A 2008 report by the International Monetary Fund (IMF) finds the prudential framework governing the financial system in Brazil to be sound, although supervision needs to be further strengthened to monitor risk-taking by banks. However, the report also confirms that Brazil is taking steps in this direction. The findings of a 1998 self-assessment by the Central Bank of Brazil are mentioned in a 1999 report published by the Institute of Brazilian Business & Public Management Issues (IBI) at the George Washington University. It concluded that 11 of the 30 Basel Core Principles (BCPs) for Effective Banking Supervision (considering that Principle 1 is divided into 6 sub principles) were being fully implemented by Brazil, twelve were being partially implemented and one had not been implemented. Principles that were rated partially implemented were, however, noted as being on their way to full implementation with a number of new regulations addressing the weaknesses found in the assessment. The self-assessment did not assign explicit compliance levels to the other six assessed principles. However, there is little subsequent information publicly available validating these compliance levels. There is also insufficient information publicly available as to Brazil's compliance with the BCPs not rated in the 1999 IBI report. The Central Bank of Brazil, nevertheless, states in a 2008 report that it implemented the 1988 Basel Capital Accord in 1994 and is gradually implementing Basel II in a phased manner starting 2004. A 2008 U.S. Department of Commerce report adds that supervision has been strengthened in recent years with the establishment of tighter capital adequacy rules, higher reserve requirements, loan-classification and provisioning rules, and more stringent internal control rules and tougher bank audits.

General Overview

The 2008 Public Information Notice (PIN) published for Brazil by the International Monetary Fund (IMF) notes that the prudential framework for the financial sector is "generally sound," although it needs to be reviewed and strengthened further to limit supervised entities' excessive risk taking practices associated with rapid credit growth especially to the private and consumer sectors. Non-performing loans were low on average, although liquidity oversight and lender-of-last-resort facilities need to be improved, especially in light of the ongoing global financial crisis. The IMF, however, acknowledges that Brazil is taking measures to strengthen all the above mentioned areas of supervision. As the 2008 Country Commercial Guide (CCG) of the U.S. Department of Commerce (DoC) adds, the Central Bank of Brazil (BCB) has strengthened bank supervision in recent years after a spate of bank failures and consolidations and tightened capital adequacy rules that better reflect risk. It has also established high mandatory reserve requirements for supervised banks. Loan classification and provisioning requirements as well as high mandatory reserve requirements have also been stipulated. Further, the BCB has implemented more stringent internal control requirements as well as tough bank audits for supervised banks. These requirements apply equally to state-owned and private banks. The IMF recommends a Financial Sector Assessment Program (FSAP) Update to review the adequacy of financial sector oversight. A 2005 PIN by the IMF also attested to the progress made by Brazil in strengthening financial sector supervision and observed that banks were "well capitalized and profitable and capital adequacy ratios [were] high by international standards." The banks were, however, observed as being overly exposed to the public sector. The IMF, therefore, recommended steps to promote financial intermediation such as gradually reducing directed lending requirements and the distortionary taxes on intermediation.

According to a 1999 report published by the Institute of Brazilian Business & Public Management Issues (IBI) at the George Washington University, the findings of a 1998 self-assessment by the Central Bank of Brazil concluded that eleven of the Basel Core Principles (BCPs) for Effective Banking Supervision were being fully implemented by Brazil, twelve were being partially implemented and one had not been implemented. It did not assign explicit compliance levels to the other six assessed principles. However, there is little subsequent information validating these compliance levels. There is also scant updated information publicly available as to Brazil's compliance with the BCPs not mentioned in the report. As for the preconditions of effective banking supervision, the self-assessment noted that the country was fully compliant on this front. The only shortcoming pertained to the independence of the supervisor, the BCB. The remedy to this problem, observed the self-assessment, was a Constitutional amendment that would be a long-drawn out process. Regarding the major categories in which the principles are grouped, the self-assessment noted that the licensing principles were mostly enforced, except that new powers given to the supervisory staff needed to be complemented by effective training in the exercise of those powers. Prudential regulations, to be considered fully implemented, needed to cover market and operational risks. Principles related to supervisory inspections were well implemented and Brazil was taking various steps to make progress in areas that were deemed weak. Accounting and financial reporting were robust; and supervision was consolidated and comprised of cross-border supervision and home-host supervisory agreements. However, some fine-tuning and training was still required to strengthen supervision.

The Supervision Manual published by the BCB in 2008 and available on its website affirms that the BCB is a self-governed institution under the Ministry of Finance (MdF) and it was created in 1964 by Law No. 4.595 of the same year. The Manual spells out the BCB's mission as follows: "ensuring stability of currency purchasing power and a sound national financial system." Further, its supervisory duties include receiving mandatory and voluntary payments from financial institutions; forwarding rediscount and loan operations to financial institutions; monitoring financial institutions and authorizing their operation; establishing pre-requisites for the exercise of any director's position in financial institutions; monitoring the activities of entities in capital and financial markets; and controlling the capital flow within the country. In regulating the operations of financial entities, the BCB promotes the following objectives: (1) assessing risks assumed by entities and management of regulatory and prudential limits; (2) monitoring compliance with laws and regulations and rules of its jurisdiction; (3) fostering transparency and disclosure of information by entities to promote good corporate governance and equality among market participants; (4) preventing the use of financial system for money laundering and financing of terrorism; and (5) responding to complaints and requests of information.

The National Monetary Council (CMN) is the highest deliberative and regulatory body with regard to the National Financial System (SFN), states the BCB Supervision Manual. It is in charge of establishing rules and policies applicable to the SFN. The CMN was also established in 1964 by Law No. 4.595 of the same year. The BCB complies with as well as supervises compliance with rules promulgated by the CMN. In implementing CMN resolutions, the BCB issues circulars, circular-letters, and communiqués, the latter two dealing with operating aspects of resolutions and circulars.

A 2008 KPMG report observes that "Brazil's banking industry has become accustomed to a high level of government supervision. The extent of such regulation often comes as a surprise to foreigners" (p. 137). Supervision ranges from routine banking operational matters relating to limits on capital, credit, foreign currency, and fixed assets to more specific government directives on operational and accounting matters relating to lending rates on different loans, loan targets to small and medium sized companies, limits on loans to foreign entities, pricing policies on specific services, and methods to recognize revenues on certain types of transactions. As the 2008 BCB's Manual notes, Brazil implemented the 1988 Basel Capital Accord in 1994 by Resolution No. 2.009, and thereby introduced minimum capital requirements for each financial institution in accordance with their risk in asset operation, in line with the Basel Accord. As the 2007 Financial Stability Report published by the BCB adds, Resolutions No. 2.837 of 2001 and No. 3.444 of 2007 introduced further improvements in the provisions implementing the Basel Committee Recommendations. Basel II, "shall be gradually implemented in Brazil," states the Manual. The first step was taken in 2004 with the publication of Communiqué 12.746. The Communiqué has established a schedule for Basel II implementation with outlines of main phases to establish the new capital structure, the Manual attests. The 2008 KPMG report adds that the June 2006 CMN Resolution No. 3.380 was issued to improve the banks' operational risk management so that the banks could align themselves with the Basel II requirements. Its implementation was phased out till the end of 2007 and required banks to create effective operational risk management programs covering their operations and internal controls and allowing their management to identify, assess, manage and mitigate all risks facing them. The Resolution also requires them to create a database of operational losses as a contingency arrangement to continue operations in an emergency. Further, the same report mentions that CMN Resolution No. 3.464 of June 2007 laid down market risk management requirements for financial institutions, again to be implemented in a phased manner through June 30, 2008. The stipulations include the market risk management director, the definition of the institution's policies, system implementation to monitor market risk, and validation of internal models of market risk. More requirements have been put in place for a staggered enforcement between 2008 and 2011 and include the validation of internal models of credit and market risk. They are expected to be important steps in full Basel II compliance by Brazilian financial institutions.

On the regional level also, Brazil is actively involved in developing its banking supervisory expertise and resources. As a presentation by the Association of Supervisors of Bank of the Americas (ASBA) Chairman and the Deputy Governor of the BCB published on the International Association of Deposit Insurers (IADI) website explains, ASBA, of which the BCB is member, has worked out a Strategic Plan in 2003 defining goals to be achieved during the period 2004-2008. They include promoting the implementation of regulatory frameworks in line with international standards; developing bank supervisory policies and practices in line with international best practices; and supporting members in developing their bank supervisory capacity, expertise, and resources to enable effective supervision. The speech by its Deputy Governor further notes that the BCB has taken consolidated steps towards developing a risk-based supervisory framework in Brazil and a suitable legal and regulatory structure to support it. Supervision is now tailored to the risk level taken by each supervised institution as determined by ongoing on-site inspections and off-site surveillance.

As of 2005, the BCB had been supervising 2,464 institutions, which include multiple or universal banks, commercial banks, savings banks, credit cooperatives, development banks, consumer finance companies, savings and loan companies, mortgage companies, development agencies, savings and loan associations, micro-entrepreneur credit company, leasing companies, exchange brokerage companies, representatives of foreign institutions, consortium managers for self-acquisition of durable consumer goods and services, special system for liquidation and custody of government bonds (SELIC), and center for the custody and financial liquidation of private issues (CETIP), per information on the BCB website. The BCB also shares supervisory responsibility with the CVM in the supervision of investment banks, commodities and futures exchanges, securities brokers and dealers, independent agents for investments, mutual investment funds, and foreign investors' portfolios. Providing statistics for the year 2007, the Financial Stability Report of the same year published by the BCB states that the banking sector plays a predominant role in the overall economy. It notes that the total balance sheet assets of the consolidated banking sector increased to 88.6 percent of the national GDP in 2007. Private sector banks as well as foreign banks have increased their participation in the consolidated banking sector, making inroads into the market share previously dominated by public sector banks. The Brazilian banking system also showed a high level of profitability on assets with returns on net worth remaining high and showing an upward trend. Overall, stress tests returned satisfactory results and national financial institutions displayed the capital and net worth to withstand extreme fluctuations in interest and exchange rates, as well as credit portfolio deterioration. As the 2008 U.S. DoC CCG adds, the financial sector is fairly concentrated, with 65 percent of the assets in the hands of the 10 largest financial institutions. A number of bank failures, mergers and acquisitions in the late 1990s have left a few large banks in the market but they have returned to profitability. Many banks are also government-owned, both federal and state. In fact, three of the largest banks in Brazil are federally owned, although they are undercapitalized and saddled with badly performing loans given out to fund social projects of the government. However, the situation is improving with the government requiring that such loans be backed by explicit government subsidies and with the banks selling back their government bonds. The growth of public banks, nevertheless, has shown a positive trend and is equivalent with private banks, with a market share of 35 percent in 2007, as compared to 33 percent in 1996. Foreign banks showed an even more impressive growth. Their profits increased 160 percent in 2007 over the previous year, as opposed to an increase of 22 percent by domestic banks.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

EN

According to a 1999 report by De Melo, a 1998 self-assessment conducted by the BCB found Brazil to have "fully implemented" this principle. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates this compliance level. The report also observed that the BCB is responsible under the law to supervise and regulate the banking system. It defines minimum prudential standards for banks and imposes penalties for non-compliance. It is also made responsible for the orderly resolution of problem banks. Further, regulations pertaining to the financial system are frequently updated by the Resolutions of the National Monetary Council and other regulation issued by the BCB Board. The report noted that with the regulation of Article 192 of the Constitution, the enforcement of which depends on complementary legislation pending with the Congress, there is a possibility of the creation of a separate supervisory authority for the banking sector independent from the BCB. However, it remains remote and unwise in the short and medium run due to lack of resources or expert capacity to man the two agencies.

1.(2) Operational independence and adequate resources.

II

The 1998 BCB self-assessment, as reported in the 1999 report by De Melo, noted that Brazil had "partially implemented" this principle. The BCB is a semi-automatic entity with its own distinct legal identity. However, it is directly under the Ministry of Finance and reports directly to the latter. The BCB is also not financially independent since its budget is subject to the Ministry's appraisal and approval. The BCB is also constrained in its budget that directly and adversely impacts its training, equipment, travel, and pay packages. Nevertheless, the report did note that the supervisory staff is selected by public examination on their technical and professional skills and expertise and hold office on secure tenure safeguarded against unjustified dismissal. These factors lend credibility to their supervisory professionalism and independence. Further, the regulation of Article 192 of the Constitution is also expected to grant further independence to the BCB. However, there are no updates to this information. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and there is also no subsequent information publicly available that validates the self-assessment's rating.

1.(3) A suitable legal framework for authorization and ongoing supervision.

EN

This principle was "fully implemented" in Brazil, per the 1998 BCB self-assessment as reported in the 1999 De Melo report, since the BCB has all the powers required under this principle. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates this compliance level.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

EN

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, rated this principle "fully implemented" in Brazil. The report stated that the CMN "issues regulations that enable the Central Bank [BCB] to execute inspection of financial institutions; apply penalties; authorize operations and issue licenses, require remedial action of problem institutions (such as capital requirements, mergers and splitting, transfer of stock control, etc.)" (p. 24). The supervised banks and financial institutions are also obliged to disclose all information requested by the BCB. However, the report recommended improvements in the process of penalties by making them speedier and more effective. Since the 1999 report addressing the 1998 self-assessment, there is little subsequent information publicly available as to Brazil's compliance with this principle.

1.(5) Legal protection for supervisors.

EN

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, rated Brazil as fully implementing this principle since "by law, Central Bank supervisors were given the right of legal assistance provided by the Central Bank" (p. 25). However, there is no recent information publicly available addressing Brazil's compliance with this principle. and the self-assessment did remark that under the new Basel methodology this principle would only be partially implemented. This is because despite legal protection, there were gaps in actual implementation. Supervisory decisions may only be contested in the federal courts. However, inferior courts and lower judges can order seizure of the supervisory staff's personal assets until a final decision is reached by the federal court resulting in considerable embarrassment for the supervisors before final acquittal. The report observed that this gap could only be filled by a restructuring of the financial system or more specific provision of protection for the staff.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

EN

Per the 1998 BCB self-assessment, as reported in the 1999 De Melo report, this principle was "fully implemented" by Brazil. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates this compliance level. According to the report supervisory information is kept strictly confidential as mandated by secrecy laws, and can only be released on a court order or by Congressional mandate. The secrecy laws, nevertheless, allow for supervisory exchange of information while maintaining confidentiality, both domestic and foreign, as also for cross-border supervision agreements.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

EN

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, rated this principle "fully implemented" in Brazil. The CMN and the BCB clearly define the permissible activities of the supervised institutions, while the term "bank" is also legally defined. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

II

The 1998 BCB self-assessment of banking supervision in Brazil, as reported in the 1999 De Melo report, rated this principle "partially implemented" and observed that "new regulation for licensing has greatly improved discretionary powers of the Central Bank as licensing authority, and in fact full compliance would apparently have been achieved with it" (p. 27). It, however, tempered this observation with the comment that the extent of its enforcement was too early to evaluate. Further, the licensing staff still needs to be trained to adequately evaluate the applicants' suitability, especially with regard to their strategic and operating plans and the transparency of their ownership structures. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

4. Authority to review and reject transfer of ownership.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, rated Brazil's compliance with this principle as "partially implemented" because of insufficient powers of the BCB to take action against a significant change in ownership if it is not accompanied by a transfer of control resulting in the deterioration of the standard required of a new bank. The assessment mentioned new regulations to remove this limitation, but stated that they are still under analysis. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

5. Authority to review major acquisitions and investments.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, rated Brazil's compliance with this principle as "partially implemented" because "in practice the capability of supervision to assess the risks arising from new acquisitions is limited" (p. 28). The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report, since "current regulation does not comprehend all market risk as prescribed by the BCBS" (p. 29). The assessment did note that improvements have been made with clearer definition of capital components, and adoption of new rules for exchange rate risks. Further, rules on interest rate risks were also in the offing. However, overall, more clarity was still required on all aspects of the definition of capital. As the 2008 U.S. DoC CCG adds, the BCB has strengthened bank supervision in recent years after a spate of bank failures and consolidations and tightened capital adequacy rules that better reflect risk. It has also established high mandatory reserve requirements for supervised banks. These requirements apply equally to state-owned and private banks. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

According to the 1999 De Melo report, the 1998 BCB self-assessment rated Brazil's compliance with this principle as "partially implemented" because the BCB "regulations and practices are coherent with the Principle and criteria, but the information provided to supervisors is still quite dispersed among different forms and systems" (p. 30), hampering effective supervision. However, various steps have been taken to remove this drawback. Consolidated Global Inspection procedures have been adopted; the supervisory staff strives to require banks to observe certain principles on credit granting and administration, such as the preparation of operational manuals, clear definition of loan approval and management policies, client exposure and limits, credit monitoring and internal control systems; and a Credit Risk Bureau has been set up to gather credit information on borrowers and help assess credit risk exposure of banks, the self-assessment noted. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report, because there are no provisions for loan classification in the regulation for provisioning and write-off, except the definition of overdue loans. However, new regulations are in the works to address this shortcoming. As the 2008 U.S. DoC CCG adds, the BCB has strengthened bank supervision in recent years after a spate of bank failures and consolidations and established loan classification and provisioning requirements as well as high mandatory reserve requirements for supervised banks. These requirements apply equally to state-owned and private banks. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

9. Prudential limits and management information system on concentration of exposure.

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report, because the use of the Credit Risk Bureau by banks is only preliminary so that they do not fully observe the exposure limits imposed by regulation. Regulations on internal control requirements have, however, been implemented introducing a culture of internal auditing and risk and policy management. Regulation defining related companies in a more comprehensive manner is also in the offing. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

10. Arm's length rule and monitoring for connected lending.

EN

According to the 1999 De Melo report, the 1998 BCB self-assessment rated Brazil's compliance with this principle as "fully implemented." However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating. The 1999 IBI report adds that "current regulation is strict, forbidding loans or advances to individuals or corporations that hold more than 10% of the institution's capital, as well as to corporations in which the bank holds more than 10% of capital" (p. 32). Exposures to clients and related parties also have strict limits.

11. Policies and procedures for country risk and transfer risk.

NC

Brazil was adjudged non-compliant with this principle by the 1998 BCB self-assessment, as reported in the 1999 De Melo report, since it does not impose capital requirements or provisions on banks on the basis of country or transfer risk. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available confirming its rating. Country exposure in the very few internationally active Brazilian banks is generally supervised in the context of internal control management issues, as this risk is not considered very significant.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

Brazil had partially implemented this principle, per the 1998 BCB self-assessment, as reported in the 1999 De Melo report, because some aspects of market risk regulation were at the time still absent and were in the process of being formulated. For instance, there were no regulations for operational risks and the BCB did not yet have adequate expertise to monitor bank information on these risk management, especially as regards stress testing and reliability of models. A later (2008) report by KPMG notes that the CMN Resolution No. 3,464 of June 2007 laid down market risk management requirements for financial institutions, to be implemented in a phased manner through June 30, 2008. The stipulations include the market risk management director, the definition of the institution's policies, system implementation to monitor market risk, and validation of internal models of market risk. More requirements have been put in place for a staggered enforcement between 2008 and 2011 and include the validation of internal models of credit and market risk. They are expected to be important steps in full Basel II compliance by Brazilian financial institutions. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

13. Comprehensive risk management processes.

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report, because all aspects of market risk had not yet been regulated at the time of the self-assessment and the BCB had not yet developed adequate capacity to monitor the risk management processes of banks. The report noted that although internal control regulations meet minimum standards to be reached by banks, they remain incomplete until comprehensive market risk regulations are enacted. The 2008 KPMG report adds that the BCB created the Credit Risk Database in 1997 to improve fraud detection and prevention so as to make supervision more effective. This database has also proved useful in monitoring credit risk of supervised entities. The institutions are required to feed into the database all consolidated credit exposures above R$5,000, including the identity of the borrower, their credit standing, amount of loan, its maturity and status. The database has undergone more upgrades in recent years to improve the accuracy of information available to the regulators and financial institutions, mentions the KPMG report. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

14. Adequate internal controls.

EN

According to the 1999 De Melo report, the 1998 BCB self-assessment rated Brazil's compliance with this principle as "fully implemented." However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating. The 1999 Puga report also mentioned that Resolution No. 2,554 of December 1998 established that financial institutions should present a program to the Central Bank for implementing internal control systems that are in accordance with the Basel Committee requirement. The 2001 IIB report mentions the same legislation and notes that it requires internal control procedures and the appointment of a compliance officer at every bank in Brazil. The regulation, per the BCB self-assessment, contains requirements on internal and external audit checks, top level reviews, ongoing assessment and updating of control systems, and specific rules on BCB approval for the nomination of the directors and senior management. As the self-assessment stated, these regulations follow the Basel recommendations and comply with most of their criteria. However, three areas still need work. One, BCB supervisory capacity has to be improved with training to adequately evaluate bank compliance, bank management needs to be educated and informed to establish a corporation-wide control culture, and information systems at banks need to be upgraded to cover all risks. As the 2008 U.S. DoC CCG adds, the BCB has strengthened bank supervision in recent years after a spate of bank failures and consolidations and implemented more stringent internal control requirements as well as tough bank audits for supervised banks.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating. A 2005 IMF report on anti-money laundering/combating the financing of terrorism (AML/CFT) further attests that "Law 9613/98 creates a generally comprehensive framework of anti-money laundering requirements for a wide range of financial institutions" (p. 6), requiring customer identification, record-keeping, and suspicious transaction reporting, to be supervised and enforced by the relevant supervisory agencies. Requirements for banks are contained in CMN Resolution No. 2025 and BCB Circular No. 2852. Further, as the 2008 Cavalheiro presentation mentions, a centralized data record system, the National Financial System Client Reference File, was created by the BCB in 2005. Financial institutions are required to keep records of their customers and their legal agents in this file for purposes of money laundering prevention and property determination of clients.

16. Effective supervisory system consisting of on-site and off-site supervision.

EN

Brazil was rated as fully implementing this principle by the 1998 BCB self-assessment, as reported in the 1999 De Melo report, since Brazilian "regulation and practice require supervisors to carry out direct and indirect supervision with a consolidated approach" (p. 38). However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating. According to the same report , the BCB supervisors have adequate expertise to conduct effective off-site and on-site supervision. The integrated off-site and on-site supervisory approach and elaborate prudential data submission requirements enable the supervisors to take a comprehensive view of the developments in the sector. However, there is little subsequent information publicly available that validates this compliance level assigned by the 1998 self-assessment.

17. Regular contact with bank management and understanding of bank's operations.

II

The 1998 BCB self-assessment gave Brazil a "partially implemented" rating for this principle according to the 1999 De Melo report, because regular meetings with senior and middle management are not standard procedure. The banks, however, are required to keep the BCB informed of any major changes in the nature of their activities or any adverse development pertaining to them. A new regulation also includes a thorough analysis of the quality of bank management to be conducted as part of the licensing process. The 1998 self-assessment's rating is ambiguous in terms of Brazil's compliance with the Basel Committee's requirements for this principle and since, there has been insufficient information publicly available that validates the self-assessment's rating.

18. Analytical reports and statistical returns on solo and consolidated basis.

EN

Brazil was rated as fully implementing this principle by the 1998 BCB self-assessment, as reported in the 1999 De Melo report, since "the Central Bank has all the powers [required in this principle] and effectively uses them to request information and enforce regulation" (p. 39). However, the self-assessment did note that the information gathering format creates overlaps as well as additional burden on the data gathering and analyzing staff. Efforts are, nevertheless, on to develop an information matrix to consolidate all data required for supervisory purposes as well as to improve the quality of information provided by the supervised entities. The self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating.

19. Independent validation of supervisory information through on-site examination or external auditors.

II

Without explicitly assigning a level of compliance to Brazil with regard to this principle, the 1998 BCB self-assessment, as reported in the 1999 De Melo report, mentioned that financial institutions are required to use independent auditors for a long time. External auditors are now required to submit to the BCB all relevant financial information based on generally accepted accounting principles, and inform the latter of all the factors interrupting the audited institution's activities, and the efficacy of their internal controls, information systems, and risk management practices. Financial institutions are, in turn, required to change their external auditors every four years and appoint a director of accounting and auditing. The 1998 self-assessment, however, felt that relationships between the BCB and the external auditors can be further improved to enhance the quality and targeting of their work. The 1999 Puga report added that Provisional Measure 1.334 of March 1996 made the audit companies or independent accounting auditors reviewing a financial institution's books responsible for any cases of irregularities found at the institution. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.

20. Ability to supervise on a consolidated basis.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, mentioned that adequate regulations are in place to enable effective consolidated supervision of all financial institutions, including cross-border conglomerates. However, supervision over non-financial related companies is not enabled by the regulation. The BCB, nevertheless, is developing regulation to remove this limitation. There is no subsequent information publicly available regarding this regulation and Brazil's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

EN

Brazil was rated as fully implementing this principle by the 1998 BCB self-assessment, as reported in the 1999 De Melo report. However, the self-assessment was conducted in 1998 and there is no subsequent information publicly available that validates its rating. According to the 1999 IBI Report, the BCB's accounting requirements for banks are based on Generally Accepted Accounting Principles (GAAPs). Banks are required to have a director responsible for accounting and financial record keeping, and the financial information provided by banks are evaluated by external auditors, as well as by off-site and on-site inspection staff of the BCB. According to the assessment of Brazilian accounting and auditing practices conducted by the World Bank in 2005 and published in 2007, Brazilian GAAPs have been converging with international standards, however, significant areas of inconsistency still exist. The World Bank, therefore, recommends mandating the application of International Financial Reporting Standards (IFRSs) in preparation of consolidated financial statements by all public interest entities, amending the Corporate Law and other legislation to bring Brazilian GAAPs in line with international standards and establishing an independent accounting standard-setter. Some of these recommendations have since been addressed. The most significant change, as noted in the Deloitte IAS Plus update for July 2007, was brought about by the enactment of Law No. 11.638 in 2007 (effective January 1, 2008). The new law amends aspects of the Corporate Law so as to align Brazilian accounting practices with the international framework. As a consequence, all Brazilian listed companies will be required to apply IFRSs in their consolidated financial statements starting in 2010 (optional from 2007). As the 2008 KPMG report also adds, Comunicado 14.259 issued by the BCB in 2006 requires all financial conglomerates to prepare and publish their consolidated financial statements in accordance with IFRS effective December 2010. This initiative of the BCB, per the report, "has some specific objectives such as to reduce funding costs, enable financial institutions to access international capital markets, improve comparability and trustworthiness of the local banking system and encourage transparency" (p. 142). The overall aim is to align Brazilian financial reporting practices with international standards. As explained in the World Bank assessment, the BCB enforces accounting standards using a two-tier supervision system and is legally empowered to monitor and enforce accounting requirements. Financial reporting requirements for banks are governed by the Accounting Plan for Financial Institutions and CVM rules (which apply exclusively to listed banks only if these are not in conflict with the BCB requirements), besides the Corporate Law. The World Bank report explains that the Accounting Plan for Financial Institutions includes compulsory chart of accounts, accounting methods and standard formats for reporting. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, mentioned that "current regulation clearly defines corrective measures to be taken when requirements are not met" (p. 43). The BCB also has adequate powers to take punitive actions ranging from fines to revocation of licenses to protect the depositors and safeguard the stability of the financial system. On identification of risk situations, the BCB can take wide-ranging remedial measures that may affect the management or capitalization of the relevant banks. Despite the above descriptive information, the 1998 self-assessment does not directly address Brazil's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, mentioned that the BCB "has the authority to supervise overseas activities of locally incorporated banks, but in practice this supervision is hindered by the lack of cross-border agreements and secrecy legislation with some countries" (p. 43). This necessitates supervisory inspections for compliance to be made exclusively off-site in the case of internationally active banks to provide globally consolidated supervision. The 2008 Supervision Manual of the BCB states that in line with the Basel Committee of Banking Supervision recommendations spelled out in the document, "The Supervision of Cross-Border Banking" of October 1996, the BCB has signed cooperation agreements with several foreign banking supervisors on issues relating to supervisory exchange of information for cross-border banking entities, inspection operational practices, confidentiality of information shared and limit to its use for supervisory purposes, and other topics related to contacts, meetings, terms, changes, etc. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.

24. International exchange of information with other supervisors.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, mentioned that "there are some formal and informal arrangements with other countries for cross-border supervision" (p. 44); however, some countries do not cooperate in information-sharing. The BCB deals with such problems through negotiation, rather than by limiting operations of national banks in those countries by imposing sanctions - recourses that are within the BCB's powers. The 2008 Supervision Manual of the BCB states that in line with the Basel Committee of Banking Supervision recommendations spelled out in the document, "The Supervision of Cross-Border Banking" of October 1996, the BCB has signed cooperation agreements with several foreign banking supervisors on issues relating to supervisory exchange of information for cross-border banking entities, inspection operational practices, confidentiality of information shared and limit to its use for supervisory purposes, and other topics related to contacts, meetings, terms, changes, etc. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

II

The 1998 BCB self-assessment, as reported in the 1999 De Melo report, noted that 5 of the 6 essential criteria of this principle were fulfilled; however, the BCB does not request the approval of home supervisors to license foreign entities, chiefly owing to lack of response or delays in approval licensing proceedings. The 2008 Supervision Manual of the BCB states that in line with the Basel Committee of Banking Supervision recommendations spelled out in the document, "The Supervision of Cross-Border Banking" of October 1996, the BCB has signed cooperation agreements with several foreign banking supervisors on issues relating to supervisory exchange of information for cross-border banking entities, inspection operational practices, confidentiality of information shared and limit to its use for supervisory purposes, and other topics related to contacts, meetings, terms, changes, etc. Despite the above information, none of the cited sources directly address Brazil's compliance with this principle.