brazil is given the task
of defining the procedures and parameters to be used in
calculating the shares of PRE.
In the case of PEPR, the procedures and parameters were
set down by Circular n. 3,360, dated September 12, 2007,
which incorporates the Simplified Standardized Approach
found in Basel II into the Brazilian capital structure. Criteria
are defined to identify and quantify exposures, based on
the FPR to be applied to each one of them according to
the risk of the respective counterpart and the treatment
given to possible risk mitigation through the permitted
instruments. The volume of the products of the exposures
by the respective FPR (0%, 20%, 35%, 50%, 75%, 100%
and 300%) provides the EPR, which is multiplied by the F
factor, set at 0.11 (eleven one hundredths), in order to obtain
the component PEPR.
Differentiated values for the F factor were defined for credit
unions, varying between 0.13 (thirteen one hundredths) and
0.17 (seventeen one hundredths), depending on the size of
the institution, whether it is or is not related to a central
cooperative and utilization of the right not to calculate
components referring to market risk. The F factor for
development agencies was reduced from 0.30 (thirty one
hundredths) to 0.11 (eleven one hundredths), which is the
same used for other financial institutions.
Among the innovations introduced by Circular n. 3,360/2007,
with respect to the previous system of calculating capital to
be allocated, mention should be made of the following:
• application of requirements to exposures related to
credit commitments that can not be unilaterally and
unconditionally canceled by the institution, the value
of which is calculated through application of the Credit
Conversion Factor (CCF) to the value of the commitment
assumed, deducting possible amounts already converted
into credit operations. The CCF is 20% (twenty percent)
for commitments with terms of less than one year and
50% (fifty percent) for all others;
• application of the 0% (zero percent) FPR to exposures to
multilateral organizations and Multilateral Development
Agencies listed in Basel II, including guarantees provided
and operations that have securities issued by them as their
asset target;
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• application of the 20% (twenty percent) FPR to interbank
operations in national currency maturing in up to
three months;
• introduction of the 35% (thirty five percent) FPR for
financing residential real estate acquisitions and financing
guaranteed by residential real estate mortgages, with a
contracted value of less than 50% (fifty percent) of the
guarantee, on the date on which the credit is granted. The
certificates of real estate receivables with backing in these
financing operations receive the same FPR;
• application of the 50% (fifty percent) FPR for financing
of residential real estate acquisitions and financing
guaranteed by residential real estate mortgages, with
contracted value between 50% (fifty percent) and 80%
(eighty percent) of the guarantee, on the date on which
the credit is granted. The same FPR is applied to the
certificates of real estate receivables with backing in these
financing operations;
• introduction of the 75% (seventy five percent) FPR for
exposures related to retail operations, defined as those
that cumulatively meet the established requirements and
the counterparty, granularity, operation value and specific
destination;
• application of the 100% (one hundred percent) FPR to
exposures related to investment fund quotas, permitting
application of an FPR equivalent to the weighted average
of the FPR applicable to operations included in the fund
portfolio, in those cases in which they can be identified;
• recognition of risk mitigating instruments, with the
effect of attributing the instrument’s FPR to the share of
exposure covered.
The procedures for calculating the share of PRE for
market risk in operations with exposure to variations in
preset interest rates were defined by Circular n. 3,361,
dated September 12, 2007, based on Value-at-Risk – VaR
methodology, in which the parameters referring to volatilities
and correlations are updated daily on the basis of market
prices. This circular consolidates regulations on the subject
preserving and improving the methodology already adopted
and incorporating greater sensitivity to risk. The following
innovations deserve highlighting:
• restriction on the scope of application to operations subject
to interest rate variations classified in the trading book;
• segmentation of long-term operations into specific
vertices as a consequence of the tendency to lengthen the
terms of operations;
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• adoption of volatility families (short, medium and
long-term maximum volatility) instead of the maximum
volatility of all vertices.
The calculation procedures for the shares of PRE targeted
to coverage of market risk in exposures subject to exchange
coupon variation (PJUR[2]), price index coupons (PJUR[3]) and
interest-rate coupons (PJUR[4]) are defined respectively by
Circulars n. 3,362, 3,363 and n. 3,364, all dated September
12, 2008. Calculation of these components is based on
the Maturity Ladder, foreseen in Basel II for standardized
models. This methodology considers the differences between
vertical and horizontal mismatches over the maturity terms,
segmented by risk factor. It also considers consolidated
differences among maturity groupings, denominated
“maturity zones”.
In the case of PJUR[2], the variations of US dollar, euro,
Swiss franc, and pound sterling coupons are considered
separately, provided they are greater than 5% of total
exposures. The requirement for other foreign currencies
may be calculated jointly. For the component P JUR[3],
exposures subject to variations in the coupons of the Broad
National Consumer Price Index (IPCA) and General Price
Index – Market (IGP-M) must be considered separately,
provided they be greater than 5% of total exposures in
price index coupons. The requirement of exposures subject
to variations of other price index coupon rates may be
calculated jointly. With respect to PJUR[4], exposures subject
to variations in the Reference Rate (TR), Long-Term
Interest Rate (TJLP) and Basic Financing Rate (TBF) must
be considered separately, provided they are greater than
5% of the total of these exposures. Other exposures may
be dealt with jointly.
Circular n. 3,368, dated September 12, 2007, regulates
procedures for calculating the share of capital requirements
applicable to exposures in commodities (PCOM), which did not
exist in the past. Its scope includes both operations classified
in the trading book and those not classified therein, excluding
exposures in commodities from the calculation of PEPR.
PCOM is calculated according to the standard simplified
methodology of Basel II, which deals with all commodities
as having the same spot market risk. The value of this
component is calculated in two stages. In the first, which
covers the risk of spot market commodity price variations,
a factor of 0.15 (fifteen one hundredths) is applied to the
absolute value of net exposure in each type of commodity.
The second stage of the calculation refers to the other
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market risks of operations with commodities, applying a
factor of 0.03 (three one hundredths) to gross exposure
(sum total of the absolute values in real of each long and
short position).
The procedures for calculating PACS are regulated in Circular
n. 3,366, dated September 12, 2007, encompassing exposures
in stocks included in the trading book. Exposures in stocks
not classified in the trading book are considered in the
calculation of PEPR.
The calculation methodology of PACS results in the sum total
of two amounts, one related to the specific risk and the other
to general risk. The amount related to specific risk is obtained
through application of the factor of 8% (eight percent) to
the sum total of the absolute values of net exposures of
each issuer. In its turn, the amount referring to general risk
is obtained through multiplication of a factor equal to 8%
(eight percent), as recommended in Basel II, but which can
be reduced to 4% (four percent) in the case of diversified
portfolios, to the absolute value of the sum total of the net
exposures in stocks of each issuer.
Circular n. 3,367, dated September 12, 2007, consolidates
regulations dealing with the treatment of exchange risk and
introduces improvements targeted to the existent risk of
convertibility in operations carried out abroad. In calculating
the volume of exchange exposure, three components are
considered, the sum total of which is multiplied by the F”
factor, currently set at 1.00 (one hundred hundredths), in order
to obtain the capital requirement for that risk determinant.
In order to calculate the first component of exchange
exposure, the methodology known by the term “gross
aggregate position” is utilized and consists of the consolidated
sum total of the absolute values of net exposures in gold
and in each foreign currency. Positions in United States
dollars, euro, Swiss francs, yen, pound sterling and gold
are considered jointly, as if they were a single currency.
The second component of exchange exposure is obtained
through application of the factor H, set at 0.70 (seventy one
hundredths) to the volume of the opposite positions in the
currencies specified above, as recognition of an imperfect
correlation between them. The third component is associated
to recognition that, though offsetting between positions in
the country and abroad may be adequate to calculate the
consolidated risk of the group, it is necessary to observe
that significant intragroup risks and imbalances may exist
that are not perceived in the first component. Following the
recommendations of Basel II, exposures that have been offset
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among institutions of a single conglomerate in the country
and abroad must continue receiving specific treatment.
The provisions of Circular n. 3,367/2007 went into
effect when they were issued. Among the improvements
introduced, the following deserve mention:
• following market practice, calculation of exposures at the
sale price of the foreign currencies;
• permission for the institutions themselves to determine
the currencies to be included in the long exposure
associated to the short position consequent upon foreign
participation, provided that they be subject to specific
conditions that avoid utilization of this prerogative as an
incentive to adopt speculative exchange market strategies;
• consideration of the value of short operations in foreign
currency, corresponding to hedge of participations in
investments abroad, as protection of the cited long
exposure in foreign currency, including fiscal effects.
5.2 Measuring the risk of
operations not classified in
the Trading Book (Banking
Book)
Though Basel II does not establish a specific methodology
for calculating and allocating capital related to existent
market risk in positions not classified in the trading book,
the document does recognize the need for capital injections
for this purpose. Subject to evaluation on the part of the
regulatory authority, these are to be calculated according to
the internal methodology of each institution based on some
minimum risk measuring criteria.
Circular n. 3,365, dated September 12, 2007, introduces
Basel II recommendations, defining the minimum criteria
for measuring interest rate risk in operations not classified
in the trading book. Internal systems must reflect the nature
of the operations carried out, the complexity of the products
and the dimensions of the risk exposure of the institution.
They must include all operations sensitive to variations in
interest rates; utilize risk measurement techniques and widely
accepted financial concepts; consider data related to rates,
maturities, prices, optionalities and adequately specified other
information; defined adequate premises for transforming
positions into cash flows; measure sensitivity to changes
in the temporal structure of interest rates, among different
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rate structures, and in the premises; be integrated into daily
risk management practices; allow for simulation of extreme
market conditions (stress tests); and estimate the volume of
PR compatible with the identified risks.
5.3 Limit on exchange exposure
As a result of the process of improvement in established
rules, a system was adopted that deals with each question
in a specific rule in order to ensure uniformity and facilitate
reference. Thus, the limit on exchange exposure previously
dealt with together with the rules for calculating capital
requirements is now disciplined by Resolution n. 3,488,
dated August 29, 2007, which maintained the limit for
exposure in gold, foreign currency and operations subject
to exchange variations at 30% (thirty percent).
5.4 Ombudsman
In order to improve the regulations that discipline relations
among financial system institutions and society, the CMN
issued Resolution n. 3,477, dated July 26, 2007, establishing
the obligation of constituting the office of ombudsman as
an organizational component of financial institutions and
all other institutions authorized to operate by the Central
Bank of Brazil. Identical rules were applied to group buyer
management companies by Circular n. 3,359, dated August
23, 2007.
The activities of the ombudsman must be marked by
transparency, independence, impartiality and an absence
of bias, in order to ensure strict observance of legal and
regulatory rules related to consumer rights and to act as a
communications channel between these institutions and their
clients and users of financial products and services, including
mediation of conflicts. The obligation of elaborating halfyearly reports by the director responsible for the office of the
ombudsman was also instituted. These reports are to focus
on activities up to June 30 and December 31 of each year
and whenever relative events occur.
These reports are to be sent to the Central Bank of Brazil
within a period of up to 60 days as of the base date or the
relevant event mentioned above, together with position
statements by the external auditors, internal auditors and
approval by the audit committee, when such an organization
exists. Circular n. 3,370, dated October 23, 2007, defined
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the minimum information related to the activities of the
ombudsman that must be included in the reports to be sent
to the Central Bank by the director responsible for that
organizational component.
Resolution n. 3,489, dated August 29, 2007, introduced
new provisions aimed at preserving a situation of equality
in terms of the demands made of the institutions covered by
this rule. Among the major alterations, the following should
be mentioned:
• extension of the right of utilization of services rendered and
advisory services provided by professional associations,
based on agreements, to real estate credit companies,
exchange brokerage companies, leasing companies
that are not part of conglomerates and savings and
loan associations;
• inclusion of the possibility of stock and security brokerage
companies and stock and security distribution companies
that are not part of conglomerates making use of services
rendered and advisory services provided by professional
associations to which they are affiliated, on the basis of
agreements, together with the already mentioned right to
utilize the same services provided by stock exchanges
and commodities and futures exchanges;
• exclusion of the requirement for constituting the office
of ombudsman in the case of central credit cooperatives,
since their clients are composed only of single affiliated
cooperatives which, therefore, have membership distinct
from that to which the office of ombudsman is designed.
5.5 Accessibility
As a consequence of discussions with the Federal Prosecutor’s
Office and, particularly, the section of that office that deals
with Citizens’ Rights, Circular n. 3,369, dated October
19, 2007, determines that financial institutions and other
institutions authorized to operate by the Central Bank of Brazil
must obtain a technical report signed by a legally qualified
professional attesting that the facilities of its branches and
bank service outposts meet the accessibility requirements
set down in Decree n. 5,296, dated December 2, 2004.
Corroboration may also be done on the basis of documents
related to certification as specified in article 13, 1 and 2 of
the aforementioned Decree, which deal with accessibility
conditions and the occupation and operating license issued
by the proper entities. With regard to the branches and bank
service outposts already in operation when this rule goes into
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effect, a period of 360 (three hundred and sixty) days was
allowed for them to obtain the necessary documents.
5.6 Bank fees
In the framework of discussions held in various circles,
including the workgroup created by the Consumer
Defense Committee of the Chamber of Deputies, with
the participation of members of that Committee and the
Central Bank of Brazil, Ministry of Finance, Ministry of
Justice and Federal Prosecutor’s Office, and, with the aim
of enhancing the transparency of the contractual relations
between financial institutions and their clients and users,
Resolution n. 3,516, dated December 6, 2007, revoked article
2 of Resolution n. 3,401, dated November 6, 2006, which
had defined the maximum value in real of the fees that were
permitted as a consequence of anticipated settlement of credit
or lease contracts, since innumerable suits had been filed in
the courts regarding this question.
With regard to contracts formalized as of the date on which
it went into effect, the Resolution prohibited charging fees
for anticipated settlement of credit operations and leasing
operations contracted with individual persons and micro
and small scale businesses, as defined in Law n. 123, dated
December 14, 2006, and set down criteria for calculating
the current value of payments for purposes of anticipated
amortization or settlement of such contracts.
Resolution n. 3,517, dated December 6, 2007, introduced
a requirement that makes it obligatory for institutions to
provide the Total Effective Cost (CET) of the operation to the
borrower before formalizing the operation, when contracting
credit and leasing operations with individuals. The CET is
to be expressed in the form of an annual percentage. The
purpose of this measure is to facilitate comparisons among
the credit opportunities available on the market, thus aiding
in improving relations between financial institutions and
their clients and users of financial services and products.
Resolution n. 3, 518, dated December 6, 2007, introduced
new measures regarding the charging of fees by financial
institutions, determining, among other measures, basic
conditions for charging fees, expansion of the list of services
for which charging is not permitted and standardization
of the nomenclature of the fees that refer to what are
considered priority services for individual persons subject
to fees. This will make it possible for the consumer public
to draw comparisons, while stimulating competition among
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institutions and improving pricing of the amounts charged for
services. These measures are to go into effect as of April 30,
2008, observing that the current rules set down in Resolution
n. 2,303, dated July 25, 1996, with the alterations given by
Resolution n. 2,747, dated June 28, 2000, will remain in
effect until April 29, 2008.
Circular n. 3,371, dated December 6, 2007, completed the
measures adopted by the CMN, defining priority services as
related to deposit accounts, fund transfers, credit operations
and reference documents, determining standardization of
names and delivery channels, identification by acronyms
and descriptions of the respective generating facts, together
with the component items and number of events of the
standardized priority services package that must necessarily
be offered to individual clients.
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Appendix
Banco Central do Brasil Management
Units involved in the elaboration of the Financial Stability Report
Acronyms
May 2008
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Banco Central do Brasil Management*
Board
Henrique de Campos Meirelles
Governor
Alexandre Antonio Tombini
Deputy Governor
Alvir Alberto Hoffmann
Deputy Governor
Anthero de Moraes Meirelles
Deputy Governor
Antonio Gustavo Matos do Vale
Deputy Governor
Maria Celina Berardinelli Arraes
Deputy Governor
Mario Torós
Deputy Governor
Mário Magalhães Carvalho Mesquita
Deputy Governor
* Position on 12/31/2007
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Advisors to the Board involved in the
elaboration of the Financial Stability Report
Clarence Joseph Hillerman Junior
Financial System Organization and Regulation (Dinor)
Flávio Pinheiro de Melo
Monetary Policy (Dipom)
Katherine Hennings
Economic Policy (Dipec)
Sidnei Corrêa Marques
Banking Supervision (Difis)
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Units involved in the elaboration of the
Heads of Departments
Altamir Lopes
Department of Economics (Depec)
Amaro Luiz de Oliveira Gomes
Financial System Regulation Department (Denor)
Carlos Hamilton Vasconcelos Araujo
Research Department (Depep)
Cornélio Farias Pimentel
Department of Financial System Monitoring and Information
Management (Desig)
João Henrique de Paula Freitas Simão
Open Market Operations Department (Demab)
José Antonio Marciano
Department of Banking Operations and Payments System
(Deban)
Luiz Edson Feltrim
Financial System Organization Department (Deorf)
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Acronyms
AP
APR
ARM
BaFin
BM&F
BNDES
BoC
BoJ
Bovespa
b.p.
CBLC
CCF
CCP
CDS
CET
Cetip
CIP
CMN
CNAE
CNPJ
Compe
Copom
Cosif
CPF
CPMF
CSLL
CVM
DAX
DNS
DOC
DPMFi
Embi+ Brazil
Embi Global
FCVS
FDIC
Fed
FGC
FHA
FIDC
FIFs
134 |
Permanent Assets
Assets Weighted by Risk
Adjustable-Rate Mortgages
German Banking Regulator
Commodities and Futures Exchange
National Bank of Economic and Social Development
Bank of China
Bank of Japan
São Paulo Stock Exchange
Basis points
Brazilian Clearing and Depository Corporation
Credit Conversion Factor
Central Counterparty
Credit Default Swap
Total Effective Cost
Clearinghouse for Custody and Settlement
Interbank Payment Clearinghouse
National Monetary Council
National Classification of Economic Activity
Corporate National Income Tax Registration
Centralizer Clearance for Checks and Other Documents
Monetary Policy Committee
Accounting Plan of National Financial System Institutions
Person's income tax registration
Provisional Contribution on Financial Operations
Social Contribution on Net Income
Securities and Exchange Commission
Deutscher Aktienindex
Deferred net settlement
Credit Document
Internal Federal Public Security Debt
Emerging Market Bond Index Plus Brazil
Emerging Market Bond Index Plus Global
SFH Wage Variation Compensation Fund
Federal Deposit Insurance Corporation
Federal Reserve
Credit Guaranty Fund
Federal Housing Administration
Credit Receivable Funds
Financial Investiment Funds
|
May 2008
FIP
FOMC
FR
FSA
FTSE
GDP
Ibovespa
ID
IGP-DI
IGP-M
IHH
IMF
IPCA
IPO
KfW
LFT
LTCM
LTN
NFR
NPL
NTN-B
PAF
PBoC
PDCF
PLA
PLE
PR
PRA
PRE
PRimob
RCO_A
ROA
RSPL
RTGS
S&P
SBPE
SCM
SCR
Selic
SFN
Siloc
Sisbacen
Sitraf
SPB
STN
STR
TAF
TBF
TEC
TED
Stock Participation Investment Funds
Federal Open Market Committee
Financial Risk
Financial Services Agency
Financial Times Securities Exchange Index
Gross Domestic Product
São Paulo Stock Exchange Index
Domination Index
General Price Index
General Price Index – Market
Herfindahl Hirschman Index
International Monetary Fund
Broad National Consumer Price Index
Initial Public Offering
Kreditanstalt für Wiederaufbau
Treasury Financing Bill
Long-Term Capital Management
National Treasury Bills
Net Financial Risk
Non Performance Loans
National Treasury Notes – Series B
Annual Borrowing Plan
People's Bank of China
Primary Dealers Credit Facility
Adjusted Net Worth
Required Net Worth
Base Capital
Adjusted Base Capital
Required Base Capital
Adjusted Base Capital for calculating the fixed asset ratio
Adjusted Operating Revenues
Average Returns on Assets
Returns on Net Worth
Real Time Gross Settlement System
Standard and Poor's
Brazilian System of Savings and Loans
Microentrepreneur Credit Companies
Credit Information System
Special System of Settlement and Custody
National Financial System
Deferred Settlement System for Inter-bank Credit Orders
Banco Central Information System
Fund Transfer System
Brazilian Payments System
National Treasury Secretariat
Reserve Transfer System
Term Auction Facility
Basic Financing Rate
Special Credit Transfers
Electronic Funds Transfers
May 2008
|
| 135
TJLP
TR
TSLD
TVMs
VaR
VIX
136 |
Long-Term Interest Rate
Reference Rate
Term Securities Lending Facility
Stocks and Securities
Value-at-Risk
Volatility Index
|
May 2008

Financial Stability Report – May 2008

Transcription

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