II - bcb.gov.br54 / Boletim do Banco Central do Brasil - Annual Report 2001 At the end of September,...

II Money and credit / 53

MONEY AND CREDIT

II

Monetary policy

Toward the end of 2000 and early days of 2001, expectations regarding growth ofthe Brazilian economy were quite positive and reflected the steady trajectory ofinternal macroeconomic fundamentals and the low level of international marketvolatility. In that scenario, the Selic rate target dropped to its lowest point (15.25%per year) on January 17, corresponding to the ex-ante real rate of interest – adoptingthe midpoint of the interval defined for the year’s inflation target of less than 11%in 2001. It is important to stress that this real Selic rate level would have beensimilar to the result in 2000, when the growth of product and per capita incomecame to 4.4% and 3%, in that order.

As of mid-March, priority was given to adjusting growth in aggregate demand tothe transitory supply shocks represented by the risks inherent to the impact ofexchange depreciation and, later, of electricity supply restrictions on consumerprices. With regard to the upward trajectory of exchange, it was thought that therewould be increasing pressures for transferring rising costs to prices and, eventhough such increases would not be perceived as permanent, they would havepotential for generating alterations in relative prices and attempts at realigningprices.

In response to such pressures, the monetary authority increased the supply offoreign currency on the internal market by raising short-term interest rate targets insuch a way as to better adjust the domestic interest curve. The instrument used inimplementing this policy was that of sporadic spot market dollar auctions, whichbecame daily and systematic as of July, coupled with net placements of securitiesindexed to foreign currency.

In such circumstances, the Monetary Policy Committee (Copom) graduallyraised the Selic rate target as of the meeting closed on March 21, until reachinga level of 19% per year on July 18, the same level in effect in the first quarter of2000. The basic interest rate was maintained at this target level through to the endof the year.

54 / Boletim do Banco Central do Brasil - Annual Report 2001

At the end of September, additional measures were adopted with the aim ofdiscouraging foreign currency retention on the part of internal agents. Thus,compulsory reserves on time deposits were reactivated as the rate was raised fromzero to 10%. Since these reserves are set aside in federal securities, reactivation ofthis mechanism made it more difficult for the financial system to position itself inforeign currency. Parallel to this measure, the minimum share of demand resourcesto be held as banking reserves was increased from 60% to 80% of the medianposition, with the objective of reducing short-term potential for retaining foreigncurrency. It should be stressed that the compulsory reserve rate on demandresources was maintained at 45%. In this case, compliance is judged according tothe criterion of the average position in two weeks of operation.

The Securities and Exchange Commission (CVM) permitted dilution of the effectsof exchange variation in 2001 on the accounting results of open stock corporationsover the course of the four subsequent fiscal years. The effect of this measure wasminimization of demand for hedging without effective financial need or, in otherwords, when such hedging was sought only to sustain accounting results that wouldnot jeopardize the solvency of the company.

At the end of September, the CMN reduced financial institution exchange exposurelimits. The circumstances of the moment and the short periods of time permitted foradjustment led institutions to seek adjustment through reductions in their foreigncurrency positions, instead of capitalizing or altering other positions.

Aside from generating a market perception of the dissociation between the intensifiedArgentine crisis and the Brazilian economy, these measures had the effect ofreversing the unfavorable expectations, as is evident in the results of financialmarket indicators. In this context, one should note the reduction in the interest rateforward structure as of early October, as the Interbank Deposits (DI) x pre one yearswap rates slipped from 26.5% to 20.2% at the end of December, while the interest

Graph 2.1

Swap DI rate x efective Selic rate

15

18

21

24

27

30

Jan2001

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

% p

.y.

Swap DI rate Efective Selic rate


rate moved into a downward curve as of the middle of that month, decreasing byapproximately 16% up to the end of the year.

Federal public securities

Operations with federal public securities in 2001 were impacted by the circumstancesof the international economic scenario, including reduced global growth and theArgentine crisis, and their impact on the national economy, particularly in terms ofpressures on the interest rate forward structure and increased exchange ratevolatility. In this sense, the adverse circumstances that predominated during muchof the year made it increasingly difficult to simultaneously achieve the two majorobjectives of federal securities debt management policy: expanded participation ofpreset papers in the overall debt and lengthening of the average maturity term ofthese papers. An option was made for lengthening the term of the public debt withthe aim of reducing both refinancing risks and the cost of carrying the debt. Withthis decision, significant progress was made toward lengthening the maturities ofthese papers, as the participation of preset papers in the total federal securities debtissued competitively dropped from 21.4% at the end of 2000 to 11.8% at the endof 2001.

Preset papers were offered regularly in early 2001 – 12 and 18 month NationalTreasury Bills (LTN). It is particularly interesting to note the January firm offerauction of 27 month LTN at an average rate of 16.04% per year. In mid-March, withthe year’s first increase in the Selic target and pressures on the interest curve,placements of preset securities were interrupted without, however, provokingsignificant changes on debt composition, since few maturities were scheduled forthat and the following month. Parallel to this, there was a progressive increase inthe volume of placements of Treasury Financing Bills (LFT) as of the month ofApril. These papers bear earnings according to the Selic rate. At the same time,simultaneous growth was registered in the discount on placements of these papers.Profitability up to April came to about 0.05% per year above the Selic rate, risingprogressively until reaching a maximum of 0.41% per year in the month of August.

Placements of LTN were recommenced in May, with offers of shorter term paperswith maturities between 4 and 7 months at rates close to 20% per year. With thegrowing uncertainties evident on the external market, the rates on these papers alsomoved up gradually, reaching a maximum of 24.28% per year at the start of Octoberfor six month papers. At the end of the year, with growing market awareness of thefact that Brazil had not been overly impacted by the Argentine crisis, it becamepossible to recommence issues of preset papers with longer terms, reaching as longas about 16 months. Initially, the spread over and above the overnight rate came to5.8 p.p., later dropping to 3 p.p. LFT issues indexed to the Selic rate were


suspended in the month of October, since the market showed greater preference forpapers indexed to exchange. This made it possible to continue the strategy ofreducing the ties between the federal securities debt and the basic interest rate.

Adapting to the requirements set down in Complementary Law 101 (FiscalResponsibility Law), which determines that Banco Central will no longer issuesecurities as of May 2002, the National Treasury and Banco Central initiated thetransition process in the management of the internal debt indexed to exchange. Inearly September, the National Treasury effected placements of exchange securities,National Treasury Notes - Series D (NTN-D), and at the end of that month BancoCentral stopped placing its exchange papers, known as Banco Central Notes -Special Series (NBCE), on the market. At the same time, an effort was made torecompose the Banco Central portfolio with National Treasury papers (NTN-D) toavoid the possibility of any interruption in the continuity of exchange and monetarypolicy.

Placements of papers indexed to exchange in 2001 were sharply affected byincreased market volatility. At the start of the year, NBCE placements were markedby steady lengthening of maturities to as much as six years in mid-February,compared to just two years at the end of 2000. As uncertainties grew with regard

Graph 2.2Auctions

LTN

LFT

0

3

6

9

12

15

Jan Mar May Jul Sep Nov

Mon

th

0

5

10

15

20

25

% p.y.

Average term Average rate

0

3000

6000

9000

12000

15000

Jan

Fe

b

Mar

Apr

May Ju

n

Jul

Aug

Sep Oct

Nov

Dec

R$

mill

ion

Financial amount

20

30

40

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60

70


Mon

th

0.0

0.1

0.2

0.3

0.4

0.5

% p.y.


0

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12000

16000

20000

Jan

Feb

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Jul

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Sep Oct

No

v

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c

R$

mill

ion

Financial amount


to exchange rates, the placement terms of exchange securities shrank to periods asshort as six months. In these circumstances, net placements of this type of securitywere made with the objective of providing hedge instruments to the market. Netplacements of exchange securities occurred particularly in the months of June,September and October when they came to R$7.3 billion, R$13.1 billion and R$7.5billion, respectively. As a consequence, the participation of competitively issuedsecurities indexed to exchange in the overall debt in the same type of securitiesmoved from 27.5% at the end of 2000 to 37.8% at the end of 2001.

It is important to stress that the supply of papers indexed to exchange as aninstrument of market protection had the result of reducing public debt financialcharges. The market’s natural aversion to risk generally leads to expectations ofexchange devaluation at a level much greater than effectively occurs. Amongevents that should be seen in this light, stress should be given to the September 21auction of exchange securities placed at an average rate of 5.57% per year, whenthe value of the dollar stood at R$2,80.

On December 31, with the dollar at R$2,32, these papers accumulated profitabilityof -15.9%, while capitalization of the Selic rate in the period came to 4.75%.

Graph 2.3Auctions

NTN-D

NBCE

0

10

20

30

40

50


Mon

th

8

9

10

11

12

13

% p.y.


0

3000

6000

9000

12000

15000

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep Oct

Nov

Dec

R$

mill

ion

Financial amount

0

15

30

45

60

75


Mon

th

8

9

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11

12

13

% p.y.


2000

5000

8000

11000

14000

17000

Jan

Feb

Mar

Apr

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y

Jun

Jul

Aug

Sep Oct

Nov

Dec

R$

mill

ion

Financial amount


As a result of the strategy adopted in 2001, it was possible to continue the policyof lengthening the term of the federal public debt that has been followed for severalyears. At the end of 2000, the average term of the federal public securities issuedin public offers was 15.93 months, expanding to 25.47 months at the end of 2001,for growth of 59.9%. This increase was due to strong growth in the maturities ofNational Treasury papers, since Banco Central restricted its operations to placementsof exchange papers as a hedging instrument against fluctuations in short-termexchange rates and did not make any new placements in the final three months ofthe year. As a matter of fact, the average term of the public securities issued by themonetary authority dropped from 17.81 months in 2000 to 15.77 months at the endof 2001, while the average term of National Treasury papers increased from 15.36months at the end of 2000 to 29.4 months in 2001.

Progress was also achieved in the lengthening of the average duration ofcompetitively issued federal securities, moving from 6.37 months to 10.47 months,with a reduction in the exposure of the securities debt to the volatility of the basicinterest rate. This evolution was basically due to increased participation of papersindexed to exchange in the total federal securities debt, the duration of whichincreased from 16.3 months to 16.7 months. Aside from this, emphasis should begiven to the contribution of regular placements of National Treasury Notes - SeriesC (NTN-C), which are long-term papers indexed to the IGP-M. As a result, theparticipation of these papers in the total securities debt moved from 1.8% to 5.3%,with an increase in average duration from 37.78 to 72.27 months.

The percentage of the federal public securities debt due to mature in the next 12months – an important indicator of short-term refinancing needs – showed positiveresults in the year, with a reduction from 42.4% at the end of 2000 to 25.6% at theend of 2001. This result was better than expected, as evident in the fact that theNational Treasury had defined a target of 27.1% in its Annual Financing Plan.

Graph 2.4

Average duration

0

5

10

15

20

25

Jan2001

Mar May Jul Sep Nov

Mon

th

BC TN Total

Graph 2.4

Monthly average duration

0

5

10

15

20

25

Jan2001


Mon

th

Bacen TN Total


Consequently, the conditions for refinancing the federal securities debt in 2002should be considerably better.

Regular placements of NTN-C – papers indexed to the IGP-M – with maturitiesbetween 4 and 30 years played an important role over the course of the year in thestrategy of building markets and generating real long-term interest rate parameters.The interest rates registered in these auctions came to approximately 10.50% peryear for the various placement terms and provide a rather good indication of the realrate of interest of the economy over the long-term. Placements of NTN-C withmaturities specified at 10 and 20 years have the effect of consolidating the forwardstructure of real interest rates.

NTN-C auctions are carried out in two stages. In the first, the price of the papersis defined and payment is made in cash and, in the second, payment is made throughthe use of securitized credits and other papers for which the National Treasury isliable, such as Treasury Financing Bills - Series A (LFT-A), Treasury FinancingBills - Series B (LFT-B) and Treasury Financial Certificates - Series E (CFT-E).With this, and considering that approximately 57% of total NTN-C issued wereexchanged for other papers, it is possible to affirm that NTN-C auctions also playan important role in the sense of enhanced standardization of public debt instruments.Over the course of 2001, R$13.8 billion in NTN-C were placed. Of this total, R$6billion were received in cash and R$7.8 billion were exchanged for other securities.

Monetary aggregates

The evolution of the monetary aggregates in 2001 was a function of decelerationin the pace of economic activity, the volume of credits granted and, particularly forbroader aggregates, the trajectory of exchange and basic interest rates.

Graph 2.5

AuctionsNTN-C

40

120

200

280

360

440

Jan2001

Mar May Jul Sep Nov

Mon

th

10,0

10,4

10,8

11,2

11,6

12,0

% p.y.


0

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2000

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Jan2001

Mar May Jul Sep Nov

R$

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ion

Financial amount


In keeping with economic policy objectives, the country fully complied with thetargets defined in quarterly monetary programming for the principal aggregates. Inthis context, the median of daily money supply balances added up to R$78.9 billionin December, accumulating growth of 12.2% in the year, corresponding to R$30.6billion in currency held by the public and R$48.3 billion in demand deposits. In amanner that was fully consistent with growth in nominal income, currency held bythe public registered stationary income velocity, with average daily balancesexpanding by 14.8%. The income velocity of demand deposits showed slightupward movement, closing the year at the same level as in December 2000,basically in response to the lesser transiting of resources originating in loanoperations. In this way, the average balance of the aggregate expanded by 10.5%in the year.

Table 2.1 - Monetary program (concluded)R$ billion

Itemization Money supply (M1) Money supply broader concept (M4)

Minimum Maximum Confirmed Minimum Maximum Confirmed

2000 1st Quarter 50.4 59.2 53.5 528.8 620.8 569.4

2nd Quarter 51.1 59.9 54.7 555.5 652.1 588.2

3rd Quarter 51.8 60.8 58.1 569.1 668.1 618.6

4th Quarter 63.1 74.1 70.4 584.8 686.5 652.1

2001 1st Quarter 65.7 77.1 66.7 606.4 711.9 674.7

2nd Quarter 62.9 73.8 67.1 629.4 738.9 693.4

3rd Quarter 63.0 74.0 68.4 650.1 763.1 746.6

4th Quarter 70.9 83.2 78.9 703.7 826.1 756.2

Table 2.1 - Monetary programR$ billion

Itemization Restricted monetary base Expanded monetary base

Minimum Maximum Confirmed Minimum Maximum Confirmed

2000 1st Quarter 38.4 45.1 40.9 417.2 489.8 469.5

2nd Quarter 35.4 41.5 37.9 455.8 535.1 501.9

3rd Quarter 33.9 39.8 38.1 483.9 568.0 521.3

4th Quarter 42.1 49.4 46.3 489.2 574.3 538.7

2001 1st Quarter 41.5 48.8 43.3 510.0 598.7 565.3

2nd Quarter 40.6 47.6 43.9 525.7 617.1 593.8

3rd Quarter 41.4 48.6 45.1 590.2 692.8 646.2

4th Quarter 46.9 55.1 52.8 610.0 716.1 646.7

(continues)


In terms of median monthly balances, the monetary base remained stable in 2001,with moderate growth as of the month of July, reaching a level of R$52.8 billion atthe end of December. The 14.1% percentage change in twelve months wasconditioned to demand for cash deposits since no alterations were registered in therate of compulsory reserves on demand resources in 2001. In the same period, theaverage balance of currency issued increased by 16.4% and that of banking reservesby 9.6%.

Graph 2.6 Currency outside banks and demand deposits -

Income-velocity1/

20

30

40

5060

70

80

Mar1998

Jun Sep Dec Mar1999

Jun Sep Dec Mar2000

Jun Sep Dec Mar2001

Jun Sep Dec

Currency outside banks Demand deposits

1/ Defined as the ratio between 12 month accumulated GPD (valuated by IGP-DI) and the monthly average balance of the monetary agregate.

Graph 2.7

Monetary base and money supply (M1)Average daily balances

Monetary base

0

10 20

30

40 50

60

Mar2000

Jun Sep Dec Mar2001

Jun Sep Dec

R$

billi

on

Currency issued Banking reserves

Money supply (M1)

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Mar2000

Jun Sep Dec Mar2001

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on

Demand depositsCurrency outside banks

Monetary base

-10-505

101520253035

Mar2000

Jun Sep Dec Mar2001

Jun Sep Dec

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thly

% c

hang

e

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-25

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25

Monthly percentage change

Money supply (M1)

-10-505

101520253035

Mar2000

Jun Sep Dec Mar2001

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% c

hang

e

051015202530

Percentage change accumulated in 12months


Monetary policy execution involved implementation of measures aimed at reducingliquidity. Among these, emphasis should be given to Circular 3,062, dated 9.21.2001,which reactivated the system of compulsory reserves on time deposits by raising thezero rate to ten percent. Since federal securities are utilized to comply with reserverequirements, reactivation of the reserve rate reduced financial institution potentialfor retaining foreign currency.

In the same sense, Circular 3,063, dated 9.26.2001, which went into effect onOctober 1, raised the minimum percentage of reserves on the demand resources thatare to be maintained as banking reserves by banks that create currency from 60%to 80%. Considering that compliance is defined in terms of the average position

Table 2.2 - Collection rate on mandatory reservesPercentage

Period Demand Time Savings Credit FIF FIF FIF

deposits deposits deposits operations Short-term 30 days 60 days

Prior to

Real Plan 40 - 15 - - - -

1994 Jun 100 20 20 - - - -

Aug " 30 30 - - - -

Oct " " " 15 - - -

Dec 90 27 " " - - -

1995 Apr " 30 " " - - -

May " " " 12 - - -

Jun " " " 10 - - -

Jul 83 " " " 35 10 5

Aug " 20 15 8 40 5 0

Sep " " " 5 " " "

Nov " " " 0 " " "

1996 Aug 82 " " " 42 " "

Sep 81 " " " 44 " "

Oct 80 " " " 46 " "

Nov 79 " " " 48 " "

Dec 78 " " " 50 " "

1997 Jan 75 " " " " " "

1999 Mar " 30 " " " " "

May " 25 " " " " "

Jul " 20 " " " " "

Aug " " " " 0 0 "

Sep " 10 " " " " "

Oct 65 0 " " " " "

2000 Mar 55 " " " " " "

Jun 45 " " " " " "

2001 Sep " 10 " " " " "


over two weeks, the fact that the compulsory reserve rate on demand resourcesremained at 45% meant that the 20% increase in the amount that must be held incash up to the second to last day of the period had the objective of reducing potentialcapacity for short-term retention of foreign currency.

Simultaneously, at the end of September, the CMN reduced the limit on financialinstitution exchange exposure and gave institutions fifteen days in which to adjust.Current restrictions and the short time period allotted led institutions to adjust byreducing their exchange positions instead of capitalizing or altering other positions.

With regard to the sources of primary currency issues, foreign sector operationswere the most important, generating a contractive impact of R$18.6 billion, as aresult of net sales of exchange on the interbank exchange market, particularly as ofthe month of July, when the mechanism of daily interventions was adopted as aconsequence of the uncertainties of economic agents provoked by events on theinternal and external scenarios. Net operations in the National Treasury operatingaccount resulted in monetary base contraction of R$11.9 billion. In terms of theannual inflow, the increase closed at R$22.2 billion, for a total of R$185 billion.

Graph 2.8

Monetary base and money supplyMonetary program and values occurred

Monetary base

3235

38

4144

47

50

5356

I2000

II III

IV I2001

II III

IV

Minimum Maximum

Extended monetary base

400

450

500

550

600

650

700

750

I2000

II

III

IV I2001

II

III

IV

Bal

ance

s in

R$

billi

on

Occurred

M1

455055606570758085

I2000

II

III

IV I2001

II

III

IV

Minimum Maximum

M4

500

550600

650700

750800

850

I2000

II

III

IV I2001

II

III

IV

Occurred


In much the same way, operations with the financial system produced a contractiveimpact of R$5.2 billion. One operation that deserves mention was amortization ofR$1.6 billion in Banco Nacional debt with the Program of Incentives to theRestructuring and Strengthening of the National Financial System (Proer).

In the case of the primary market, the results reflected net placements of R$9.8billion in Banco Central papers and net redemptions of R$37.3 billion in NationalTreasury securities. Aside from this, the liquidity adjustment was carried outthrough net redemptions totaling R$13.9 billion on the secondary market.

With respect to the broad monetary base – defined as high liquidity federal securityand monetary liabilities – this variable increased by 20% and closed with a balanceof R$646.7 billion. For the most part, this performance was due to the autonomousgrowth that resulted from the updating of the federal securities debt on the marketwhich, to a great extent, reflected exchange depreciation in the period, as well asspecial issues in the amount of R$39.5 billion made in June and July by the National

Table 2.3 - Financial assetsEnd of period balance R$ billion

Period M1 M2 M3 M4

2000 Jan 56.6 269.8 475.8 557.2

Feb 54.0 261.5 485.8 562.5

Mar 53.3 261.4 488.8 569.4

Apr 53.7 259.8 492.6 571.7

May 53.0 259.8 500.3 580.7

Jun 54.7 260.1 521.3 588.2

Jul 57.1 262.7 523.7 601.2

Aug 56.6 264.1 526.8 610.4

Sep 59.5 264.8 532.1 618.6

Oct 60.2 265.7 540.1 630.7

Nov 63.1 271.6 548.7 640.5

Dec 74.4 283.8 556.6 652.1

2001 Jan 66.5 276.5 562.9 657.4

Feb 68.3 279.8 570.2 666.5

Mar 66.0 278.4 571.1 674.7

Apr 65.8 279.6 573.8 679.5

May 65.5 283.5 581.9 689.2

Jun 66.4 289.1 590.9 693.4

Jul 67.3 290.5 601.0 716.9

Aug 67.6 295.6 607.0 731.0

Sep 68.5 296.6 610.2 746.6

Oct 67.5 295.9 612.5 750.8

Nov 70.0 301.7 614.2 757.6

Dec 83.7 321.6 625.1 756.2


Treasury in the framework of the Program for Strengthening Federal FinancialInstitutions. External sector and National Treasury operations generated contractivepressures and tended to attenuate the aforementioned result.

The broad money supply was reformulated in both conceptual and methodologicalterms in order to adapt it to international tendencies and the criteria recommendedby international organizations. In conceptual terms, emphasis was shifted fromdegrees of liquidity to issuing systems. Methodologically speaking, the source ofall data gathering was shifted to the accounting statements sent to Banco Centraland based upon the Accounting Plan of National Financial System Institutions(Cosif) and government information on public securities on the market expressedin terms of the custody positions of the non-issuing sector.

Consequently, the M2 concept – composed of M1, savings deposits and securitiesissued by financial institutions – expanded by 13.3% in the year. M3, whichcorresponds to M2 plus the share of fixed income fund portfolios not included inthe more restricted concept and committed operations with federal securities,expanded by 12.3% in the same period, mostly reflecting capitalization of itscomponents, with no significant primary alteration. M4, which is composed of M3plus public securities held by the nonfinancial sector, turned in expansion of 16%in the year and closed at a level of R$756.2 billion, with moderate primary growthdue basically to credits granted by the financial system.

Financial system credit operations

The performance of credit operations over the course of 2001 clearly reflected thedeteriorating expectations of economic agents generated by the adverse factors thatimpacted the economy over the course of the year. This situation contrasted sharplywith the previous year’s scenario, which was characterized by expanding economicactivity, international stability, expanded inflows of resources and an interest rate

1/ Last 12 month GPD at prices of indicated month (deflator: IGP-DI centrado) based on the series released by IBGE.

Graph 2.9

Financial assets - percentage share of GPD1/

101520253035404550556065

Dec1999

Mar2000

Jun Sep Dec Mar2001

Jun Sep Dec

%

M2 M3 M4


downturn. In 2001, on the other hand, demand for resources for consumption andinvestment purposes declined, at the same time in which credit costs increased andfinancial institutions became much more selective in granting credit. As a result, thetotal volume of credit came to R$332.5 billion in the month of December for onlymoderate growth of 4.2% in relation to the previous year.

The growth registered in financial system credit operations was generated by thesegment of nonearmarked resources, as evident in the fact that operations based onearmarked resources dropped sharply in June 2001 as a result of cutbacks in theloan portfolios of federal financial institutions. The reduction in operations basedon targeted and controlled resources was defined in the Program for StrengtheningFederal Financial Institutions, which was created by Provisional Measure 2,196,dated 6.28.2001. This instrument had the objective of ensuring recapitalization ofthe four major federal banks through adoption of a series of important measures,including security issues, with concomitant transfer of low liquidity and lowearnings credits involving the housing, rural and public sectors as well as specifiedregional water and sewage, infrastructure and development programs to the AssetManagement Company (Emgea) and to the Federal Government. With this measure,the ratio between the balance of financial system credit operations and GDPdropped from 28% in December 2000 to 26.8%.

A breakdown of total credits channeled to the productive sector shows thatoperations contracted by the private sector added up to R$322.7 billion in December,for growth of 5.3% in the year. The most important headings in the period wereindividuals, industry and other services. Loans to the latter segment came to R$59.9billion in the month of December, for an increase of 31% in the year. In this case,the most important operations involved funds released to the segments oftelecommunications, telephone services, transportation and energy. In the sameperiod, credits targeted to industry increased by 15.4% and came to a total ofR$98.8 billion. In the months of April, May, September and December, the stockwas sharply impacted by exchange rate alterations.

Graph 2.10Credit operations in the financial system

Balances

0

100

200

300

400

Jun2000

Jul Aug Sep Oct Nov Dec Jan2001


R$

billi

on

Total volume Non-earmarkedEarmarked Leasing operation and public sector


Credit operations based on targeted resources contracted by the financial systemover the course of the year registered negative growth of 14.8% in the balance. Thesectors that had the strongest contractive effects were housing (-57.5%) and rural(-3.5%) operations. On the other hand, one should underscore the importance ofBNDES operations, with growth of 13.9%.

Housing financing operations registered a balance of R$24 billion. The R$30.2billion reduction registered in June was basically caused by the volume of transfersby the Federal Savings Bank (CEF) to Emgea and the Federal Government, withmore than 80% of the total being channeled to the Asset Management Company. Incontrast, the state company in question assumed corresponding CEF liabilities tothe Employment Compensation Fund (FGTS), Worker Support Fund (FAT), Fundfor Support to Production of Low Income Housing (Fahbre) and the SocialDevelopment Fund (FDS). It should also be stressed that the downward trajectoryin financing as of August 2000 that resulted in an accumulated reduction of 13.6%up to May 2001 can be explained basically by anticipated liquidation of contractsformalized under the terms of the Wage Variation Compensation Fund (FCVS).

Housing financing – considering the sum total of nonearmarked and specificallytargeted resources – came to R$1.9 billion in the year under consideration, orpractically the same level as in 2000. It is important to recall that the CEF, theprimary source of housing financing, suspended its credit lines in November 2001due to the growing gap between funding and lending costs. As a result, loans basedon FAT resources using the TJLP as the basis of indexing the new contracts becamethe primary source of this type of funding. Analyzed from the point of view of theobjective of the resources, 63.5% were made available for purposes of acquiringalready built housing units and 36.5% were channeled into financing newconstructions.

Aside from the restructuring of the housing credit portfolio through transfers ofassets to Emgea and the ongoing process of paying off contracts with discountsthat had been formalized on the basis of the FCVS, the government has beenimproving the regulatory rules in order to provide more suitable conditions fordeveloping market conditions that are better suited to the interests of savers andinvestors.

In this sense, the Program of Subsidies to Housing of Social Interest (PSH) wascreated and was important in separating monetary and fiscal resources in housingfinance operations. The program guaranties the availability of budget resources inorder to make it possible for financial institutions to grant housing financing to thelower income segments of the population, on the basis of criteria to be defined bythe federal government. Exclusively at the time of contracting, the resources are to


be complementary to the proponent’s financial capacity to pay for residential realestate and should be sufficient to ensure the required economic-financial equilibriumof the operations carried out by the financial institutions involved.

In order to reduce both borrower and real estate financing agent risks, ProvisionalMeasure 2,221, dated 9.4.2001, created what is known as public interest assets.This instrument allows the incorporator to maintain the amounts related to land andthe accessions of each real estate incorporation, as well as the goods and rightsconnected to such. These assets must not be confused with other goods, rights andasset liabilities of the incorporators and with other public interest assets and aretargeted exclusively to achieving the ends of the corresponding incorporation andto delivery of the respective units to the acquiring parties.

Provisional Measure 2,223, dated 9.4.2001, created the Real Estate Exchange Bill(LCI) and the Real Estate Credit Bill (CCI). The objective of these instruments isto expand mechanisms for mobilizing the resources to be used in providing realestate financing, while bringing greater dynamics to operations among financialinstitutions, securitization companies holding real estate receivables, particularlyconstruction and real estate incorporation companies. The first of these instrumentswill be nominal and will be backed by real estate credits guarantied by mortgagesor by a chattel mortgage covering the object in question. Since it is issued by thereal estate creditor, the CCI can be in the full amount or broken down into smalleramounts, with or without real or fiduciary guaranties, and may be in bond oraccounting form. Redemption of the debt will be demonstrated with a quittancedeclaration issued by the creditor or, in the absence of the creditor, by otheraccepted means. To ensure that these papers will have enhanced liquidity whenissued for periods of more than 36 months, they may be adjusted monthly accordingto a price index.

In the case of the rural sector, the credit balance came to R$26.1 billion, for a dropof 3.5% in the year. This performance was also influenced in the month of June bythe assign of the asset portfolio, especially that involving the operations included inthe Special Program of Asset Restructuring (Pesa), which was implemented by Law9,138/1995, to the National Treasury, based on reception of federal public securities.

In the second half of the year, credit operations channeled to the rural sectorexpanded by 11.5%. Here, emphasis was given to the current expenditures of the2001/2002 summer harvest, at the same time in which funding was made availableunder the terms of Moderfrota, based on onlending operations from the BNDES andFiname. In the year, the disbursements of this institution into rural financingincreased by 50.7%.

The participation of rural financing granted in the form of investment came to


48.6% of the total, while participation of current expenditure financing reached42.7% in December. When one analyzes the sources of financial system resources,51.2% are specifically earmarked resources, such as demand deposits and ruralsavings accounts, while onlending operations and refinancing account for 46.6% oftotal resources.

In the institutional field, the rural sector benefited from a reduction of 32.5% in thedebt securitized by the National Treasury, as well as by extension of the maturityof the share scheduled for November to the month of December. This measure wasdetermined in Provisional Measure 9, dated 10.3.12001, which had the objectiveof ensuring the economic-financial equilibrium of the rural sector. Based onResolution 2,902, dated 11.21.2001, the National Monetary Council authorizedmaintenance of the current risk levels of these debts in the period under consideration.

Another measure of importance to the rural sector was Resolution 2,904, dated11.21.2001, which extended the period for renewal of debt subject to interest rateequalization by the National Treasury, through issues of federal securities, to6.30.2002.

When one analyzes the sources of controlled resources used by the financialsystem, it becomes evident that the trajectory in 2001 has been basically characterizedby growth of 13.9% in the financing granted by the BNDES system, in the form ofdisbursements to activities related to the generation and marketing of electricityand to the service sector. The flow of the state development bank’s resourcesaccumulated R$25 billion from January to December, representing growth of 9%in relation to the same period of the previous year.

The balance of leasing operations came to R$11.8 billion in December, for areduction of 14.3% in the year. This result was caused by contract liquidations andlesser demand for these resources as a result of exchange rate volatility and thereduction in the rate of the Tax on Credit, Exchange and Insurance Operations, orStock and Bond Operations (IOF), principally in operation contracted by individualpersons for purposes of vehicle acquisitions.

In much the same way, there was a decline in the number of new leasing contractsfrom 338.7 thousand in 2000 to 226.6 thousand in 2001, reflecting a reduction of15.9% in the flow of these operations, which came to a total of R$8.1 billion in theyear.

Loans channeled to the public sector as a whole dropped by 21.7% in the year, witha total balance of R$9.8 billion. This behavior was brought about by a reduction inthe volume of credits related in operations involving infrastructure, water andsewage and low cost housing. These operations were transferred in the month ofJune to the Federal Government in exchange for federal securities.


Credits targeted to the states and municipalities in December totaled R$5.8 billion.In relation to disbursements, emphasis should be given to release of R$640 millionby the CEF in the month of March in order to ensure the actuarial/social securityequilibrium of water and sewage companies in the process of being privatized.Furthermore, BNDES also released funding during the course of the year forpurposes of investment in the segments of gas distribution and tourism (Prodetur).Since these resources originate in World Bank funds, the volume of the credit linetends to fluctuate as a result of alterations in the rate of exchange.

The Federal Government banking debt turned in a balance of R$4.1 billion at theend of 2001. The most important operations involved funding granted to the directadministration for purposes of federalization of state debts and acquisition of assetsunder the terms of Provisional Measure 2,196-3. Both of these operations awaitissue of federal securities. With regard to the debts of state energy companies, themost important factors were the impacts of exchange variations on contracts, aswell as half-yearly liquidation of operations related to the construction of theBrazil-Bolivia Gas Pipeline.

The overall volume of credit operations based on nonearmarked resources came toR$192.7 billion in December 2001, for growth of 25.2% in the year. Consideringthat changes were introduced into standards altering criteria and expanding theinformation base, one should compare the growth of credit in the second half ofeach of the years under consideration. This comparison shows growth of 4.7% in2001 compared to 23.1% in the previous year. It should be noted here that the lastsix months of 2000 were characterized by macroeconomic stability, while the sameperiod in 2001 was marked by instability on both the external and internalscenarios, which generated increases in interest rates, exchange depreciation and,consequently, a dampening of credit demand for investment and consumptionpurposes.

Graph 2.11Credit operations with non-earmarked

Balances

30

90

150

210

Jun2000

Jul Aug Sep Oct Nov Dec Jan2001


R$

billi

on

Total volume Individuals Legal entities


The stock of credits contracted by legal entities totaled R$122.8 billion at the endof 2001, for growth of 19.7% in the year and 3.6% in the second half, compared to20.2% in the June-December period of 2000. This result was based on theperformance of operations involving internal resources and demonstrated theeffects of the falloff in economic activity in 2001. In the case of credit lines basedon external funding, the portfolio balance expanded by 17.4% in 2001, comparedto 7.4% between June and December 2000, reflecting growth in operations grantedand the impact of the rate of exchange on the stock of this operational modality.

Insofar as new credits granted to legal entities are concerned, growth was registeredin the number of renewals with only negligible impact on the balance. Disbursementsof operations involving internal resources increased by 22.6%, when one comparesthe second half of 2001 with the same period of the preceding year. Operations basedon external resources turned in growth of 27.4%, using the same reference base.

The volume of credit operations granted to individual persons came to R$69.9billion in December 2001, for growth of 36.2% in the year and 6.6% in the secondhalf, compared to 29.4% in the June to December 2000 period. As far as newlycontracted operations are concerned, the total accumulated between June andDecember 2001 was 20.2% greater than in the same period of 2000. However,emphasis should be given to the fact that revolving credits turned in the strongestperformance among these operations, with growth of 25%. This was a clearindication that families were making more intense use of special overdraft checksas a way of supplementing their income flows.

Interest rates on credit operations based on nonearmarked resources rose sharplyin 2001, despite the reduction that occurred in the last two months. The interest ratetrajectory in the year clearly reversed the downward trend that had been evidentsince March 1999. In the period from March to July, growth of 3.75 p.p. in the Selicrate target, coupled with futures market interest rate volatility as of the secondquarter of the year, were the elements basically responsible for the turnaround inthe rate trajectory. Other factors that contributed to this performance were the rateincrease from 0.3% to 0.38% in the Provisional Contribution on Operations orTransmission of Values and Credits and Rights of a Financial Nature (CPMF) andthe increase in the compulsory reserve on time deposits from zero to 10%.

In December 2001, the average rate of interest came to 60.2% per year, for growthof 7.6 p.p. in the year. The rate on operations with legal entities increased by 6.2p.p., reaching a level of 43.8% per year, while the rate on operations withindividuals rose by 5.3 p.p. to a level of 71.8% per year.

At the same time, the average funding cost – based on Bank Deposits Certificates


(CDB) – came to 18% per year. Consequently, the median differential betweenlending and funding rates (banking spread) reached a level of 41.6 p.p., for growthof 4.3 p.p. in relation to the previous year, despite the downturn that occurred in thefinal two months of the year under analysis.

In the face of the restricted macroeconomic scenario, financial institutions becameconsiderably more selective in their credit operations, at the same time in whichthey offered longer terms to clients classified within the higher quality brackets.

Table 2.4 - Rates for prefixed credit operations - 2001% p.y.

Itemization Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Interest rates - general 50.6 53.2 51.5 54.8 54.7 55.6 58.2 62.0 62.9 65.8 61.9 60.2

Legal entities 35.6 37.4 36.4 39.2 38.9 39.4 41.9 44.3 44.5 47.3 44.0 43.8

Discount of trade bills 42.0 44.2 42.1 45.5 45.4 45.9 49.1 51.4 51.0 53.3 50.3 50.1

Working capital 31.2 32.8 30.9 33.6 34.0 34.0 35.8 39.2 39.4 41.2 38.5 37.7

Guaranteed overdraft

accounts 51.4 54.0 54.0 57.2 55.4 55.6 56.3 60.1 60.2 66.6 62.3 63.7

Acquisition of goods 29.1 28.7 28.3 30.8 30.9 30.4 36.2 35.9 34.1 36.5 33.9 34.4

Individuals 63.6 66.3 63.5 66.7 66.1 67.2 69.7 74.4 75.6 78.6 74.1 71.8

Special overdraft

checks 152.6 150.4 148.8 145.1 145.7 147.1 150.0 158.8 159.9 160.3 160.5 160.2

Personal credit 67.3 70.9 68.4 73.1 72.1 74.4 78.6 83.1 86.2 89.2 87.5 84.2

Acquisition of goods

vehicles 34.9 34.5 33.6 36.2 37.4 38.6 42.0 44.3 44.3 45.7 40.4 38.2


others 61.5 60.8 60.9 63.1 66.7 64.5 65.5 68.0 66.8 67.6 69.6 69.6

CDB rate 15.0 14.8 15.2 16.0 16.4 17.2 18.9 19.0 18.9 18.9 18.5 18.6

Spread - general 35.6 38.4 36.3 38.8 38.2 38.4 39.4 43.1 44.0 46.9 43.5 41.6

Legal entities 20.6 22.6 21.3 23.2 22.4 22.2 23.1 25.3 25.7 28.4 25.6 25.2

Discount of trade bills 27.0 29.4 27.0 29.5 29.0 28.7 30.2 32.4 32.1 34.4 31.9 31.6

Working capital 16.2 18.0 15.8 17.6 17.5 16.8 16.9 20.3 20.6 22.3 20.0 19.1

Guaranteed overdraft

accounts 36.4 39.2 38.9 41.2 39.0 38.4 37.4 41.2 41.4 47.7 43.9 45.2

Acquisition of goods 14.1 13.8 13.1 14.8 14.5 13.2 17.3 17.0 15.3 17.5 15.5 15.9

Individuals 48.6 51.4 48.3 50.7 49.7 50.0 50.9 55.4 56.7 59.6 55.6 53.3

Special overdraft

checks 137.6 135.6 133.6 129.1 129.3 129.9 131.2 139.8 141.0 141.4 142.0 141.6

Personal credit 52.3 56.1 53.3 57.1 55.6 57.2 59.7 64.1 67.4 70.2 69.0 65.7


vehicles 19.9 19.6 18.5 20.2 21.0 21.4 23.1 25.4 25.5 26.8 21.9 19.7


others 46.5 46.0 45.8 47.1 50.3 47.4 46.6 49.1 48.0 48.7 51.1 51.0

Source: Sisbacen, userkey PEFI300


Consequently, the average term of these operations moved from 93 to 103 days inthe segment of legal entities and from 279 to 303 days in the segment of individualpersons.

With respect to implementation of measures aimed at expanding the credit supplyand reducing the differential between financial institution funding and lendingrates, the effectiveness of the Bank Credit Bill was improved considerably byintroducing a provision that expanded the concept of chattel mortgage as a guarantyof fungible goods and rights. Previously, chattel mortgages covered only nonfungiblemovable property, such as vehicles and, more recently, real estate, as permitted byLaw 9,514, dated 11.20.1997.

With respect to loan distribution by risk level, R$207.3 billion of the total grantedwere classified within levels AA and A, indicating stability in relation to Decemberof last year, while the amounts classified under level H, which demand 100%provision, declined from 5.4% to 4.2%. Credits to the industrial sector classifiedat risk levels AA and A totaled R$64.7 billion, followed by portfolios of individualpersons (R$50 billion), other services (R$39.4 billion) and commerce (R$22.8

billion).

Operations of the private financial system accounted for 65.1% of the total andreached a December level of R$216.4 billion, with growth of 21.2% in the year.Here, particular stress should be attributed to credits channeled to individualpersons and industry. A breakdown of the credit portfolio by risk level demonstratesthat R$147.1 billion were classified at levels AA and A, accounting for 68%, whilethe relative participation of level H closed at 3%.

The public financial system credit portfolio totaled R$116.1 billion, for a declineof 17.3% in the year, reflecting implementation of the Program for StrengtheningFederal Financial Institutions. This adjustment program was targeted at adapting

Graph 2.12

Credit operations in the financial system by levels of risk - December 2001

Others7.8%

B17.3%

C8.3%

H4.2%

AA29.2%

A33.2%


the asset situations of the four major federal public banks – Banco do Brasil (BB),CEF, Banco do Nordeste (BNB) and Banco da Amazônia (Basa) – to the standardsthat define the minimum capital requirements of financial institutions as well as thenew rules on credit provisions, as defined in Resolution 2,682, dated 12.21.1999.The classification of the credit portfolios of public financial institutions by risklevel shows that R$60.2 billion or 51.8% of the total were registered under levels

AA and A, while R$7.6 billion or 6.6% were classified under level H.

With respect to the financial system credit portfolio, operations classified asnormal risk (AA to C) accounted for 88% of the total in December, with a balanceof R$292.5 billion. Loans registered under risk level 1 (D to G) came to R$26billion, or 7.8% of the total, while R$14 billion were classified under risk level 2(level H).

Provisions, which are important prudential indicators, remained at an adequatelevel in 2001, as the volume constituted by the financial system came to R$24.6billion in December, for annual growth of R$4.4 billion, corresponding to 7.4% of

Others11,6%

B22.8%

C7.3%

H6.6%

AA22.8%

A29%

Graph 2.14 Credit operations in the public financial system by levels of risk - December 2001

Others5,8%

A35.4%

B14.4%

H3%

C8.8%

AA32.6%

Graph 2.13

Credit operations in the private financial system by levels of risk - December 2001


credit operations. In the specific case of operations based on nonearmarkedresources, the default level increased as the percentage of arrears of more than 15days moved from 5.7% to 6% in operations with legal entities and from 9.5% to13.8% in those with individual persons. It is important to note that, to a great extent,this performance was due to the risk trajectory of the portfolio of credit operationswith individual persons. As a matter of fact, the balance of credit targeted to thissegment and classified under level H rose from R$3 billion to R$4.6 billion.

The relative participation of provisions to total credits came to 7.4%, compared to6.3% in December 2000. Here, one should note the increase in the volume of loansto individuals, other services and industry classified under risk level 1. Theparticipation of the amount provisioned by private banks in relation to total creditassets dropped from 6.1% in December of last year to 5.9% in 2001. With respectto the public financial system, its percentage participation shifted from 6.7% to10.2%. In this context, one should highlight the impact of the reduction in the valueof its credit portfolios as of the month of June, a movement that is explained bymeasures taken to adapt the level of capital of institutions to the terms of prudentialregulations, with a positive impact on the solidity of the financial system.

Resolution 2,836, dated 5.30.2001, which had the objective of increasing utilizationof credit assigns in improving asset management, permitted financial institutionsand leasing companies to assign credits to persons that are not included in theNational Financial System (SFN), without co-liability, eliminating the need forcase-by-case Banco Central authorization. It should be noted that, in the past, creditassigns were only permitted for institutions of the same nature or for securitization

Table 2.5 - Credits granted by the financial systemPercentage share (Balance)

Itemization 1999 2000 2001

Total 100.0 100.0 100.0

Deposit money banks 87.6 70.9 73.4

Commercial and multiple banks 66.6 52.4 54.7

Banco do BrasilBanco do Brasil 11.7 9.1 12.6

Other public banksOther public banks 27.6 3.8 5.7

Private banks Private banks 27.3 39.5 41.4

Domestic 16.0 23.7 24.8

Foreign 11.3 15.8 16.6

Savings banks 21.0 18.5 18.7

Development and investment banks 8.4 21.1 17.6

BNDES 7.3 19.8 16.4

Others 1.1 1.3 1.2

Nonbanking financial institutions 4.0 8.0 9.0


companies that have the exclusive objective of credit acquisitions. Assigns toindividuals or legal entities that exercise control, are associated or controlledentities, including those with offices abroad or that have stock participation in thecountry and abroad still depend on prior authorization.

National Financial System

In 2001, the process of adjusting the SFN to internationally standardized rulescontinued. This is an essential conditions for achieving institutional growth, as wellas creating the financial instruments needed for national institutions to takeadvantage of the growing opportunities to participate in an increasingly moreglobalized world financial market.

With regard to the question of prudential regulation, one of the operational limitsto which financial institutions are subject is the limit on risk diversification perclient. This limit is set at 25% of the reference assets (PR) and the concept of clientis defined as any individual or legal entity, as well as any group representing acommon economic interest. This limit is applied to specified asset operations, suchas credits, rendering of guaranties and operations with derivatives. The calculationbase used (PR) refers to the total net assets adjusted by the result of the period, plusthird party inflows with low reserve requirements.

In June 2001, Resolution 2,844 defined rules for controlling the exposure of largescale clients that, despite the 25% PR limit, could register high levels of concentrationin the channeling of their funds. In this sense, the Resolution defined the ConcentratedExposure concept which is defined as the exposure of a client that represents 10%of more of PR. The sum total of these exposures may not surpass the mark of 600%of PR.

In terms of institutional growth, Resolution 2,828, dated 3.30.2001, altered therules covering constitution and operation of development agencies, which is oneof the alternatives available for those institutions that adhere to the Program ofIncentives to the Reduction of the State Public Sector in Banking Activities(Proes). The major changes refer to adaptation of development agencies to therules on operational limits defined for the functioning of financial institutions.With respect to the Basel limit, defined as capital required to cover the risk ofasset operations, the initial value of 0.20 was set as the factor applicable to assetsweighted by risk.

The idea of having a factor higher than that used by financial institutions in general(0.11) is a result of the fact that the maximum leverage of development agenciesshould be less since they operate with resources originating in onlending operations


and not contracted with the public. Aside from their own resources, they are alsopermitted to utilize constitutional funds, budget funds, resources from national andinternational development organizations and financial institutions.

At the end of the year, 16 state institutions had been authorized to transformthemselves into development agencies our of a total of 43 that had adhered to Proes.From December 2000 to November 2001, the total assets of the developmentagencies grew from R$1.1 billion to R$1.8 billion; in the same period of time, totalcredits moved from R$409 million to R$1.1 billion, and net worth from R$730million to R$979 million.

Going on to the process of state bank privatization, two institutions were soldduring the year: Banco do Estado de Goiás (BEG) and Banco do Estado daParaíba (Paraiban). The first was sold to Banco Itaú for R$665 million,corresponding to a premium of 121% above the minimum auction prices. Thesecond institution was sold for R$76.5 billion to ABN AMRO Bank Real, at 52%above the floor price.

Since Proes first went into operation in February 1997 up to the end of 2001, ninestate banks were privatized, seven of them by the states and two by the FederalGovernment, after the institutions in question had been federalized. There are stillfive more to be privatized, all of which are in the process of federalization. Of theinstitutions already privatized, two were sold outside of the context of Proes –Banco do Estado de São Paulo S.A. (Banespa) and Paraiban.

Aside from this, the rules that discipline the constitution and operation of creditcompanies that operate specifically with micro-entrepreneurs were altered. Thesecompanies were created in the context of the measures taken to stimulate creditoperations as of the second half of 1999. Their operational activity is limited togranting financing to individuals and legal entities classified as microbusinesses,with the objective of making small scale undertakings feasible. The financinggrantedcan not be utilized for consumption purposes.

The new regulatory structure of these institutions (Resolution 2,874) permitsbroadening of the scope of the activities involved, to the extent that they include therendering of guaranties to individuals, as well as permit them to act on the basis ofservice contracts in the name of an institution authorized to grant loans. At the endof the year, 14 micro-entrepreneur credit companies were in operation, as comparedto six of these institutions at the end of 2000.

With respect to the number of banking institutions in operation, the numberdropped during the year from 217 to 207. Parallel to this, the participation offoreign capital increased from 31.8% of the total number of institutions in December


2000 to 34.3% in December 2001. From December 2000 to November 2001, theparticipation of foreign institutions in the total assets of the banking sector movedfrom 24.6% to 28.1%, while participation in net worth shifted from 24.4% to27.1%.

Resolution 2,815, dated 1.24.2001, repealed the prohibition applicable to theopening of branches by institutions under direct or indirect foreign capital control.As a matter of fact, this prohibition could have been lifted earlier as a consequenceof international reciprocity agreements and the interests of the Brazilian government.The measure demonstrates the increased presence of foreign capital in the nationalfinancial system in recent years, particularly as a result of privatizations andacquisitions of private institutions.

Also in terms of institutional growth, a project approved in June 1999 is nownearing conclusion and involves the restructuring of the Brazilian paymentssystem. The objective is to adapt the system to internationally defined standards,including those supported by the Bank for International Settlements (BIS), theinstitution charged with defining paradigms for the supervisory activities andsystemic risk control mechanisms of the central banks of a variety of countries.

Among the objectives of the new Brazilian payments system, mention should bemade of implementation of the system of real time transfers of large amounts andalteration of the operations of the Banking Reserve account so that Banco Centralwill be able to monitor it in real time.

The regulatory framework of the system is already in operation and clearly definesthe responsibilities of the monetary authority, financial institutions and otherparticipants in the system, such as clearance and liquidation centers. In this sense,Banco Central will now share responsibility with the market for managing the risksinherent to fund transfers, including both credit and systemic risk.

With respect to the new operating rules of the Banking Reserve account, Circular3,060 defined the scheduled activities, determining that the only segment to beoperated by Bacen is the System of Reserve Transfer (STR), which is to beavailable as of April 22, 2002. As of that date, Banco Central will perform realtime monitoring of the balances and financial liquidation of liabilities in thisaccount. The final date for conclusion of the transition process has been set atJune 24, 2002, after which no negative balances will be permitted at any timeduring the day.

These alterations mean that banking institutions will have to manage their cash flowin real time throughout the day. Banco Central will offer a line of credit throughcommitted operations with federal securities, without financial cost if such is


terminated during the day. Thus, implementation of the new payments system willresult in further evolution of the mechanisms used by Banco Central in providingfinancial assistance to institutions.

With regard to Banco Central inspection activities, 19 institutions were placedunder special management systems in 2001, all of them in the category of extrajudicialliquidation, including four banks. Since the start of the Real Plan up to the end of2001, 224 special systems were decreed, including all three modalities: intervention,special temporary management and extrajudicial liquidation. Most of these incidentsinvolve group purchase management organizations (25.4%), banks (25%) andstock and bond distribution companies (20.5%). Of these, 93 institutions stillremain within the system, all of them under the heading of extrajudicial liquidation.In other words, these institution have concluded the phase of recovery and are readyto return to the SFN. The remainder will be declared bankrupt or be transformedinto nonfinancial institutions.

With the objective of adapting to internationally accepted standards, Circular3,068, dated 11.8.2001, altered the norms for registration and accounting evaluationof stocks and bonds, effective as of March 31, 2002. The new rules apply tofinancial institutions, with the exception of credit cooperatives, developmentagencies and micro-entrepreneur credit companies.

In the past, stocks and bonds were registered at acquisition cost plus earnings andmarket value was calculated monthly. In those cases in which market value was less,the item constituted a portfolio deduction provision. Consequently, what prevailedwas the criterion “cost or market, the lesser of the two”, with reflections on theresult, since it was not permitted to register any valuation that may have occurred.The exceptions were the securities included in investment fund portfolios (evaluatedat market value) and federal securities with indexed to exchange acquired withexternal resources (maintained in portfolio to maturity and evaluated at acquisitioncost).

With the new rules, instruments are classified in three headings: papers for trading,acquired with the purpose of being frequently traded; papers available for sale; andpapers held to maturity, with the exception of nonredeemable shares, in those casesin which there is the intention and financial capacity to maintain them in portfolio.The first two categories are evaluated at market value, while evaluation of thepapers maintained to maturity is done according to acquisition cost plus earningsreceived.

The objective is to reflect the real situation for purposes of valuation of the assets.From this point of view, higher liquidity papers are registered at market prices,above or below cost. Adjustment to market value effectively represents valuation


(gain) or devaluation (loss) of the asset while it remains in portfolio. For papersmaintained in portfolio to maturity, payment of the contractually specified earningsis permitted and it is not necessary that they be evaluated at market value.

With respect to the evolution of financial instruments, issue of certificates backedby bank credit bills has been duly regulated. The bank credit bills were created inthe context of the measures taken to stimulate credit with financial security for thesystem. This is a credit security issued by an individual or legal entity in the benefitof the institution that assigns the credits, representing the promise of clearly legalpayment in cash, and may refer to any type of credit operation. The objective increating this credit security is to achieve greater uniformity among financialinstruments with a view toward facilitating the processing of judicial execution ofcredits.

Based on bank credit bills issued by borrowers, financial institutions are permittedto issue and trade certificates, according to the regulations set down in Resolution2,843, dated 6.28.2001. These instruments may represent bills with differentvalues, maturities and earnings conditions, belonging to the institution itself orthird parties, and are earmarked to the bills deposited. With the charging of thecredits, the principal and charges are turned over to those holding title to thecertificates.

On permitting securitization of the receivables, issue of the certificates stimulatescredit operations. These papers may even be the object of committed operations,with the increasing development of their secondary market and enhancement of theliquidity of the operations involved.

Insofar as economic-financial indicators for the various segments of the nationalfinancial system are concerned, table 2.6 and graph 2.15 indicate alterations in thepublic and foreign segments over recent years. While the foreign segment increasedits participation, not only does one note lesser presence of public institution, butalso incorporation of adjustments aimed at strengthening the asset structure andincreasing the efficiency of the institutions that remain under public capital control.

In terms of the profitability of the funds belonging to the institutions themselves,particular emphasis should be given to the recovery registered in the past year inthe foreign segment due to the more than proportional increase of net income inrelation to the institutions’ own capital. The negative profitability that occurred in2000 was a consequence of the Banespa acquisition by Santander of Spain inNovember 2000. Banespa closed 2000 with a negative result due to the provisionsset aside as part of the privatization process.

The foreign segment is adapting to the Banespa acquisition which, in November


2001, represented 8.5% of the total assets of the group. In the same month, Banespaturned in a net positive result, already reflecting the adjustments introduced intothat very important retail institution by adjusting it to the operational paradigms ofprivate financial institutions.

Graph 2.15 shows the growth that has occurred in recent years in the participationof foreign institutions in the national financial system, particularly in relation tototal assets. On the other hand, the steady process of reduction in public sectorparticipation is a reflection not only of the privatizations generated by Proes butalso of the adjustments being introduced into the major federal institutions. In June2001, a new program aimed at restructuring federal public banks was introduced.Among the measures adopted, emphasis should be given to transfer of part of theCEF credit portfolio to Engea, which was created at that time.

As regards administrative expenses per asset unit, one should note the drop thatoccurred in the public segment in 2001, reflecting a 15.7% reduction in administrative

Table 2.6 - Financial system indicators

Itemization 1998 1999 2000 2001*

Credit operations leverage1/

Public system 5.68 4.38 4.54 3.65

Private system

Domestic 1.94 1.92 2.24 2.23

Foreign 2.10 2.09 2.63 2.51

Administrative expenditures by unit of asset

Public system 2.61 3.08 2.53 2.07

Private system

Domestic 3.03 2.93 2.85 2.18

Foreign 2.83 2.69 3.21 1.88

Profitability of net worth

Public system - 2.60 2.05 4.65 2.60

Private system

Domestic 6.30 3.89 4.86 5.79

Foreign 1.77 3.66 - 8.45 8.44

Gross operating profit margin2/

Public system 1.18 1.37 1.33 1.26

Private system

Domestic 1.28 1.32 1.34 1.28

Foreign 1.27 1.38 1.42 1.32

1/ It indicates how many times credit operations exceed net worth.2/ Operating profit revenues in relation to operating profit expenditures. The main operating profit revenues

refer to credit, exchange and securities operations. The main operating profit expenditures refer to

inflow, exchange, loans, on-lendings and provision for hard-to-recover credits.

* Refers to November/2001.


Graph 2.16

Assets' breakdown in the National Financial System

1998 38% 31%

12%16%3%

Investment in securities Credit and leasing operations

Exchange operations Permanent

Others

35%29%

11%20%

5%

2001

Graph 2.15

National Financial System - participation by segment

0

10

20

30

40

50

60

Par

ticip

atio

n (%

)

1998 1999 2000 2001

Total assets

Public institutionsPrivate institutionsForeign institutions

0

10

20

30

40

50

Par

ticip

atio

n (%

)

1998 1999 2000 2001

Total deposits


0

10

20

30

40

50

60

Par

ticip

atio

n (%

)

1998 1999 2000 2001

Net worth


0

10

20

30

40

50

60

Par

ticip

atio

n (%

)

1998 1999 2000 2001

Total loans



and personnel outlays, while the total assets of public institutions grew by only2.8% from December 2000 to November 2001. For foreign institutions, the drop inthe indicator was due to the combination of a 30.8% increase in assets and a 23.6%reduction in expenditures. The private national segment registered a reduction inoutlays (-9.7%) together with growth in total asset operations (17.9%). It should benoted that the indicator in question has been dropping each year in this grouping ofinstitutions.

Graph 2.17

Liabilities' breakdown in the National Financial System

1998

37%

11%8%9%

2%10%

23%

DepositsLiabilities consequent upon committed operationsForeign liabilities for loans and on-lendingsDomestic liabilities for loans and on-lendingsExchange operationsNet worth Others

34%

14%8%5%3%

11%

25%2001

II - bcb.gov.br54 / Boletim do Banco Central do Brasil - Annual Report 2001 At the end of September,...

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