## _cr12207

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---

### Information and methodology used for assessment
- Assessment period: February 27 through March 20, 2012.
- Methodology: BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in October 2006.
- Scope: The BCB is the sole supervisor of the banking system; the assessment covers only the BCB.
- Assessors: Laura Ard (World Bank) and Jose Tuya (consultant).
- Sources reviewed and activities undertaken:
  - Authorities’ self-assessment (addressed both essential and additional criteria).
  - Responses to a detailed questionnaire.
  - Meetings with BCB supervisory, legal and policy staff and meetings with commercial banks.
  - Review of inspection reports, licensing and change-in-control applications, enforcement documents, internal and bank-submitted reports.
  - Review of on-line presentations on the Risk and Control Assessment System (SRC).
- Grading framework: four-grade qualitative system — compliant; largely compliant; materially noncompliant; noncompliant. Principle may be considered not applicable where justified by the 2006 Core Principles Methodology.
- Proportionality: Standards evaluated in the context of Brazil’s financial system structure and complexity; assessments reflect commensurate expectations given bank complexity, interconnectedness, size, risk profile, and cross-border operations.

### Institutional and macroeconomic setting and market structure
- System size and composition (as of November 2011 unless otherwise noted):
  - Total deposit-taking financial institutions: 1,475.
  - Banks: 137.
  - Development banks: 4.
  - Savings bank: 1.
  - The five largest banks account for two-thirds of total assets and are typically part of larger financial conglomerates including insurance and asset management operations.
- Ownership and control breakdown (as of September 2011):
  - Total banks: 137.
  - Public: "1333.4843.2645.86 41.90" (table reproduced exactly from source).
  - Private: "12466.5256.7454.14 58.10" (table reproduced exactly from source).
  - Domestic: "6739.6039.0738.02 40.15".
  - Under foreign control: "5726.9217.6716.12 17.96".
  - Total 137100.00100.00100.00 100.00 (table reproduced exactly from source).
- Key system metrics (September 2011 / March 2011 where specified):
  - Average Basel capital adequacy ratio: 17.17 percent.
  - Regulatory required capital ratio in Brazil: 11percent.
  - Basel I/II required ratio: 8 percent.
  - Leverage ratio: (9.57).
  - Liquidity ratio: around 1.08 (based on liquidity buffer/stressed cash flow).
  - Return on Equity (RoE): 22.83 percent.
  - Foreign banks control slightly less than 20 percent of total banking assets (down from close to 30 percent in 2002).
  - Santander market share: 9 percent of the system’s assets.
  - HSBC market share: 3 percent of the system’s assets.
  - Foreign banks’ international exposures: around 10 percent of their assets and 17 percent of their liabilities (as of March 2011).
  - Domestic banks’ foreign lending and borrowing: around 5-6 percent of their assets and liabilities.
- Macroeconomic context and ratings:
  - Brazil estimated to be the sixth largest economy (just ahead of the United Kingdom).
  - Investment grade achieved in 2008.
  - Recent ratings: BBB by Fitch and S&P; Baa2 by Moody’s (as cited in source).

### Preconditions for effective banking supervision
- Legal and institutional framework:
  - BCB operates independently and has authority to impose sanctions, preventive corrective action and to resolve weak banks, including their liquidation.
  - Amendments to Law 4595/1964 (Banking Law) recommended to codify operational independence further (e.g., authority to directly issue resolutions, legal reasons for removal of the BCB Governor, establish a fixed term for the Governor).
- Debt collection and insolvency:
  - Reform: Bankruptcy and Judicial Recovery Law (Law 11101) establishes the priority of bank liabilities over tax liability, improving debt collection efficiency (noted especially for home loans and vehicle financing).
- Payments, clearing and settlement:
  - Five main components: the BCB; the Interbank Chamber of Payments (clearing and payment); Compe (check clearing system of Banco do Brasil); Cetip (registry for swaps, municipal and state securities, corporate securities and options); BM&FBovespa (four clearinghouses for derivatives, securities, interbank currency operations, and CBLC).
  - All Brazilian institutions obliged to deposit available funds in reserve accounts at the BCB.
- Accounting and auditing framework:
  - Federal Accounting Council (CFC) responsible for publishing technical and professional accounting and auditing norms.
  - BCB issues accounting norms for the banking sector (legislative power from Law 4595/64 and Article 61 of Law 11941/2009).
  - CVM’s regulations applicable where not conflicting with BCB rules, per Article 22, § 2 of Law 6385/1976.
  - Auditors for institutions supervised by BCB subject to stringent independence criteria and certification exam covering financial system and IFAC norms.
  - Brazil adopting IFAC auditing norms and IASB accounting norms; CFC adopted auditing norms and is in the process of adopting accounting norms.
  - Since December 31, 2010, listed banks must publish accounting statements in accordance with international standards (IFRS).
- Disclosure and deposit insurance:
  - Banks required to disclose accounting, prudential and other information to the public and to submit individual and consolidated accounting statements to the BCB (per Banking Law and Corporate Law).
  - Deposit insurance provided by the Credit Guarantee Fund (FGC), a private entity established by Resolution 2197.
  - Institutions covered by FGC: multiple banks, commercial banks, investment banks, development banks, Federal Savings Bank, credit, financing and investment companies, mortgage companies and savings and loan associations.
  - Maximum value guaranteed by the FGC: Reals 70 thousand.
  - FGC funds sourced from ordinary contributions from associated institutions, fees from default of checks, credit rights subrogated by the FGC from associated institutions, results of services rendered by the FGC and interest from investing its resources.

### Main findings — supervisory framework, practices, and tools
- Progress since 2002 FSAP:
  - Licensing process tightened.
  - Memorandum of Understanding (MOU) between BCB and CVM fully implemented.
  - Improvements in capital quality (excluding goodwill and tax credits) being addressed by implementation of Basel II (and Basel III).
  - Recommendation to amend legislation to formally ensure BCB autonomy remains unaddressed.
- Supervisory planning and risk assessment:
  - Implementation of the Annual Program of Supervision (PAS), encompassing supervisory activity planning and the SRC.
  - The SRC (Risk and Control Assessment System) is a well-structured methodology for identifying and assessing the most relevant risks of institutions, and the quality of internal controls and risk management systems.
  - SRC provides comprehensive understanding of operations and risk profiles and aids allocation of supervisory resources in accordance with risk.
- SRC risk-rating mechanics:
  - Overall risk rating assigned based on quantitative and qualitative measures.
  - Quantitative rating: indicators of asset quality, capital adequacy, liquidity and profitability.
  - Qualitative rating areas:
    1) Business risks and controls: credit, legal, operational, market, liquidity and contagion risks.
    2) Corporate functions and controls: strategic, reputation, information technology, money laundering and operational risk.
  - Contagion risk analysis includes risks posed to the banking group from nonbanking affiliates and subsidiaries.
  - Numerical rating scale: 1–4 for qualitative, quantitative and overall ratings; frequency and scope of supervisory activities reflect institution risk.
- Supervisory enforcement and corrective action:
  - BCB has broad enforcement powers for corrective action and weak bank resolution.
  - Supervisory process is risk-based, intrusive, and concludes with a rating of the bank on a scale of one-to-four based on quantitative and qualitative factors.
  - Timeliness of corrective action improved by adoption of resolutions enabling BCB to impose corrective action based on judgmental factors, including corporate governance adequacy (Pillar 2–style resolutions).
  - Shift from a corrective enforcement focus to a more preventive approach to address unsafe or unsound practices before they impact bank condition.
  - Constraint: corporate law requires a 25 percent minimum of profits must be paid to preferred stock shareholders; although BCB can mitigate by asking for additional capital, this dividend-payout requirement hinders the ability of BCB to preserve capital in a weak bank situation.

### Recommended action plan and authorities’ response
- High-level recommendations and outstanding issues:
  - Codify BCB independence in law by:
    - Granting BCB authority to directly issue resolutions without having to go through the National Monetary Council (CMN).
    - Establishing in law the reasons for removal of the BCB Governor.
    - Establishing a fixed term for the Governor.
  - Address remaining legislative gap concerning formal autonomy of the BCB (recommendation from 2002 FSAP remains unaddressed).
- Supervisory practice enhancements already implemented:
  - Implementation of PAS and SRC to strengthen planning and risk-based supervision.
  - Adoption of regulations enabling preventive corrective actions based on judgmental factors (Pillar 2–style).
- Specific operational constraint to consider:
  - Corporate law dividend-payout rule (25 percent minimum to preferred shareholders) reduces BCB capacity to preserve capital in weak banks; mitigation currently via requests for additional capital.
- Aggregate Basel Core Principles grading (Table 1):
  - Compliant (C) – 23
  - Largely compliant (LC) – 2
  - Materially noncompliant (MNC) – 0
  - Noncompliant (NC) – 0
  - Not applicable (N/A) – 0

### Formal aspects of independence, governance, and human resources
- Independence and governance:
  - Formal legal weaknesses identified:
    - The Banking Law does not require “due cause” for the removal of the Governor.
    - The BCB cannot issue prudential regulations directly and must go through the CMN.
    - The recommendation from the 2002 FSAP for a fixed term for the BCB Board has not been addressed.
  - Operationally:
    - The BCB functions efficiently and without evidence of interference.
    - Long-standing tradition of independent operation; legal protection of the BCB governor and enforcement powers have been strengthened since the last FSAP.
  - Recommended legal changes:
    - Codify independence by providing in law that the governor and board of the BCB can only be removed for due cause detailed in the law; consider establishing a fixed term.
    - Grant the BCB authority to issue prudential regulations directly without working through the CMN.
- Staffing, hiring, and human resources:
  - Current practice:
    - Hiring is based on civil service entry examinations for entry level positions.
    - BCB is not permitted to hire specialized staff at other than entry level positions.
    - Some experienced staff have been hired at the entry level.
    - Turnover is low at the BCB; existing staff includes over 700 direct supervisors.
  - Findings and recommendations:
    - The process could be modified to grant the BCB further flexibility to hire technical experts at other than entry level.
    - Employment framework should be reviewed to determine whether technical position staffing depth is adequate.
    - Table 2 recommended action: New staff must be hired at entry level salary; inject limited flexibility to hire technical experts at other than entry level.

### Licensing, fit-and-proper and ownership controls (Principles 3–5)
- Licensing and application requirements:
  - Resolution 3040 establishes the requirements to obtain a license; applications must include an economic and financial feasibility study and a business plan detailing organizational structure, internal control structure, strategic goals, main products and services, information technology infrastructure, and standards for corporate governance.
  - Minimum initial capital: R$17,500,000 for a commercial bank; additional R$6,500,000 required to engage in foreign exchange operations.
  - Fit-and-proper criteria: Resolution 3041 requires unblemished reputation, Brazilian residency for directors, no prior violations, not having declared bankruptcy, not previously disqualified from Board service, and technical capacity; BCB checks credit records, tax records, and for foreign applicants checks Interpol and home country supervisor.
  - New banks are closely monitored for the first three years of operation.
- Change-in-control and major acquisitions:
  - Resolution 3040 requires BCB authorization for transfer of corporate control and changes in the control group; in past five years 51 change-in-control applications: 28 approved, 8 withdrawn and 15 pending.
  - Article 30 of the Banking Law requires prior approval for banks to invest in any company; Resolution 2723 initially led to ex-post notification instead of prior approval; Resolution 4062 was issued on March 29, 2012 to require prior BCB approval for acquisition of an interest in nonfinancial institutions.
  - Principle 5 assessment: Largely Compliant after adoption of Resolution 4062.

### Prudential regulation, capital, and Basel implementation (Principles 6 and related)
- Basel implementation and timelines:
  - Implementation of Basel II began in 2007.
  - All credit and market risk approaches regulations are currently in place.
  - Regulation for the advanced approach for operational risk was issued for public comment in March 2012.
  - Regulation for IRB approval was issued after lengthy consultation; starting in December 2012 banks can apply for approval to implement the IRB approach.
  - Applications for market risk approaches started being filed in 2011; approvals to implement IRB are expected in 2013 after the validation process.
  - Banks will file the first internal capital adequacy assessment process (ICAAP) report in July 2013.
- Basel III phase-in:
  - Consultations underway for gradual phase-in of Basel III.
  - A key challenge: deductions for deferred tax assets, which account for about 20-25 percent of Tier 1 capital but are not allowed under Basel III.
  - Banks are expected to meet the new standard primarily through a mix of retained earnings and some stock issuances.
- Capital adequacy specifics:
  - Definition of regulatory capital per Resolution 3444 is compliant with Basel II.
  - Banks are required to maintain an 11 percent minimum capital ratio.
  - Current industry ratio cited elsewhere in the source: 16.2 percent (and other passages cite 17.17 percent).
  - Communication 20615 (February 17, 2012) posted proposed regulation to implement Basel III; at the end of the implementation period, the minimum capital requirements will converge at 10.5.
  - Implementation will phase-out deferred tax credits stemming from fiscal losses and deferred tax credits; credits can be used when they meet tax law criteria, a process which takes up-to two years.
  - Circular 3478 establishes minimum requirements/procedures for internal models for market risk; use of internal models requires prior BCB authorization.
  - Resolution 3490 and Resolution 4019 establish BCB authority to require banks to increase capital or decrease risk exposure to address capital adequacy.

### Risk management framework, internal controls, and ICAAP (Principles 7, 17)
- Risk taxonomy: eleven risk categories — credit, market, liquidity, corporate (level) operational, business area operational, contagion, legal, reputational, strategic, information technology (IT) and money laundering.
- Board and senior management responsibilities:
  - Risk management policies must be approved and reviewed at least once a year by senior management and the board of directors.
  - Supervisor evaluates adequacy of policies for credit, market, liquidity and other risks, including stress testing and validation.
- ICAAP and capital management:
  - Resolution 3988 requires banks to establish a capital management framework; Circular 3547 establishes ICAAP requirements and reporting annually for qualifying banks.
  - ICAAP must consider risks including credit, market, operational, liquidity, interest-rate risk in the banking book, counterparty credit risk and concentration risk.
  - Banks must validate models at least every three years or when significant changes occur.

### Supervisory process, information systems, and onsite activities (CPs 19–21)
- Supervisory approach:
  - The BCB carries out rigorous, intrusive, risk-based supervision tailored to each institution’s risk profile.
  - Institutions are placed on a 12 or 24-month supervisory cycle guided by the SRC.
  - Systemic banks are high priority due to their impact.
- Information systems and analytics:
  - Supervisory information systems produce significant quantitative analysis, including use of artificial intelligence to produce quantitative risk ratings.
  - Continuous monitoring leverages regulatory reporting and data links with clearing houses and registrars; virtually every financial instrument is registered in Brazil with transactional information available with a one day lag.
- Onsite function:
  - Onsite department configured into teams responsible for designated institutions/groups and specific risks; specialized topical teams include Credit, liquidity, market and operational risks; Legal and fiscal issues; Validation (internal models); Basel II and III implementation; Corporate governance and internal controls; AML.

### Accounting, disclosure, external audit and publication (Principle 22)
- Reporting and audit requirements:
  - Banks must comply with BCB-established regulatory accounting standards and appoint a director responsible for compliance.
  - Banks must publish semiannually audited statements according to Cosif, and annually according to IFRS as applicable.
  - Financial conglomerates are required to publish consolidated statements according to IFRS.
  - All financial institutions must receive an external audit according to international audit standards.
- Disclosure requirements (Section 22 of Cosif):
  - Circular 3.477 requires disclosure of risk management structures and functions, regulatory capital, minimum required capital by type of risk and exposures.
  - Different frequencies of disclosures: some quarterly, others semiannually or annually.
  - Resolution 3464, Resolution 3380, Resolution 3721 and Resolution 3988 require annual publication of respective management structures.
- Enforcement and review:
  - Circular 2804 empowers the Supervisor to demand republication of financial statements not made according to rules.
  - Circular 3477 holds an executive director responsible for information disclosed.
  - Resolution 3198 and Circular 3467 set audit reporting obligations and BCB access to auditors’ workpapers.

### Corrective and remedial powers, resolution framework (Principle 23)
- Enforcement and corrective tools:
  - BCB has enforcement powers: corrective; prudential (preventive measures); sanctioning and intervention/resolution.
  - Resolution 4019 (2011) enables preventive enforcement measures and expanded supervisory discretion to require correction based on judgmental views.
  - Preventive prudential measures include requiring additional controls, reducing risk exposures, increasing minimum capital, imposing more restrictive operational limits, increasing liquidity level, restricting operations/acquisitions/opening branches, sale of assets, and restricting manager’s income and payments to shareholders (subject to corporate law constraints).
- Corporate law constraint:
  - Corporate law requires banks to pay a minimum of 25 percent of their net profits as dividends to preferred shareholders; recommendation to exempt banks from this requirement to ensure capital preservation in weak bank situations.
- Resolution tools and practice:
  - Resolution measures include temporary special administration regime, intervention, extrajudicial liquidation; Department of Bank Liquidation conducts processes post-resolution.
  - In the past five years one bank was closed and four were resolved through merger and acquisition.

### Consolidated and cross-border supervision (Principles 24–25)
- Consolidated supervision powers:
  - BCB empowered to supervise on a solo and consolidated basis, including all offices or entities within the group irrespective of location or legal structure.
  - Consolidated supervision is primarily based on information compiled at the parent level; parent banks subject to mandatory detailed regular reporting covering internal global risk management and internal controls.
  - Resolution 2723 establishes BCB must have total access to information, data, documents and verifications necessary for assessing assets, liabilities, and risks associated to subsidiaries.
- Cross-border cooperation and home-host relationships:
  - BCB coordinates and exchanges information with domestic and foreign supervisors; signed MOUs with a number of countries including Argentina, Bahamas, Cayman Islands, Germany, Indonesia, Mexico, Panama, Paraguay, Portugal, Spain, United States, and Uruguay.
  - BCB conducts supervisory colleges as home supervisor for Banco do Brasil and Itaú-Unibanco and participates as host in others.
  - Circular 3317 requires information from home supervisors to determine consolidated supervision and cross-border management systems.
- Assessment:
  - Principle 24: Compliant.
  - Principle 25: Compliant.

### AML/CFT framework and supervisory practice (Principle 18 and related)
- Legal and regulatory basis:
  - AML/CFT is addressed in Law 9613 and Circular 3461.
  - Circular 3461, Resolution 3.198, Circular 2.025 and Circular Letter 3.298 set reporting, account-closing and auditor notification obligations.
- Customer due diligence and correspondent banking:
  - Strengthened procedures apply to initial relationships via electronic means, correspondent banks, or other indirect means.
  - Requirements for correspondent relationships include gathering information on correspondent reputation and supervision, assessing correspondent controls, obtaining approval from director responsible for foreign exchange market transactions, and documenting responsibilities.
  - Prohibitions on relationships with institutions that (I) do not have physical presence in the country of constitution and license; or (II) are not affiliated to any financial services group subject to effective supervision.
- Reporting and thresholds:
  - BCB Circular 3.461 (art. 13) requires communication to Coaf of:
    - I – operations with value equal to or above R$10,000.00 (ten thousand reais) that may present evidence of crimes in Law 9,613, of 1998;
    - II – operations which, by frequency, value or form, are suspicious of trying to bypass identification, control and registration mechanisms;
    - III – operations, whatever the value, to persons who reportedly have perpetrated or tried to perpetrate terrorist acts or participated/facilitated them, and existence of resources pertaining to or controlled by them;
    - IV – suspicious acts of financing terrorism.
    - §2 communications of items III and IV must be done up to the first business day following verification.
    - §3 proposals for operations described in items I–IV must also be communicated to Coaf.
  - Customer files and operation records must be kept for 5 years.
- Supervisory implementation:
  - SRC evaluates AML/CFT risk, risk management and mitigation capacity; failures may trigger Special Verifications (VE) restricted to AML/CFT subjects.
  - BCB conducts inspections, horizontal reviews and followed up on FATF recommendations; 65 inspections conducted in 2011.
  - BCB applied 13 sanctions (fines) in past years for AML violations.

### Key specific numeric and regulatory figures (preserved verbatim from source)
- Assessment period: February 27 through March 20, 2012.
- Total deposit-taking financial institutions: 1,475.
- Banks: 137.
- Development banks: 4.
- Savings bank: 1.
- Average Basel capital adequacy ratio: 17.17 percent.
- Regulatory required capital ratio in Brazil: 11percent.
- Basel I/II required ratio: 8 percent.
- Leverage ratio: (9.57).
- Liquidity ratio: around 1.08 (based on liquidity buffer/stressed cash flow).
- Return on Equity (RoE): 22.83 percent.
- Santander market share: 9 percent.
- HSBC market share: 3 percent.
- Foreign banks’ international exposures: around 10 percent of their assets and 17 percent of their liabilities (as of March 2011).
- Domestic banks’ foreign lending and borrowing: around 5-6 percent.
- Maximum value guaranteed by the FGC: Reals 70 thousand.
- Minimum initial capital for a commercial bank: R$17,500,000.
- Additional capital to engage in foreign exchange operations: R$6,500,000.
- ICAAP first filing: July 2013.
- Banks file ICAAP report in July 2013; first IRB approvals expected in 2013.
- Reporting threshold to COAF: R$10,000.00 (ten thousand reais).
- Minimum required provisions by arrears and risk level:
  - I - arrears up to 15 days - risk level A - minimum provision of 0,5 percent;
  - II - arrears from 15 to 30 days - risk level B - minimum provision of 1 percent;
  - III - arrears from 31 to 60 days - risk level C - minimum provision of 3 percent;
  - IV - arrears from 61 to 90 days - risk level D - minimum provision of 10 percent;
  - V - arrears from 91 to 120 days - risk level E - minimum provision of 30 percent;
  - VI - arrears from 121 to 150 days - risk level F - minimum provision of 50 percent;
  - VII - arrears from 151 to 180 days - risk level G - minimum provision of 70 percent;
  - VIII - arrears over 180 days - risk level H - minimum provision of 100 percent.
- Large exposure definitions and limits:
  - "Large exposure" defined as exposure per client or per security-issuing entity that represents 10 percent or more of the bank’s capital.
  - Maximum exposure limit per client: 25 percent of capital.
  - Global limit for all large exposures added up: 600 percent of capital.
  - Limit on credit operations with public sector entities: 45 percent of capital (Resolution 2827).
- Aggregate Basel Core Principles grading:
  - Compliant (C) – 23
  - Largely compliant (LC) – 2
  - Materially noncompliant (MNC) – 0
  - Noncompliant (NC) – 0
  - Not applicable (N/A) – 0

*Source: _cr12207 - Introduction and selected assessment excerpts (IMF staff report).*

### Introduction............................................................................................................

### _cr12207 - Introduction............................................................................................................

### Information and methodology used for assessment
- Assessment period: February 27 through March 20, 2012.
- Methodology: BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in October 2006.
- Scope: The BCB is the sole supervisor of the banking system; the assessment covers only the BCB.
- Assessors: Laura Ard (World Bank) and Jose Tuya (consultant).
- Sources reviewed and activities undertaken:
  - Authorities’ self-assessment (addressed both essential and additional criteria).
  - Responses to a detailed questionnaire.
  - Meetings with BCB supervisory, legal and policy staff and meetings with commercial banks.
  - Review of inspection reports, licensing and change-in-control applications, enforcement documents, internal and bank-submitted reports.
  - Review of on-line presentations on the Risk and Control Assessment System (SRC).
- Grading framework: four-grade qualitative system — compliant; largely compliant; materially noncompliant; noncompliant. Principle may be considered not applicable where justified by the 2006 Core Principles Methodology.
- Proportionality: Standards evaluated in the context of Brazil’s financial system structure and complexity; assessments reflect commensurate expectations given bank complexity, interconnectedness, size, risk profile, and cross-border operations.

### Institutional and macroeconomic setting and market structure—Overview
- System size and composition (as of November 2011 unless otherwise noted):
  - Total deposit-taking financial institutions: 1,475.
  - Banks: 137.
  - Development banks: 4.
  - Savings bank: 1.
  - The five largest banks account for two-thirds of total assets and are typically part of larger financial conglomerates including insurance and asset management operations.
- Ownership and control breakdown (as of September 2011):
  - Total banks: 137.
  - Public: figures shown in source as "1333.4843.2645.86 41.90" (table reproduced exactly from source).
  - Private: figures shown as "12466.5256.7454.14 58.10" (table reproduced exactly from source).
  - Domestic: figures shown as "6739.6039.0738.02 40.15".
  - Under foreign control: figures shown as "5726.9217.6716.12 17.96".
  - Total 137100.00100.00100.00 100.00 (table reproduced exactly from source).
- Key system metrics (September 2011 / March 2011 where specified):
  - Average Basel capital adequacy ratio: 17.17 percent.
  - Regulatory required capital ratio in Brazil: 11percent.
  - Basel I/II required ratio: 8 percent.
  - Leverage ratio: (9.57).
  - Liquidity ratio: around 1.08 (based on liquidity buffer/stressed cash flow).
  - Return on Equity (RoE): 22.83 percent.
  - Foreign banks control slightly less than 20 percent of total banking assets (down from close to 30 percent in 2002).
  - Santander market share: 9 percent of the system’s assets.
  - HSBC market share: 3 percent of the system’s assets.
  - Foreign banks’ international exposures: around 10 percent of their assets and 17 percent of their liabilities (as of March 2011).
  - Domestic banks’ foreign lending and borrowing: around 5-6 percent of their assets and liabilities.
- Macroeconomic context and ratings:
  - Brazil estimated to be the sixth largest economy (just ahead of the United Kingdom).
  - Investment grade achieved in 2008.
  - Recent ratings: BBB by Fitch and S&P; Baa2 by Moody’s (as cited in source).

### Preconditions for effective banking supervision
- Legal and institutional framework:
  - BCB operates independently and has authority to impose sanctions, preventive corrective action and to resolve weak banks, including their liquidation.
  - Amendments to Law 4595/1964 (Banking Law) recommended to codify operational independence further (e.g., authority to directly issue resolutions, legal reasons for removal of the BCB Governor, establish a fixed term for the Governor).
- Debt collection and insolvency:
  - Reform: Bankruptcy and Judicial Recovery Law (Law 11101) establishes the priority of bank liabilities over tax liability, improving debt collection efficiency (noted especially for home loans and vehicle financing).
- Payments, clearing and settlement:
  - Five main components: the BCB; the Interbank Chamber of Payments (clearing and payment); Compe (check clearing system of Banco do Brasil); Cetip (registry for swaps, municipal and state securities, corporate securities and options); BM&FBovespa (four clearinghouses for derivatives, securities, interbank currency operations, and CBLC).
  - All Brazilian institutions obliged to deposit available funds in reserve accounts at the BCB.
- Accounting and auditing framework:
  - Federal Accounting Council (CFC) responsible for publishing technical and professional accounting and auditing norms.
  - BCB issues accounting norms for the banking sector (legislative power from Law 4595/64 and Article 61 of Law 11941/2009).
  - CVM’s regulations applicable where not conflicting with BCB rules, per Article 22, § 2 of Law 6385/1976.
  - Auditors for institutions supervised by BCB subject to stringent independence criteria and certification exam covering financial system and IFAC norms.
  - Brazil adopting IFAC auditing norms and IASB accounting norms; CFC adopted auditing norms and is in the process of adopting accounting norms.
  - Since December 31, 2010, listed banks must publish accounting statements in accordance with international standards (IFRS).
- Disclosure and deposit insurance:
  - Banks required to disclose accounting, prudential and other information to the public and to submit individual and consolidated accounting statements to the BCB (per Banking Law and Corporate Law).
  - Deposit insurance provided by the Credit Guarantee Fund (FGC), a private entity established by Resolution 2197.
  - Institutions covered by FGC: multiple banks, commercial banks, investment banks, development banks, Federal Savings Bank, credit, financing and investment companies, mortgage companies and savings and loan associations.
  - Maximum value guaranteed by the FGC: Reals 70 thousand.
  - FGC funds sourced from ordinary contributions from associated institutions, fees from default of checks, credit rights subrogated by the FGC from associated institutions, results of services rendered by the FGC and interest from investing its resources.

### Main findings
- Progress since 2002 FSAP:
  - Licensing process tightened.
  - Memorandum of Understanding (MOU) between BCB and CVM fully implemented.
  - Improvements in capital quality (excluding goodwill and tax credits) being addressed by implementation of Basel II (and Basel III).
  - Recommendation to amend legislation to formally ensure BCB autonomy remains unaddressed.
- Supervisory planning and risk assessment:
  - Implementation of the Annual Program of Supervision (PAS), encompassing supervisory activity planning and the SRC.
  - The SRC (Risk and Control Assessment System) is a well-structured methodology for identifying and assessing the most relevant risks of institutions, and the quality of internal controls and risk management systems.
  - SRC provides comprehensive understanding of operations and risk profiles and aids allocation of supervisory resources in accordance with risk.
- SRC risk-rating mechanics:
  - Overall risk rating assigned based on quantitative and qualitative measures.
  - Quantitative rating: indicators of asset quality, capital adequacy, liquidity and profitability.
  - Qualitative rating areas:
    1) Business risks and controls: credit, legal, operational, market, liquidity and contagion risks.
    2) Corporate functions and controls: strategic, reputation, information technology, money laundering and operational risk.
  - Contagion risk analysis includes risks posed to the banking group from nonbanking affiliates and subsidiaries.
  - Numerical rating scale: 1–4 for qualitative, quantitative and overall ratings; frequency and scope of supervisory activities reflect institution risk.
- Supervisory enforcement and corrective action:
  - BCB has broad enforcement powers for corrective action and weak bank resolution.
  - Supervisory process is risk-based, intrusive, and concludes with a rating of the bank on a scale of one-to-four based on quantitative and qualitative factors.
  - Timeliness of corrective action improved by adoption of resolutions enabling BCB to impose corrective action based on judgmental factors, including corporate governance adequacy (Pillar 2–style resolutions).
  - Shift from a corrective enforcement focus to a more preventive approach to address unsafe or unsound practices before they impact bank condition.
  - Constraint: corporate law requires a 25 percent minimum of profits must be paid to preferred stock shareholders; although BCB can mitigate by asking for additional capital, this dividend-payout requirement hinders the ability of BCB to preserve capital in a weak bank situation.

### Recommended action plan and authorities’ response
- High-level recommendations and outstanding issues:
  - Codify BCB independence in law by:
    - Granting BCB authority to directly issue resolutions without having to go through the National Monetary Council (CMN).
    - Establishing in law the reasons for removal of the BCB Governor.
    - Establishing a fixed term for the Governor.
  - Address remaining legislative gap concerning formal autonomy of the BCB (recommendation from 2002 FSAP remains unaddressed).
- Supervisory practice enhancements already implemented:
  - Implementation of PAS and SRC to strengthen planning and risk-based supervision.
  - Adoption of regulations enabling preventive corrective actions based on judgmental factors (Pillar 2–style).
- Specific operational constraints to consider in action plan:
  - Corporate law dividend-payout rule (25 percent minimum to preferred shareholders) reduces BCB capacity to preserve capital in weak banks; mitigation currently via requests for additional capital.

*Source: _cr12207 - Introduction (IMF assessment chapter).*

### 24.      Formal aspects of independence, although operationally the BCB functions

### 24.      Formal aspects of independence, although operationally the BCB functions

### Independence, governance, and legal framework
- Formal legal weaknesses identified:
  - The Banking Law does not require “due cause” for the removal of the Governor.
  - The BCB cannot issue prudential regulations directly and must go through the CMN.
  - The recommendation from the 2002 FSAP for a fixed term for the BCB Board has not been addressed.
- Operationally:
  - The BCB functions efficiently and without evidence of interference.
  - Long-standing tradition of independent operation; legal protection of the BCB governor and enforcement powers have been strengthened since the last FSAP.
- Recommended legal changes (Table 2, Recommended Action):
  - Codify independence by providing in law that the governor and board of the BCB can only be removed for due cause detailed in the law; consider establishing a fixed term.
  - Grant the BCB authority to issue prudential regulations directly without working through the CMN.

### Staffing, hiring, and human resources
- Current practice:
  - Hiring is based on civil service entry examinations for entry level positions.
  - BCB is not permitted to hire specialized staff at other than entry level positions.
  - Some experienced staff have been hired at the entry level.
  - Turnover is low at the BCB; existing staff includes over 700 direct supervisors.
- Findings and recommendations:
  - The process could be modified to grant the BCB further flexibility to hire technical experts at other than entry level.
  - Employment framework should be reviewed to determine whether technical position staffing depth is adequate.
  - Table 2 recommended action: New staff must be hired at entry level salary; inject limited flexibility to hire technical experts at other than entry level.

### Licensing and structure (CPs 2–5)
- Licensing enhancements and practice:
  - Licensing process involves thorough analysis of strategic plans, capital projections and fit-and-proper tests.
  - New banks are closely monitored for the first three years of operation to determine ability to achieve projections.
- Legal compliance issue and remediation:
  - Banking Law Article 30 requires banks to obtain prior approval of the BCB to invest in any company, but Resolution 2723 failed to include this requirement, resulting in ex-post notification rather than prior approval.
  - After the mission concluded, Resolution 4062 was issued requiring prior BCB approval for acquisition of an interest in nonfinancial institutions.
  - Table 1 grading: CP5 (Major acquisitions) graded LC with comment the BCB was not in compliance; Table 2 notes adoption of Resolution 4062 on March 29, 2012 to address the deficiency.
- Recommended action (Table 2):
  - Amend regulation to implement banking law requirement that investment in other companies by banks must receive prior BCB approval; establish a de minimus level to avoid excessive filings.

### Prudential regulation and requirements (CPs 6–18)
- Basel implementation and timelines:
  - Implementation of Basel II began in 2007.
  - All credit and market risk approaches regulations are currently in place.
  - Regulation for the advanced approach for operational risk was issued for public comment in March 2012.
  - Regulation for IRB approval was issued after lengthy consultation; starting in December 2012 banks can apply for approval to implement the IRB approach.
  - Applications for market risk approaches started being filed in 2011; approvals to implement IRB are expected in 2013 after the validation process.
  - Banks will file the first internal capital adequacy assessment process (ICAAP) report in July 2013.
- Basel III phase-in:
  - Consultations underway for gradual phase-in of Basel III.
  - A key challenge: deductions for deferred tax assets, which account for about 20-25 percent of Tier 1 capital but are not allowed under Basel III.
  - Banks are expected to meet the new standard primarily through a mix of retained earnings and some stock issuances.
- Securitization and reporting:
  - Prudential framework governing loan securitization strengthened in 2008 by requiring banks to report securitized loans in their balance sheets unless a final and irrevocable transfer of risk is in place.
- Country and cross-border exposures:
  - Collection of country risk data has been expanded; cross-border exposures are not significant.
  - Banks cannot place abroad funds raised in Brazil; only funds raised directly by facilities located abroad can be invested in foreign securities and corporates.
  - Total securities of the six largest Brazilian banks in December 2011 were R$630 billion and foreign securities represented only 1.4 percent.

### Risk management framework
- Risk taxonomy and oversight:
  - Risk is divided into eleven risk categories: credit, market, liquidity, corporate (level) operational, business area operational, contagion, legal, reputational, strategic, information technology (IT) and money laundering.
  - Requirements for risk management oversight and structures are comprehensive, include conservative assumptions, and are linked to capital adequacy determination.
- Supervisory risk analysis:
  - Supervision examines risk metrics used by banks, including stress-test assumptions; supervision also runs stress tests on banks’ positions using data feeds and regulatory reporting.
  - Capital calculations for each risk are prescribed and are consistent with or more conservative than those presented in Basel II.
  - Risk ratings are assigned across banking, insurance, and asset management where relevant; contagion risk is also rated.
- Internal controls:
  - Banks are required to implement adequate internal controls and comply with legal norms and regulations.
  - The Supervisor can direct additional controls if deficiencies are found and impose more restrictive operational limits if deficiencies are not corrected timely.
  - Recent regulation (Resolution 4019) provides basis to address risk management and control concerns proactively.

### Supervisory process, techniques, and information systems (CPs 19–21, 20–21)
- Supervisory approach:
  - The BCB carries out rigorous, intrusive, risk-based supervision tailored to each institution’s risk profile.
  - Institutions are placed on a 12 or 24-month supervisory cycle guided by the SRC (Supervisory and Resolution Committee) plan.
  - Systemic banks are high priority due to their impact.
- Information systems and analytics:
  - Supervisory information systems produce significant quantitative analysis, including use of artificial intelligence to produce quantitative risk ratings.
  - Supervisory staff focuses on qualitative overview: corporate governance, risk management, and conglomerate risks.
  - Continuous monitoring leverages regulatory reporting and data links with clearing houses and registrars; virtually every financial instrument is registered in Brazil with transactional information available with a one day lag.
- Onsite function:
  - Onsite department configured into teams responsible for designated institutions/groups and specific risks; also houses specialized topical teams for: (i) Credit, liquidity, and market and operational risks; (ii) Legal and fiscal issues; (iii) Validation (internal models); (iv) Basel II and III implementation; (v) Corporate governance and internal controls; and (vi) AML.
  - Supervisory cycles begin and end with a full review, evaluation, and development of the subsequent supervisory plan.

### Accounting and disclosure (CP 22)
- Reporting and audit requirements:
  - Banks must comply with BCB-established regulatory accounting standards and appoint a director responsible for compliance with accounting standards, basic accounting principles, professional ethics and banking secrecy rules.
  - Banks must publish semiannually audited statements according to Cosif, and annually according to IFRS as applicable.
  - All public listed banks and those required to appoint Audit Committees must produce annual IFRS statements.
  - Financial conglomerates are required to publish consolidated statements according to IFRS.
  - All financial institutions must receive an external audit according to international audit standards.
- Accounting convergence:
  - Since 2008, BCB has conducted an Accounting Convergence Project to evaluate differences between local and IFRS for separate financial statements; goal is convergence of domestic rules to IFRS where feasible.
  - Cosif standards generally result in more conservative figures, particularly regarding provisioning.

### Corrective and remedial powers of supervisors (CP 23)
- Enforcement powers and practice:
  - Enforcement powers are broad and were significantly enhanced with issuance of Resolution 4019, enabling the BCB to require early correction based on judgmental views of internal controls and corporate governance without waiting for quantitative deterioration.
  - The BCB’s enforcement process: letter of issues sent to bank with timeframe to resolve; enforcement escalates quickly after timeframe expires; actions are closely tracked and intervention occurs if needed.
  - The BCB meets with bank boards and management to emphasize significance of recommendations.
- Specific corporate law constraint and recommendation:
  - Brazilian corporate law requires companies to pay a minimum of 25 percent of profits as dividends for preferred shares.
  - While the BCB can offset this requirement by increased provisioning or requiring additional capital, the recommendation is to exempt banks from this corporate law requirement to ensure capital preservation in a weak bank situation.
  - Table 1 and Table 2: CP23 graded C but note that banks are subject to corporate law floor of 25 percent and recommended exemption.

### Consolidated and cross-border supervision (CPs 24–25)
- Authority and practice:
  - The BCB has broad authority to conduct consolidated supervision, empowered to supervise on a solo and consolidated basis, including all offices or entities within the group irrespective of location or legal structure.
  - Consolidated supervision is primarily based on information compiled at the parent level; parent banks subject to mandatory detailed regular reporting covering internal global risk management and internal controls.
  - The BCB coordinates and exchanges information with domestic and foreign supervisors.
  - The BCB conducts supervisory colleges as home supervisor for Banco do Brasil and Itaú-Unibanco and participates as host in others; has signed MOUs with a number of countries.

### Basel Core Principles summary, grading, and recommended action plan
- Aggregate grading summary (Table 1):
  - Compliant (C) – 23
  - Largely compliant (LC) – 2
  - Materially noncompliant (MNC) – 0
  - Noncompliant (NC) – 0
  - Not applicable (N/A) – 0
- Specific CP items noted in Table 1 with LC grading and comments:
  - 1.2 Independence, accountability and transparency — LC: The BCB cannot issue prudential regulations directly; The Banking Law does not require “due cause” for the removal of the Governor.
  - 5. Major acquisitions — LC: The BCB was not in compliance with the banking law requirement for prior authorization for participation in the capital of any company; addressed by adoption of Resolution 4062 on March 29, 2012.
  - 23. Corrective and remedial powers of supervisors — C, but note corporate law requirement to pay a floor of 25 percent of net profits as dividends; recommendation to exempt banks from this requirement.
- Recommended action plan (Table 2 highlights):
  - Principle 1(2): Codify due cause and consider fixed term; grant BCB direct authority to issue prudential regulations.
  - Staffing: Provide limited flexibility to hire technical experts at non-entry levels.
  - Principle 5: Amend regulation to require prior BCB approval for investments in other companies; establish de minimus level. (Addressed by Resolution 4062 on March 29, 2012.)
  - Principle 23: Exempt banks from corporate law requirement that 25 percent of net profits must be paid as dividends to preferred shareholders.

*Source: IMF detailed assessment excerpt (Basel Core Principles, BCB supervisory assessment).*

### 2804. AML/CFT is addressed in Law 9613 and Circular 3461. Capital rules are covered in

### _cr12207 - 2804. AML/CFT is addressed in Law 9613 and Circular 3461. Capital rules are covered in

### AML/CFT, capital rules, and regulatory instruments
- AML/CFT is addressed in Law 9613 and Circular 3461.
- Capital rules are covered in Resolutions 3444, and 3490 plus other attendant resolutions.
- There are regulations on transparency, disclosure, external auditing and internal controls.
- The BCB has substantial flexibility to issue resolutions (established by the CMN), circulars and circular letters on a timely basis to address prudential concerns.

### EC3 — Updating banking laws and regulations
- Banking laws and regulations are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices.
- Description and findings:
  - The banking law is broad and provides the framework permitting the issuance of regulations, including those to implement international standards without requiring legislative action.
  - This flexible framework permits the BCB working with the CMN to ensure that prudential regulations are current and address current risks.

### EC4 — Public disclosure of financial strength and performance
- The supervisor confirms that information on the financial strength and performance of the industry under its jurisdiction is publicly available.
- Description and findings:
  - Banks are required to publish their financial statements in a local newspaper.
  - Through its financial stability reports and its website, the BCB provides information on the financial system.

### AC1 — Risk-based supervisory program and resource allocation
- In determining supervisory program and allocating resources, supervisors take into account the risks posed by individual banks and banking groups and the different approaches available to mitigate those risks.
- Description and findings:
  - The BCB rates the banks using a 1-4 ranking—which reflects both quantitative and qualitative analyses—to reflect the adequacy of capital, asset quality, liquidity and profits.
  - The results are collected in a risk matrix and based on the risk level of each bank, plans for supervisory activities are developed and resources assigned reflecting the risk profile of the bank.
- Assessment of Principle 1(1): Compliant

### Principle 1(2) — Independence, accountability and transparency
- Essential criteria EC1–EC4 findings:
  - EC1:
    - Although the legal framework does not fully protect the independence of the BCB to conduct its supervisory activities, operationally the BCB functions efficiently and there is no evidence of interference from government or industry.
    - Lack of legal protection examples:
      - The Board of the BCB is appointed by the President and approved by the Senate and serves without a fixed-term mandate and can be dismissed “immediately and without discussion”; Decree 91961 (1985). The governor reports directly to the President.
      - The current governor is a career member of the BCB and has been in office since January 2011after having served for four years as Deputy Governor for Financial System Regulation (2006–2010). The prior governor served from 2003–2010.
      - Prudential regulation, in the form of resolutions, is established by the CMN over which the Minister of Finance presides.
    - The Banking Law, Law 6024 and Resolution 4019 establish the authority of the BCB to undertake enforcement action, apply penalties and intervene and resolve weak banks independently.
  - EC2:
    - The supervisory objectives and processes (supervisory manual) are available in the BCB website.
    - The BCB finances, budget and operations are subject to the oversight of the Congress with the assistance of the Federal Audit Court.
    - The Executive Branch exercises control by means of the Office of the Comptroller General of Brazil.
  - EC3:
    - The BCB staff operates under high professional standards and is provided with extensive developmental opportunities.
    - In 2009 the BCB published its Code of Conduct in the BCB website.
    - Internally, the BCB has an Internal Affairs unit to monitor compliance with the Code.
    - Internationally, the BCB staff participates in international forums such as the Basel Committee, and the Association of Supervisors of the Americas.
  - EC4:
    - The BCB operational budget is subject to the Fiscal Responsibility Law and included in the General Federal Government Budget.
    - The BCB depends on governmental authorization to carry out entrance examinations and hire new employees; the government’s public competition hiring process prevents the BCB from hiring technical experts at higher than entry level salaries.
    - Successful candidates are hired at the beginning salary level.
    - Although the BCB has a well-developed developmental program, it is a lengthy process to develop expertise in critical areas like modeling, interest rate and market risk.
    - The BCB has qualified staff in these areas but not depth within the ranks.
    - Although lacking full budgetary independence, the staffing levels and travel budgets are considered adequate.
    - Turnover is low and in the past four years there have been no exits from the officer ranks.
- Additional criteria AC1:
  - The head of the supervisory authority (BCB Governor and Deputy Governors) is not appointed for a minimum term.
- Assessment of Principle 1(2): Largely Compliant
- Comments:
  - Institutionalizing independence with legal safeguards (e.g., issuing resolutions, establishing a “due cause” requirement for removal of the Governor, fixed term for the Governor) would aid continuity.
  - Alternatives or modifications to the hiring process should be considered to hire experienced staff from the market place to deepen expertise and introduce new thinking.

### Principle 1(3) — Legal framework for supervision
- Essential criteria EC1–EC3 findings:
  - EC1:
    - The law identifies the authority responsible for granting and withdrawing banking licenses: The Banking Law grants the BCB the authority to grant and revoke bank licenses.
    - The BCB approves changes-in-control, mergers, opening of branches and foreign establishments.
  - EC2:
    - The law empowers the supervisor to set prudential rules (without changing laws). Prudential regulations are established by the CMN without the need to amend laws.
    - Although the BCB is a member of the CMN, it lacks the power to independently issue regulations. However, the BCB drafts the regulations and provides the technical support.
    - Regulations are issued timely and expediently and reflect international standards. The BCB can issue resolutions, circulars to further detail and implement the regulations.
    - Significant proposed regulations are published for comment.
  - EC3:
    - The law or regulations empower the supervisor to obtain information from the banks and banking groups in the form and frequency it deems necessary.
    - The Banking Law requires banks to provide the BCB with the reports necessary to implement its duties.
    - Additional regulations expand on the information to include information on members of the conglomerate or economic group.
    - Circular 3402 provides the BCB with authority to request information on an ad-hoc basis.
- Assessment of Principle 1(3): Compliant
- Comments:
  - The BCB has the capacity to issue regulations without amending laws after they have been established by the CMN.

### Principle 1(4) — Legal powers for enforcement and supervision
- Essential criteria EC1–EC3 findings:
  - EC1:
    - The Banking Law provides the BCB with enforcement authority to ensure compliance with prudential requirements.
    - Resolution 4019 adopted in 2011 establishes the broad capacity and wide range of supervisory tools of the BCB to effect corrective action and preventive action to implement Pillar 2.
    - The BCB can act on capital deficiencies, inadequate risk management, insufficient internal control, strategies that do not match the bank’s risk profile, using both judgmental and quantitative factors.
  - EC2:
    - The supervisor has full access to banks’ board, management, staff and records.
    - BCB supervision is intrusive with direct access to bank records and frequent contact with bank management.
    - Review of Board of Directors and financial committee minutes is used to monitor Board involvement in risk management.
    - For high and medium priority banks, supervisors meet annually with the Board; for lower risk banks there is a meeting with the Board every other year.
    - The Banking Law grants BCB unrestricted access to documents and bookkeeping records; refusal to comply is obstruction of supervision and subject to penalties.
  - EC3:
    - When a bank is not complying or is likely to be engaged in unsafe and unsound practices, the supervisor has the power to take prompt remedial action and impose a range of sanctions (including revocation of the banking license).
    - The BCB can restrict operations, require additional capital, require plans to correct deficiencies and, in critical situations, intervene, remove management, liquidate and/or impose fines.
    - Under Resolution 4019 the BCB powers over enforcement were broadened in the areas of supervisory discretion and judgment in analyzing risks and demanding corrective action.
- Assessment of Principle 1(4): Compliant

### Principle 1(5) — Legal protection for supervisors
- Essential criteria EC1–EC2 findings:
  - EC1:
    - The Federal Civil Servants Law 8112/90 provides that civil servants shall incur civil, criminal, and administrative liability in the case of the improper exercise of their duties.
    - Civil liability is incurred through acts of omission or commission or willful or wrongful acts that cause harm to the public treasury or to third parties and employees have a right to be represented by the Federal Attorney’s Office (Law 9028 of 1995).
  - EC2:
    - When suits are commenced against individual employees of the BCB, the General Counsel’s Office assesses whether the employee acted in good faith and within supervisory powers and then makes a recommendation to the Board.
    - The Board can authorize that the employee be defended by the General Counsel’s Office, which is part of the Federal Attorney’s Office.
    - The General Counsel’s Office has been successful in defending most cases; cases are often commenced against the BCB or the Governor, rather than against individual employees.
- Assessment of Principle 1(5): Compliant

### Principle 1(6) — Cooperation and information sharing
- Essential criteria EC1–EC4 findings:
  - EC1 (domestic cooperation):
    - BCB established agreements with:
      - Complementary Pension Secretariat (SPC), later replaced by National Complementary Pension Superintendency (PREVIC), signed on December, 2007 to exchange information and perform coordinated supervision actions.
      - Securities and Exchange Commission (CVM): agreement established since 2002 to exchange information and to communicate irregularities and corrective measures taken.
      - Secretariat of the Federal Revenue of Brazil (RFB): agreement established since 2002 to exchange information.
      - The Private Insurance Superintendence (SUSEP): signed on July, 2005, to exchange information to take coordinated supervision actions in the entities of the group.
    - In 2006, the Brazilian government created the Committee for Regulation and Supervision of Financial, Capital, Insurance, Pension Fund and Capitalization Markets (Coremec).
  - EC2 (foreign cooperation):
    - Formal and informal agreements exist with foreign supervisory authorities for Argentina, Bahamas, Cayman Islands, Germany, Indonesia, Mexico, Panama, Paraguay, Portugal, Spain, United States (OCC, FDIC, FED, OTS and New York State Banking Department), and Uruguay.
    - BCB hosts supervisory colleges for Itaú-Unibanco and Banco do Brasil and participates in colleges for Credit Suisse, Deutsche Bank, GMAC, HSBC, Rabobank and Santander.
  - EC3 (confidentiality safeguards):
    - In exchanging information and signing MOUs, the BCB ensures protection meets the privacy standards of Brazil in accordance with complementary Law 105.
  - EC4 (denial of information demands):
    - The BCB only provides information shielded by bank secrecy Laws in cases of submission of particular requests from Parliament/Justice (prescribed by Complementary Law 105/2001). Any request not covered by Complementary Law 105 is denied.
- Assessment of Principle 1(6): Compliant

### Principle 2 — Permissible activities of banks
- Essential criteria EC1–EC5 findings:
  - EC1:
    - The Banking Law defines financial institutions as “public or private legal entities, whose main or secondary activity is collection, intermediation or investment of their own or third party funds, in national or foreign currency, as well as the custody of third party property”.
    - A wide variety of financial institutions can accept deposits and are licensed and supervised by the BCB and covered by the Credit Guarantee Fund (FGC): commercial banks, multiple banks, exchange banks, development banks, investment banks, the Federal Savings Bank (CEF) and credit unions; also savings and loan association and credit cooperatives.
    - The BCB website identifies and describes permissible activities for various institutions.
  - EC2:
    - Permissible activities are clearly defined and described on the BCB website.
    - Banks are permitted to establish subsidiaries for insurance and pension funds (while not defined as financial).
    - The aggregate investment in commercial companies when aggregated with the bank’s fixed assets/premises may not exceed 50 percent of capital.
  - EC3:
    - In practice, the use of the word “bank” is limited to financial institutions chartered and supervised by the BCB.
    - Only institutions licensed by the BCB may engage in deposit taking.
    - Law 4595/1964 stipulates that individuals or legal entities that act as financial institutions without authorization are subject to one to two years of detention.
    - The BCB website defines and lists deposit taking institutions.
  - EC4:
    - Only institutions licensed and supervised by the BCB may engage in deposit taking.
    - Commercial and multiple banks are the only ones in the banking system permitted to take demand deposits.
  - EC5:
    - A list of licensed banks and branches of foreign banks operating within its jurisdiction is available on the BCB website.
- Assessment of Principle 2: Compliant

### Principle 3 — Licensing criteria
- Essential criteria EC1–EC2 findings:
  - EC1:
    - The Banking Law establishes the BCB as the sole licensing authority for financial institutions to operate in the country; install or transfer their headquarters or offices abroad; be transformed, merged or incorporated; and transfer their equity control.
    - The 1988 Constitution’s Act of Transitory Provisions restricts establishment of new branches of foreign financial institutions and increases in foreign participation until conditions are determined by complementary Law, with exceptions via presidential decree for international agreements, reciprocity, or national interest. The BCB must submit final approval applications of foreign banks for a license.
    - Control of banks can only be held by: natural persons; financial institutions and other financial system members licensed by the BCB; and other legal entities whose exclusive business purpose is to invest in the equity of financial institutions and other institutions licensed by the BCB.
  - EC2:
    - Resolution 3040 establishes the requirements to obtain a license and can be amended by the BCB through the CMN.
    - Requirements include publication of the purpose of the proposed institution to allow for public comment.
    - Foundations, investment funds and private pensions cannot have a controlling share in a bank.
    - The application should include:
      - a) An economic and financial feasibility study;
- Assessment of Principle 3: (assessment ongoing in source up to EC2)

*Source: IMF staff assessment text in the provided content unit.*

### 1. A business plan, that must describe, at least: details of the proposed organizational

### 1. A business plan, that must describe, at least: details of the proposed organizational

### Required business plan contents
- details of the proposed organizational structure; specification of the internal control structure; establishment of strategic goals; definition of the main products and services to be offered, as well as the intended target audience;

### Information technology and service network
- The information technology infrastructure to be deployed to provide the specified products and services, as well as the estimated size of the service network;

### Operations timeline
- Deadline to begin operations;

*Source: _cr12207 - 1. A business plan, that must describe, at least: details of the proposed organizational (PDF).*

### 4. Description of the criteria used in the recruitment of upper management;

### 4. Description of the criteria used in the recruitment of upper management;

### Licensing and recruitment standards (EC3–EC13)
- EC3: Criteria for issuing licenses are consistent with ongoing supervision; require adequate capital, fit-and-proper management and adequate corporate governance.
- EC4: Licensing authority can reject an application if criteria are not fulfilled or information is inadequate.
  - Findings: 37 applications filed in the past five years: 12 approved, two denied, 8 withdrawn and 15 pending.
- EC5: Authority assesses that proposed legal, managerial, operational and ownership structures will not hinder effective supervision on both a solo and consolidated basis.
  - Findings: Application must address internal control systems, organizational structure, and identification of the control group; if control is not evident, a “controlling agreement” must be provided.
- EC6: Authority identifies and determines suitability of major shareholders, including ultimate beneficial owners, and assesses transparency of ownership and sources of initial capital.
  - Findings: Resolution 3040 requires identification of significant shareholders and control group; authorization for BCB inquiries into backgrounds; sources of capital are verified and transaction documentation required.
- EC7: A minimum initial capital amount is stipulated for all banks.
  - Findings: Minimum capital is R$17,500,000 for a commercial bank. An additional R$6,500,000 is required to engage in foreign exchange operations.
- EC8: At authorization, proposed directors and senior management are evaluated for expertise, integrity (fit-and-proper), and conflicts of interest.
  - Fit-and-proper criteria include: (i) skills and experience commensurate with intended activities; (ii) no record of criminal activities or adverse regulatory judgments.
  - Findings: Resolution 3041 requires unblemished reputation, Brazilian residency for directors, no prior violations, not having declared bankruptcy, not previously disqualified from Board service, and technical capacity. BCB checks credit records, tax records, and for foreign applicants checks Interpol and home country supervisor.
- EC9: Authority reviews proposed strategic and operating plans, corporate governance, risk management, internal controls, anti-crime detection/prevention, and oversight of outsourced functions; operational structure must reflect scope and sophistication of activities.
  - Findings: Resolution 3040 requires description of proposed organizational structure, internal control structure, strategic goals, main products and services, information technology infrastructure, and definition of standards for corporate governance.
- EC10: Authority reviews pro forma financial statements and projections, assessing adequacy of financial strength to support the strategic plan and financial information on principal shareholder.
  - Findings: Applications must include information to support financial capacity of controlling shareholders, origin of funds, estimates of initial and future capital needs per business plan and viability study. Pro forma financials are used to determine organizers’ ability to support future growth. An application was denied due to proposed shareholders’ lack of funds to support projected growth.
- EC11: For foreign banks, host supervisor establishes receipt of no objection/statement from home supervisor and assesses that home supervisor practices global consolidated supervision.
  - Findings: Circular 3317 requests information from home supervisors to determine consolidated supervision, cross-border management systems, and AML compliance evaluation on a global basis.
- EC12: If license was based on false information, the license can be revoked.
  - Findings: BCB has authority to cancel a bank license.
- EC13: Board collectively must have sound knowledge of types of activities and associated risks.
  - Findings: BCB matches experience of proposed management and Board to product lines and target markets. Board members serve three-year terms; re-election requires BCB approval and re-assessment of fit-and-proper.

### Additional licensing criteria (AC1–AC2)
- AC1: Assessment includes ability of shareholder to supply additional financial support if needed.
  - Findings: BCB determines capacity of shareholders to support projected capital needs; an application was denied on this basis.
- AC2: Policies/processes to monitor progress of new entrants in meeting business and strategic goals and supervisory requirements.
  - Findings: New institutions must report for the first three years on alignment of operations with business plan objectives in financial statements. If operations are inadequate, institution must present justification; BCB may establish additional conditions and deadlines.

### Transfer of significant ownership (Principle 4; EC1–EC5)
- EC1: Laws/regulations define “significant” ownership and “controlling interest.”
  - Findings: Law 6404 defines control; Resolution 3040 establishes a 5 percent shareholding as significant.
- EC2: Requirements to obtain supervisory approval or immediate notification of proposed changes that would change ownership or control.
  - Findings: Resolution 3040 requires BCB authorization for transfer of corporate control and changes in the control group. Acts requiring approval include shareholder agreement changes, inheritance/donation, isolated or joint acts affecting control, change of business purpose, creation/cancellation of an operational portfolio by a universal bank, merger, split or incorporation. Circular 624 requires BCB be informed of changes concerning 5 percent shareholders, changes in control, and changes in foreign ownership. DEORF analyzes and must approve any change in control using a broad definition of control.
- EC3: Supervisor can reject proposals for change in significant ownership if criteria are not met.
  - Findings: Banking Law requires BCB approval to effect changes of control; in the past five years there were 51 change-in-control applications: 28 approved, 8 withdrawn and 15 pending.
- EC4: Supervisor obtains names and holdings of all significant shareholders and beneficial owners through reporting or on-site exams.
  - Findings: Circular 624 requires reporting of changes in capital ownership for controlling shareholders, 5 percent shareholders, upper management, financial institutions, and foreign shareholders.
- EC5: Supervisor can take action to modify, reverse or otherwise address unauthorized changes of control.
  - Findings: Non-compliant changes in control may lead to reversal, prohibition from working in the institution or cancellation of the bank’s license.
- AC1: Banks must notify supervisor as soon as aware of material information negatively affecting suitability of a major shareholder.
  - Findings: Through ongoing monitoring and interactions, BCB is made aware of major shareholder qualifications. Directors’ re-election triggers BCB approval and update of fit-and-proper qualifications.
- Assessment: Principle 4 — Compliant.

### Major acquisitions and investments (Principle 5; EC1–EC6)
- EC1: Laws/regulations define types and amounts of acquisitions/investments needing prior approval.
  - Findings: Banking Law and Resolutions 2723, 2743 and 4062 guide acquisitions/investments requiring BCB notification. BCB exclusively authorizes establishment and change of ownership of financial institutions, including authorization for one institution to acquire control of another. Article 30 requires prior authorization for participation in capital of any company. Resolution 4062: direct/indirect investment in capital of any domestic or foreign companies by banks is dependent on prior BCB authorization, with specified exceptions and requirement that activities complement or support investing entity’s activities.
- EC2: Regulations provide criteria to judge individual proposals.
  - Findings: See EC1.
- EC3: Supervisor ensures acquisitions/investments do not expose bank to undue risks or hinder effective supervision; can prohibit acquisitions in countries with secrecy laws preventing information flows.
  - Findings: Resolution 2723 requires applicants to provide information, data and documents to evaluate assets and liabilities of cross-border investments to ensure global consolidated supervision; applicant must commit to provide complete and unrestricted information. Prior to authorizing subsidiaries/agencies abroad, BCB communicates with host supervisor to ensure consolidated supervision is possible.
- EC4: Supervisor determines bank has adequate financial and organizational resources to handle acquisition.
  - Findings: For control acquisitions in other banking institutions, BCB performs analysis as for changes in control. For other investments, BCB requests description of invested company’s activities, expected synergies, and alignment with investor’s business strategy per Resolution 4062.
- EC5: Regulations define when notification after acquisition is sufficient.
  - Findings: No notification requirements for investments that do not require prior authorization by the BCB—e.g., investment banking activities like underwriting, and investments held for trading purposes.
- EC6: Supervisor aware of risks non-banking activities pose and can take action to mitigate.
  - Findings: Circular 2981 requires banks to detail direct/indirect investments in all foreign companies, domestic companies subject to consolidation, companies where bank investment exceeds 10 percent of shares, and investments with book value exceeding 10 percent of the participant’s net worth. BCB includes these investments in supervision and has authority to require needed information.
- AC1: For cross-border significant holdings, supervisor should consider quality of supervision in that country and ability to exercise consolidated supervision.
  - Findings: See EC3.
- Assessment: Principle 5 — Largely Compliant (Rated MNC during the mission but upgraded to LC as the end of March the BCB adopted Resolution 4062 requiring prior approval of BCB before making investment in other financial institutions or companies).

### Capital adequacy (Principle 6; EC1–EC7; AC1–AC5)
- EC1: Laws/regulations require banks to calculate and maintain a minimum capital adequacy ratio and define capital components.
  - Findings: Definition of regulatory capital per Resolution 3444 is compliant with Basel II. Banks are required to maintain an 11 percent minimum capital ratio. Current industry ratio is 16.2 percent and a leverage ratio of 10.3. In 2013 Brazilian banks will file their first ICAAP report. Qualifying banks will be authorized to implement IRB approaches in 2013.
  - Communication 20615 (February 17, 2012) posted proposed regulation to implement Basel III. Proposed resolution is more stringent early in implementation; today Brazil holds a minimum of 11 percent total capital. At the end of the implementation period, the minimum capital requirements will converge at 10.5.
  - Implementation of Basel III will phase-out deferred tax credits stemming from fiscal losses and deferred tax credits; credits can be used when they meet tax law criteria, a process which takes up-to two years.
  - For groups/holdings, minimum capital must be calculated on a consolidated basis including off-balance sheet risks. Conservative add-ons were made to Basel Committee calculations to reflect Brazilian market characteristics.
  - Basic approaches for credit, market and operational risks established by local rules. Introduction of internal models for operational and credit risk follows timelines in Communication 12746 and amendments.
  - Circular 3478 establishes minimum requirements/procedures for internal models for market risk; use of internal models requires prior BCB authorization. Communication 19028 sets beginning of authorization for basic and advanced IRB approaches.
  - Institutions must allocate capital for interest-rate risk in the banking book; stress tests and data collection for capital add-on for interest rate risk are required.
  - Financial institutions deliver monthly capital adequacy information; data is analysed, cross-checked and subject to on-site inspection. Supervisor evaluates adequacy relative to current and foreseen business activities and risks.
  - Resolution 3490 and Resolution 4019 establish BCB authority to require banks to increase capital or decrease risk exposure to address capital adequacy.
- EC2: For internationally active banks, capital definition, calculation method and ratio are not lower than Basel requirements.
  - Findings: Brazil assigns more conservative risk weights across many asset categories. (Risk-weight table as provided: preserves exact categories and weights; notable figures include 0%, 20%, 50%, 100%, 150% as applicable; Retail 75%; RRE 35% LTV < 50% = 35% etc.; vehicle and personal financing risk-weights increased: vehicle loans >60 months = 150%; personal loans >60 months = 300%.) An operational risk charge is imposed as a percentage of gross income.
- EC3: Supervisor can impose specific capital charges and/or limits on material risk exposures.
  - Findings: Resolution 3490 requires banks to measure exchange rate, commodities, price, market, interest, and credit risks and compute capital required for each. Resolution 4019 provides authority to increase capital for individual institutions; BCB developing methodology to assess additional capital charges based on supervisory risk rating.
- EC4: Required capital ratio reflects risk profile; on- and off-balance sheet risks included.
  - Findings: Compendium of regulations ensures capital reflects unique risks; Resolution 3490 requires banks compute specific charges for a number of risks and provides guidance on measurement; supervisory process can require additional capital for high-risk areas.
- EC5: Capital adequacy requirements consider domestic banking system conditions and may be higher than Basel.
  - Findings: BCB applies more conservative risk-weights and minimum regulatory capital; applies a multiplier to Basel II formulas.
- EC6: Laws/regulations give supervisor authority to act if bank falls below minimum capital ratio.
  - Findings: Resolution 4019 provides BCB authority to require additional capital without waiting until capital drops below minimum.
- EC7: Use of internal assessments (IRB, models) must meet rigorous qualifying standards and supervisor approval; supervisor may revoke approval.
  - Findings: At time of report no banks relying on IRB or market risk models for regulatory capital. Guidance for model validation is conservative and requires ongoing maintenance of standards.
- Additional criteria:
  - AC1: For non-internationally active banks, capital definitions and requirements broadly consistent with Basel principles. Findings: Capital requirements are the same for all banks.
  - AC2: For non-internationally active banks and holding companies, capital ratios calculated and applied consistent with Basel. Findings: See AC1.
  - AC3: Supervisor can require forward-looking capital management. Findings: Regulations implementing Pillar 2 are based on a forward-looking approach.
  - AC4: Supervisor requires adequate distribution of capital across entities per allocation of risks.
    - Findings: Compliance with regulatory capital is consolidated; BCB reviews activities and capital of consolidated subsidiaries to ensure adequate capitalization.
  - AC5: Supervisor may require individual banks/groups to maintain capital above minimum.
    - Findings: Brazilian banks operate with capital levels in excess of minimums.
- Assessment: Principle 6 — Compliant.

### Risk management process (Principle 7; begin)
- EC1: Banks and groups required to have comprehensive risk management policies/processes to identify, evaluate, monitor and control or mitigate material risks; supervisor determines adequacy relative to size and nature; supervisor can require strengthening if inadequate.
  - Findings: Requirements for institutions’ risk management functions are prescribed over several resolutions. (See also CPs 17, 8, 9, 13–16.) The Banking Law grants legal powers for CMN to establish governance rules subject to corporate legislation.

*Source: _cr12207 - 4. Description of the criteria used in the recruitment of upper management;*

### 6404. Relevant regulation includes:

### _cr12207 - 6404. Relevant regulation includes:

### Relevant regulation (overview)
- Resolution 2554 requires the establishment of a structure for internal controls, including financial information systems, operational and management systems, and compliance procedures.
- Specific risk management regulation: operational risk (Resolution 3380), market risk (Resolution 3464) and credit risk (Resolution 3721).
- Resolution 2804 establishes procedures for controlling liquidity risk.
- Resolution 3198 requires an audit committee for financial institutions that meet specified characteristics.
- Resolution 3041 establishes fit and proper requirements members in the key positions of the governance structure (including directors (executive management) in key risk positions).
- Resolution 3988 requires a capital management structures.
- Resolution 4019 provides the BCB the ability to require early correction of issues identified through its supervisory process based on judgemental (risk oriented) views on the adequacy of internal controls and corporate governance rather than waiting until a bank’s condition demonstrably deteriorates from the given deficiency to be able to require corrective action.
- The relevant regulations require systems and controls to be commensurate with the size and complexity of the given activity. The Supervisor possesses the authority to direct changes in institutions’ processes and to require strengthening. (See CP 23)

### EC2 — Board-approved risk management strategies; supervisory confirmation
- Supervisor confirms banks and banking groups have appropriate risk management strategies approved by the board.
- Supervisor confirms board ensures policies/processes for risk-taking are developed, appropriate limits established, and senior management monitors and controls all material risks consistent with approved strategies.

Description and findings re EC2
- Risk management policies must be approved and reviewed, at least once a year, by senior management and the board of directors.
- Supervision evaluates whether:
  - the bank has formal strategies/policies for credit risk, market risk and liquidity risk management duly approved by senior management and the board of directors;
  - these strategies/policies are aligned with the institution’s objectives and goals for risk management and communicated within the institution;
  - there is effective commitment of senior management to sound risk management practices;
  - institutional AML policies are formalized and issued by senior management or the board, and procedures related to AML are subject to improvement.
- The Supervisor evaluates, validates, and monitors risk management through onsite events (SRC and VEs (targeted reviews)) and continuous monitoring.
- The Supervision Manual defines eleven risk groups and respective control groups to be evaluated: credit risk, legal risk, market risk, liquidity risk, contagion risk, corporate operational risk, business area operational risk, reputational risk, strategic risk, information technology (IT) risk and money laundering risk.
- Risk monitoring is a key activity, especially for credit, liquidity, market, operational, legal, reputational and strategic risks.
- Analysis is commensurate with size and complexity and performed at solo and consolidated levels; risk ratings are assigned for banking, banking-related activity, and where relevant, insurance and asset management.
- Contagion risk is rated in terms of system impact if the institution experienced significant financial distress.
- Under Resolution no. 2554, institutions are required to implement adequate internal controls and comply with legal norms and regulations; Supervisor can direct additional controls or impose more restrictive operational limits when deficiencies are not corrected on time.

### EC3 — Documentation, review, communication, and exceptions
- Supervisor determines risk management strategies, policies, processes and limits are properly documented, reviewed and updated, communicated within the bank and adhered to in practice.
- Supervisor determines exceptions to policies/processes/limits receive prompt attention and authorization by appropriate management/Board where necessary.

Description and findings re EC3
- Risk management policies must be approved and reviewed at least once a year by senior management and the board.
- Supervision evaluates:
  - formal strategies/policies for credit, market and liquidity risk management duly approved by senior management and board;
  - alignment with institution’s risk objectives and communication within the institution;
  - commitment of senior management to sound risk management.
- Supervisor regularly evaluates strategic plans, data integrity within risk management, contingency plans for operational risk, development/approval/dissemination of market and liquidity risk strategies, and credit policies and procedures.
- Supervisor examines processes surrounding exceptions to policies and procedures for special approval of exceptions to policies, limits and authorizations.

### EC4 — Board and senior management understanding of risk and capital implications
- Supervisor determines senior management and the board understand the nature and level of risk being taken and how this relates to adequate capital levels.
- Senior management must ensure policies/processes are appropriate to the bank’s risk profile and business plan and review/understand implications and limitations of risk management information; same requirement applies to board with information presented in a format suitable for oversight.

Description and findings re EC4
- Supervisor continually assesses awareness and understanding of management via inspections and continuous monitoring.
- Level of understanding assessed through interviews during inspection and monitoring; Supervisor meets with the board of directors in relevant cases once a year or depending on risk profile.
- Evaluation of board minutes and information received by the board informs assessment.
- Inspections of specific risk and controls include evaluation of risk management policies and procedures.

### EC5 — Internal capital adequacy assessment (ICAAP) and capital management
- Supervisor determines banks have an internal process for assessing overall capital adequacy relative to their risk profile and reviews/evaluates banks’ internal capital adequacy assessments and strategies; methodology depends on size, complexity and business strategy.

Description and findings re EC5
- Institutions must maintain adequate capital continuously, commensurate with business risks, in accordance with Resolution no. 3444.
- Resolutions 3444 and 3490 address calculation of regulatory capital; Resolution 3988 requires banks to establish a capital management framework commensurate with their risk profile, including planning, evaluation, monitoring and control of capital needs and, for the largest banks, an internal capital adequacy assessment process (ICAAP).
- ICAAP requirements established by Circular 3547 require a comprehensive assessment of capital adequacy over a one-year horizon; banks must consider strategic objectives and risks.
- Regulation requires identification and measurement of existing and prospective risks in these categories:
  - (i) credit risk,
  - (ii) market risk,
  - (iii) operational risk,
  - (iv) liquidity risk,
  - (v) interest rate risk in the banking book,
  - (vi) counterparty credit risk, and
  - (vii) concentration risk.
- Other risks (liquidity risk, strategic risk, reputational risk and risk of environmental externalities) must also be assessed even if not effectively measured.
- Banks must fulfill stress-testing and independent validation of models on a regular basis (at least every three years or when significant model changes occur).
- ICAAP results must be reported annually and approved by the board of directors.
- Supervision Manual procedures include evaluation of the internal capital management process, verification of existence and quality of capital plan proportionate to size/complexity/risk profile/business strategy, assessment of senior management knowledge about risk and capital, and review of a policy defining minimum desired capital and risk appetite aligned with business strategy.
- For interest-rate risk in the banking book, institutions must ensure sufficient capital is measured and set apart to cover the risks.

### EC6 — Model validation and testing
- Supervisor determines that where models are used to measure components of risk, banks perform periodic and independent validation and testing.

Description and findings re EC6
- Circular 3478 outlines the independent process for validating and testing models, including Board involvement.
- Banks are required to validate internal models every three years or when there are significant changes.

### EC7 — Information systems for risk measurement and reporting
- Supervisor determines banks and groups have adequate information systems for measuring, assessing and reporting size, composition and quality of exposures; reports must be timely to board or senior management and reflect risk profile and capital needs.

Description and findings re EC7
- Supervisory process (SRC, VEs, and continuous monitoring) assesses how corporate risk information is captured and reported to management and the board regularly and timely.
- Management reports are expected to provide a comprehensive view (solo and consolidated) of the bank’s risk profile and to enable identification, prevention and timely correction of risk control and management deficiencies.
- Resolution no. 2554 addresses monitoring reports; other resolutions state the need to issue reports to senior management.

### EC8 — New products and major initiatives
- Supervisor determines banks have policies/processes to ensure new products and major risk management initiatives are approved by the board or a specific board committee.

Description and findings re EC8
- Supervisory Manual directs evaluation of new product procedures during onsite activities and continuous monitoring.
- Risk management policies must be approved and reviewed at least once a year by senior management and the board; supervision evaluates formal strategies/policies for credit, market and liquidity risk, alignment with objectives, communication, senior management commitment, and AML policies.

### EC9 — Segregation of duties for risk control functions
- Supervisor determines banks have risk evaluation, monitoring and control/mitigation functions with duties segregated from risk-taking functions and reporting directly to senior management and the board.

Description and findings re EC9
- Resolutions 3380, 3464 and 3721 require segregation of risk management functions from risk-taking functions and direct reporting of risk exposures to senior management and the board.

### EC10 — Issuance of standards for key risk types
- Supervisor issues standards related to credit risk, market risk, liquidity risk, interest rate risk in the banking book and operational risk.

Description and findings re EC10
- See CPs 8, 9, 13–16 and EC 1 above.

### Additional Criteria (AC)
- AC1: Supervisor requires larger/complex banks to have dedicated units for risk evaluation, monitoring and control; these units subject to periodic review by internal audit. Resolutions on operational, market and credit risk require risk management activities be performed by a specific unit with skills/sophistication commensurate with activities.
- AC2: Supervisor requires banks to conduct rigorous, forward-looking testing to identify possible events or changes in market conditions that could adversely impact the bank. (See EC 6 regarding stress testing.)
- AC3: Supervisor requires policies/processes for assessing other material risks not directly addressed, such as reputational and strategic risks. Circular 3547 (ICAAP) and SRC-Risk and Control Assessment System manuals specifically require evaluation of reputational and strategic risks.
- Other risks (liquidity, strategic, reputational, environmental externalities) must be assessed relative to capital even if not effectively measured; Supervisor captures and evaluates such risks through monitoring and risk rating process.

### Assessment of Principle 7
- Compliant

### Principle 8 — Credit risk (overview and essential criteria)
- Principle 8 requires supervisors be satisfied banks have a credit risk management process taking into account the institution’s risk profile, with prudent policies/processes to identify, measure, monitor and control credit risk (including counterparty risk). Covers granting loans and investments, evaluation of quality, and ongoing management of loan and investment portfolios.

EC1 — Board approval and supervisory confirmation
- Supervisor evaluates credit processes via SRC (comprehensive review), ongoing monitoring, and targeted onsite reviews (VE’s).
- Examination procedures in Supervisory Manual guide evaluation relative to size and complexity.
- Inspection process evaluates system of credit risk management, ability to identify/measure risk and strategies to control/mitigate risk.
- Evaluation includes interviews with management, audit committees and control functions to determine if credit granting and growth are commensurate with policies, procedures, controls and risk appetite.
- Supervisory assessment examines:
  - credit risk management framework;
  - operating rules for credit committees;
  - credit policies and lending strategies (including limits, large exposure management);
  - credit process (granting, monitoring, collecting, segregation of duties, client analysis, collection activity, exception monitoring, etc.);
  - methodology for rating each loan and for establishing the relevant loan loss provision;
  - credit portfolio management;
  - credit systems (IT);
  - routines and procedures to identify, measure, manage and mitigate credit risk exposures.
- Policies and strategies for credit risk management required to be reviewed at least annually by Board and senior management.

EC2 — Controlled credit risk environment
- Supervisor requires policies/processes to establish an appropriate and properly controlled credit risk environment, including:
  - a well documented strategy and sound policies/processes for assuming credit risk;
  - well defined criteria/policies/processes for approving new exposures and renewing/refinancing existing exposures with appropriate approval authority;
  - effective credit administration policies/processes, including continued analysis of borrower’s ability/willingness to repay, monitoring of documentation, legal covenants, contractual requirements and collateral, and a classification system consistent with bank activities or supervisor-prescribed asset grading;
  - comprehensive policies/processes for reporting exposures on an ongoing basis;
  - comprehensive policies/processes for identifying problem assets; and
  - prudent lending controls and limits, including monitoring exposures relative to limits, approvals and exceptions.

Description and findings re EC2
- Main standards enumerated in Resolution 2554, Resolution 2682 and Resolution 3721.
- Resolution 3721 requires banks to implement a credit risk management structure responsible for:
  - policies and strategies for credit risk management;
  - validation of systems, models and procedures used in credit risk management;
  - estimation of losses due to credit risk;
  - adoption of procedures for credit recovery;
  - use of credit risk mitigation tools;
  - limits for risk appetite;
  - classification of exposures according to level of credit risk;
  - assessment of credit risk associated to new products;
  - stress testing of credit risk models;
  - credit risk management reports and documentation.
- Supervisory staff conducts continuous offsite monitoring including review of:
  - public reports concerning credit risk management structure;
  - external audit reports reviewing criteria adopted to classify operations and evaluation of correspondent provisions;
  - internal bank management reports and MIS;
  - information from Credit Risk Monitoring (MRC) tool used by continuous monitoring department;
  - meetings with teams responsible for credit risk management in the institution.

EC3 — Arm’s length credit decisions and conflict of interest mitigation
- Supervisor requires and periodically confirms credit decisions are free of conflicts of interest and on an arm’s length basis.

Description and findings re EC3
- Ban on loans or advancements to related parties is defined in Banking Law 4595 and Circular 30; violations defined as crimes against the SFN in Law no. 7492.
- Resolution 3721 (2009) forbids staff and directors from accumulating activities that may offer conflicts of interest and bans cumulative execution of granting/approving loans, credit risk management and/or internal audit.
- Resolution 3859 (2010) establishes corporate governance principles for credit unions.

EC4 — Supervisory access to credit portfolio information and officers
- Supervisor has full access to information in credit and investment portfolios and to bank officers involved in credit risk functions.

Description and findings re EC4
- Banking Law guarantees access to all institutional data necessary for supervisory duties.
- Complementary Law 105 establishes that secrecy of financial institutions operations will not be used to deny BCB scrutiny while carrying out supervision.
- Documentation relating to credit risk management structure and related policies/strategies must be kept available to BCB (Resolution 3721).
- Institutions must send information about credit operations to the BCB (Resolution no. 3658 and Circular 3567) as input for ongoing credit risk supervision.
- Information available through on- and offsite processes is extensive and used heavily in ongoing analysis of credit risk quality, trends, and management and board oversight.

Additional Criteria for Principle 8
- AC1: Credit policy must prescribe that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by senior management; Resolution 3721 provisions include evaluation/decision according to size and risk content, including large exposures.
- AC2: Supervisor determines banks have policies/processes to identify, measure, monitor and control counterparty credit risk exposure, including potential future exposure; when institution sells credit portfolio but retains major risks, it must remain on balance sheet (Resolution 3533).
- AC3: See EC 5 regarding assessment of other risks.

Assessment of Principle 8
- [Assessment entry present in source but not repeated here as this content unit ends prior to a formal grading for Principle 8 in the supplied text.]

*Source: _cr12207 - 6404. Relevant regulation includes:*

### 3721. These provisions include that credit risk exposures are to be evaluated and decided

### _cr12207 - 3721. These provisions include that credit risk exposures are to be evaluated and decided

### AC3 — Supervisor requires monitoring of total indebtedness
- The supervisor determines that banks have policies and processes to monitor the total indebtedness of entities to which they extend credit.
- Description and findings:
  - Main provisions for credit risk management for institutions are enumerated in Resolution 3721.
  - Systems, routines and procedures must exist to identify, measure, monitor and mitigate exposure to credit risk.
  - Limits to extension of credit must be established on the individual level and on the aggregate level concerning operations with similar characteristics.
  - In practice, the largest banks manage credit risk through a developed management committee structure assuring a “more than four eyes” approach to credit analysis and approval.
  - Boards receive comprehensive information on credit risk management.
- Assessment of Principle 8: Compliant

### Principle 9 — Problem assets, provisions and reserves (overview)
- Supervisors must be satisfied that banks establish and adhere to adequate policies and processes for managing problem assets and evaluating the adequacy of provisions and reserves.

### EC1 — Legal/regulatory requirements for identification and management of problem assets
- Laws, regulations or the supervisor require banks to formulate specific policies and processes for identifying and managing problem assets and to conduct periodic review of problem assets and asset classification, provisioning and write-offs.
- Description and findings:
  - Resolutions 2682 and 2697 provide the regulatory framework for loan classification (including leasing and other extensions of credit) and provisioning standards.
  - Financial institutions must grade credits into nine categories: AA, A, B, C, D, E, F, G and H (increasing levels of risk).
  - Institutions must make a qualitative judgment about a borrower’s ability to repay using verifiable and consistently applied criteria; both past performance and future prospects must be considered.
  - When more than one credit to a customer or economic group is outstanding, the most severe classification applies for both (exceptions may apply for specific loan characteristics such as highly liquid collateral).
  - Classification must be based on “consistent and verifiable criteria and supported by inside and outside information.”
  - Past due credits must be automatically classified on a monthly basis according to the number of days past due.
  - Credits rated “H” must be written-off after 6 months but continue to be accounted for off-balance sheet.
  - Accrual of interest is required to stop after 59 days in arrears.
  - Credits past due a minimum of 15 days must be rated at the “B” level, at a minimum, with progression to “H” for a period greater than 180 days.
  - Minimum provision amounts depend on loan rating and range from zero for AA to 100 percent for H.
  - Management remains responsible for ensuring adequacy of provisions notwithstanding minimum requirements.
  - Resolution rules address renegotiated credits, documentation for internal credit reviews, collateral valuation, and disclosure in financial statements.
  - Reclassifications of renegotiated credits are allowed upon significant amortization or relevant new facts (e.g., new highly liquid collateral).
  - Payments on renegotiated credit are recognized only when installments are duly paid.
  - Auditors must review restructuring criteria and verify appropriateness of classifications and loan loss reserves.
  - Supervisors may require changes in classifications and impose additional provisions.
  - Resolution 3721 requires institutions to implement a credit risk management framework including detection and prevention of credit risk deterioration and periodic evaluation of collateral.
  - Resolution 2682 directs periodic review of credit classification: a) monthly due to payment delay; b) each 6 months if a single client or group represents 5 percent or more of the institution’s capital base; c) each 12 months for all other cases.
  - Financial institutions are required to rate all loans where they retain credit risk, including purchased loans; if purchased with full recourse, the purchaser must assess the selling institution’s creditworthiness.

### EC2 — Supervisor confirmation of adequacy of classification and provisioning
- The supervisor confirms adequacy of a bank’s classification and provisioning policies and processes and their implementation; reviews supporting this opinion may be conducted by external experts.
- Description and findings:
  - Determination of adequate classification and provisioning processes (consistent with Resolutions 2682, 2554, and 3721) is a key focal point of credit risk inspections.
  - Key elements examined include credit analysis, approval, and management processes.
  - Onsite inspections perform tests to ensure institutions use a minimum set of credit factors in assignment and review of risk ratings.
  - Borrower creditworthiness, portfolio condition, and risk management adequacy (including accuracy of risk ratings and provisions) are determined by selecting and evaluating a sample of credit operations decided prior to the inspection.
  - Samples may be selected randomly or based on evidence from the Credit Information System (SCR), including borrowers with delinquent loans in other institutions or worse ratings elsewhere.
  - Following inspection, the Supervisor may determine new ratings and require additional provisioning according to Resolution 2682.

### EC3 — Off-balance sheet exposures included in classification and provisioning
- The system for classification and provisioning takes into account off-balance sheet exposures.
- Description and findings:
  - Resolution 3721 requires provisioning mechanisms for all exposures, including off-balance sheet.
  - The Supervisor classifies all credit obligations associated with the borrower including loans (funded and unfunded commitments), guarantees, and other relevant off-balance sheet obligations.

### EC4 — Provisions and write-offs reflect realistic recovery expectations
- The supervisor determines that banks have appropriate policies and processes to ensure provisions and write-offs reflect realistic repayment and recovery expectations.
- Description and findings:
  - See also EC2.
  - Resolution 3721 requires a credit risk management framework including:
    - a) well documented policies and strategies establishing operational limits, mitigation mechanisms and procedures to maintain exposures within senior management–defined acceptable levels;
    - b) estimation and provisioning of credit losses based on consistent and prudential criteria;
    - c) procedures for loan recovery; and
    - d) documentation on loss/recovery of loans.
  - Framework must include procedures for credit information and documentation; periodic collateral evaluation; identification and prevention of credit quality deterioration; and handling of limit and credit exceptions.
  - Credit risk management must be conducted by a unit separate from the business line.
  - Resolution 3721 prescribes stress tests and use of outcomes to define thresholds and policies.
  - Since July 2010, banks seeking approval for internal models to calculate capital requirement for market risk have had their stress tests assessed by the supervision.
  - In 2012, there will be on-site examinations regarding the IRB implementation process in large banks which will include assessment of credit risk stress tests.
  - In 2013, the scope of stress testing assessments will include all risks and the way each one affects the others, in the context of ICAAP.
  - For selected banks implementing the Internal Ratings-Based (IRB) approach, the Supervisor will conduct a review of credit risk stress testing. This review started at the end of

*Italic: IMF staff report content as provided in the source document.*

### 2011. The Supervisor also intends to require large banks (that opt for an Internal Model

### _cr12207 - 2011. The Supervisor also intends to require large banks (that opt for an Internal Model

### Asset quality, classification, and provisioning (Principle 9)
- Supervisor duties and powers
  - Supervisor may determine reclassification of credit operations and demand corrective actions including capital allocation for incorrectly classified operations (Resolution 2682).
  - Supervisor may require, as a prudential measure, financial institutions to increase capital when deterioration could threaten soundness of the bank (Resolution no. 4019).
  - Supervisor maintains an extensive database updated monthly by financial institutions and can request additional information as deemed necessary.
- Onsite review and validation
  - Specialist credit inspection teams examine asset quality during on-site inspections, including loans and advances, off balance sheet items, due from banks, investments, acquired assets, and other assets.
  - Supervisors validate banks’ internal loan review systems, classification and provisioning policies, loan approval and credit administration, collection efforts, collateral valuation practices, and adherence to bank policies.
- Valuation and risk mitigants
  - Valuation of collateral is required to reflect the net realizable value. Resolution 3721 directs that risk mitigants, including guarantees, be considered in classification and supervisory credit review.
- Criteria and thresholds for impairment and provisioning
  - Resolution no. 2682 establishes a threshold of R$50,000 as an exception to classifying and provisioning by delinquency, but all credits require individual evaluation (classification).
  - Minimum required provisions by arrears and risk level:
    - I - arrears up to 15 days - risk level A - minimum provision of 0,5 percent;
    - II - arrears from 15 to 30 days - risk level B - minimum provision of 1 percent;
    - III - arrears from 31 to 60 days - risk level C - minimum provision of 3 percent;
    - IV - arrears from 61 to 90 days - risk level D - minimum provision of 10 percent;
    - V - arrears from 91 to 120 days - risk level E - minimum provision of 30 percent;
    - VI - arrears from 121 to 150 days - risk level F - minimum provision of 50 percent;
    - VII - arrears from 151 to 180 days - risk level G - minimum provision of 70 percent;
    - VIII - arrears over 180 days - risk level H - minimum provision of 100 percent.
- Assessment
  - Principle 9: Compliant.
  - Comment: Regulatory framework and supervisory process diligently address and continuously monitor credit risk; supervisor receives rich on- and off-site information.

### Large exposure limits and concentration (Principle 10)
- Definitions and limits
  - "Large exposure" defined as exposure per client or per security-issuing entity that represents 10 percent or more of the bank’s capital.
  - Maximum exposure limit per client: 25 percent of capital.
  - Global limit for all large exposures added up: 600 percent of capital.
  - Limit on credit operations with public sector entities: 45 percent of capital (Resolution 2827).
- Monitoring and authority
  - Resolution 2844 defines “client” and authorizes BCB flexibility to interpret connectedness and to adopt measures necessary for compliance with exposure concentration limits.
  - BCB monitors exposures via credit registry and can require corrective action if concentration levels expose the bank to significant risks (Resolution 2844, Resolution 4019).
- Reporting
  - Circular 3398 establishes reporting requirements corresponding to limits and minimum standards, including exposure per client and sum of concentrated exposures.
- Assessment
  - Principle 10: Compliant.

### Exposures to related parties (Principle 11)
- Legal prohibitions and enforcement
  - Article 34 of the Banking Law prohibits lending to or guaranteeing obligations of: (i) directors, executive officers, managers, members of fiscal council, their spouses and certain relatives; (ii) any entity of which the institution holds more than 10 percent of capital (except with prior BCB approval in certain circumstances); (iii) any entity of which the persons in (i) hold more than 10 percent of total capital.
  - Violations defined as crimes against the SFN in Law no. 7492.
- Monitoring
  - BCB closely monitors compliance through the credit registry to ensure banks do not make arrangements to lend to each other’s related parties; cases of collusion have been uncovered and prosecuted.
- Assessment
  - Principle 11: Compliant.

### Country and transfer risk (Principle 12)
- Requirements and monitoring
  - Resolution 3721 requires banks to include country risk and transfer risk within credit risk frameworks and to implement systems to monitor credit risk.
  - BCB can obtain banks’ foreign exposures from the credit registry; banks must disclose total credit risk exposure and average exposure in the quarter segmented by countries and geographic regions with relevant exposures.
  - International exposure of Brazilian banks is limited: banks cannot on-lend funds raised in Brazil on a cross-border basis.
- Assessment
  - Principle 12: Compliant.

### Market risk (Principle 13)
- Governance and responsibilities
  - Resolution 3464 (amended by Resolution 3897) regulates market risk management framework, requiring a segregated market risk management unit; the director responsible must not execute asset management or treasury functions.
  - Policies and strategies must be approved and revised at least annually by senior management and board.
- Controls, valuation, and stress testing
  - Market risk unit must perform stress tests and scenario analysis and evaluate systems at least annually.
  - Supervisory on-site inspections verify adequacy of policies, mark-to-market processes, limit structures, back testing accuracy, and independence of valuation personnel.
  - Two market features minimize valuation problems: compulsory registration of financial instruments and absence of a secondary market for private instruments.
- Assessment
  - Principle 13: Compliant.

### Liquidity risk (Principle 14)
- Framework and reporting
  - Resolution 2804 requires banks to provide daily assessment of maturity and repricing gaps over a 90 day horizon, establish processes to ensure liquidity in distressed scenarios, and have contingency planning (Circular 3393).
  - Liquidity regulation to be updated to emphasize responsibilities of board and senior management.
- Monitoring and stress testing
  - Supervisor conducts stress tests, continuous monitoring, and generates exceptions on transactional, position, and trend bases; extensive regulatory reporting and interfaces with financial instrument registrars provide timely information.
- Foreign currency considerations
  - Brazilian banks are not allowed domestically to have deposits and investments in foreign currency; foreign currency exposures are tracked, and Resolution 2804 requires banks to evaluate liquidity risk for each material currency separately.
- Assessment
  - Principle 14: Compliant.

### Operational risk (Principle 15)
- Regulatory requirements
  - Resolution 2554 and Resolution 3380 require implementation of internal control and operational risk management frameworks commensurate with complexity of operations.
  - Operational risk includes internal/external fraud, employment practices, customer/product practices, physical asset damage, interruptions to activities, IT gaps, and failure to meet deadlines.
- Supervisory structure and examinations
  - Dedicated supervisory teams: Operational Risk Team, Legal Risk and Tax Accounting Team, IT Team, Corporate Governance Team.
  - Supervision uses VE—Special Verification—Operational Risk Management procedures to evaluate governance, loss databases, reporting, and contingency planning.
- IT and outsourcing
  - Resolution 2554 directs periodic security tests; Resolution 3380 treats IT failures as operational risk and requires operational risk framework to address outsourcing risks and contingency plans.
  - Supervisory Manual uses Cobit methodology for IT and continuity evaluations.
- Assessment
  - Principle 15: Compliant.

### Interest rate risk in the banking book (Principle 16)
- Governance and measurement
  - Resolution 3464 and Circular 3365 require banks to implement policies, systems, and stress testing for IRR in the banking book; policies must be approved and reviewed at least annually.
  - Circular 3365 requires IRR systems to:
    - incorporate relevant instruments and accepted techniques;
    - address characteristics like rates, maturities, pricing, embedded options;
    - transform positions into cash flows and measure sensitivity to term structure changes;
    - be integrated into daily risk management and include stress tests and capital measurement.
- Stress testing and reporting
  - Stress tests must be performed at least quarterly and estimate percentage change in market value of banking operations against regulatory capital.
  - Stress tests must estimate number of basis points of a parallel interest rate shock that would lead to a decline in market value of banking operations corresponding to 5 percent, 10 and 20 percent of regulatory capital.
  - Institutions must forward a report on the results of IRR assessment to the Supervisor.
- Model validation and retention
  - Models are required to be validated every three years unless significant change warrants earlier validation.
  - Supervisory information retention: monitoring reports of internal control system for a period of five years; reports detailing measures of IRR and capital details per Circulars and Letters cited.
- Assessment
  - Principle 16: Compliant.

### Internal control and audit (Principle 17)
- Responsibilities and frameworks
  - Resolution 2554 assigns to board and senior management responsibility for internal controls; internal controls framework based on BIS/COSO five components and detailed in the Supervision Manual.
  - Audit committee requirements (where applicable) include assessing effectiveness of external and internal auditors and reporting evidence of error or fraud to the Supervisor.
- Internal audit and compliance
  - Resolutions 2554 and 3056 require an internal audit function; internal audit must have sufficient resources, independence, full access to records, a risk-based audit plan, and authority to assess outsourced functions.
  - Majority of banks (95 percent of institutions) assign an officer or unit responsible for compliance activities; large banks typically have separate compliance units.
- Supervisor powers
  - BCB can suspend directors (Article 44 of Banking Law), impose a Board, and ultimately liquidate if issues persist; BCB vets board member qualifications on appointment and renewal (every three years).
- Assessment
  - Principle 17: Compliant.

### Abuse of financial services / AML-CFT (Principle 18)
- Institutional responsibilities and coordination
  - Central Bank of Brazil (BCB) issues regulations, conducts inspections, verifies compliance and applies administrative sanctions (Law 9613).
  - Council for Financial Activities Control (COAF) is the Financial Intelligence Unit; BCB has a seat on COAF’s Council and access to communications on suspicious transactions.
- Required bank measures
  - CMN and BCB regulations (Resolution 2554, Circular 3461) require banks to implement AML/CFT internal control procedures that:
    - specify responsibilities at each hierarchical level;
    - enable timely collection and registration of customer information including identification of final beneficiaries and politically exposed persons;
    - define criteria for employee selection, training and monitoring;
    - include preliminary analysis of new products and services for AML/CFT risk;
    - be approved by the board and extensively internally disclosed.
  - Monitoring and reporting obligations:
    - Communication to COAF of cash operations and transactions exceeding R$ 100 thousand, and reporting of operations showing signs of crimes in Law 9613 irrespective of value.
    - Maintain customer files and operation records for 5 years.
  - Nomination of a director responsible for implementation, compliance, and communication of suspicious transactions to COAF.
  - Adoption of rigorous procedures for correspondent banking and relationships with foreign financial institutions, especially with jurisdictions lacking similar registration and control procedures.
- Legal protections and coordination
  - Law 9613 states communications made in good faith to COAF will not result in civil or administrative liability.
  - BCB must notify competent authorities of evidence of irregularities or illegal administrative offenses discovered in supervision (Complementary Law no. 105).
- Assessment
  - Principle 18: Compliant.

*Source: _cr12207 - 2011. The Supervisor also intends to require large banks (that opt for an Internal Model (excerpt) — IMF provided PDF content.*

### 3461. These strengthened procedures also apply to the initial relationship with customers

### _cr12207 - 3461. These strengthened procedures also apply to the initial relationship with customers

### AML/CFT customer due diligence and correspondent relationships
- Strengthened procedures apply to initial relationships established via electronic means, through correspondent banks, or any other indirect mean.
- Financial institutions should dedicate special attention to transactions with customers from countries that apply the recommendations of the Financial Action Task Force (FATF) in an unsatisfactory manner.
- Requirements for cross-border correspondent relationships:
  - a) gather information on the correspondent institution about its reputation and the quality of its supervision, including if the institution has been subject to investigation or to any action related to AML/CFT;
  - b) assess the controls adopted by the correspondent institution with respect to AML/CFT;
  - c) obtain approval from the director responsible for the transactions in the foreign exchange market before establishing a new correspondent relationship;
  - d) document the respective responsibilities of each institution regarding AML/CFT.
- RMCCI provisions (Title 1, Chapter 13, Section 1, item 9A) reproduce these duties and prohibit relationships with institutions that:
  - I - do not have physical presence in the country in which is constituted and licensed; and
  - II - are not affiliated to any financial services group that is subject to effective supervision.

### Enhanced attention areas (Circular 3461 / Circular 3.461)
- Financial institutions should pay special attention to:
  - a) transactions or proposals whose characteristics (involved parts, values, forms of implementation and instruments) or lack of economic or legal grounds raise suspicion of crimes described in Law 9613;
  - b) opening of accounts and/or beginning of transactions with politically exposed persons of Brazilian nationality and those from countries with high financial/commercial transactions or proximity to Brazil;
  - c) evidence of fraud in identification and registration procedures set out in Circular 3461;
  - d) customers and operations where it is not possible to identify the final beneficiary;
  - e) transactions with customers from countries that unsatisfactorily apply the FATF recommendations (responsible officers of Brazilian banks with subsidiaries/branches in those countries must communicate the BCB about the unsatisfactory application);
  - f) situations where it is not possible to keep customer information files updated.
- Special attention measures include enhanced monitoring, analysis prior to reporting to the COAF, and senior management evaluation regarding entering/maintaining the relationship.

### Supervisory Review and Control (SRC) and Special Verifications (VE)
- SRC evaluates AML/CFT risk, risk management and mitigation capacity; failures may require measures of improvement.
- SRC findings may lead to Special Verifications (VE), which:
  - are restricted to AML/CFT subjects;
  - use more detailed procedures to assess policies and controls;
  - monitor action plans for improvements to be implemented.
- Evaluation of internal controls includes:
  - a) evaluation of organizational structure, including Board/senior management role in fostering AML/CFT practices;
  - b) policies of Customer Due Diligence, “know-your-employee” and training;
  - c) examination of the work of the auditors.
- Internal audit must be part of internal controls; when not performed internally it may be carried out by an external auditor. Circular 3467 requires AML compliance be audited.

### Reporting obligations and thresholds (Circular 3.461 / Resolution 3.198 / Circular 2.025 / Circular Letter 3.298)
- BCB Circular 3.461 (art. 13) requires communication to Coaf:
  - I – operations with value equal to or above R$10,000.00 (ten thousand reais) that may present evidence of crimes in Law 9,613, of 1998;
  - II – operations which, by frequency, value or form, are suspicious of trying to bypass identification, control and registration mechanisms;
  - III – operations, whatever the value, to persons who reportedly have perpetrated or tried to perpetrate terrorist acts or participated/facilitated them, and existence of resources pertaining to or controlled by them;
  - IV – suspicious acts of financing terrorism.
  - §2 communications of items III and IV must be done up to the first business day following verification.
  - §3 proposals for operations described in items I–IV must also be communicated to Coaf.
- CMN Resolution 3.198 (Art. 23) requires independent auditors/audit committees to communicate to the Central Bank in up to three days from identification evidence of error or fraud meeting specified criteria.
- BCB Circular 2.025 (Article 13) requires financial institutions to close a deposit account with serious irregularities and communicate immediately to the Central Bank of Brazil.
- BCB Circular Letter 3.298 requires sending ombudsman reports to the Central Bank on specified themes (e.g., opening accounts without proper documentation, unauthorized debits, scams, frauds by employees, complaints from correspondent network, bank secrecy).

### AML/CFT program elements and bank practices (EC4 / EC5 / EC8–EC12)
- KYC program essential elements (group-wide):
  - customer acceptance policy excluding certain relationships;
  - customer identification, verification and due diligence program, including beneficial ownership verification and risk-based record updates;
  - policies/processes to monitor and recognize unusual or potentially suspicious transactions, particularly high-risk accounts;
  - escalation to senior management for decisions on high-risk relationships (e.g., politically exposed persons);
  - clear rules on records retention with at least a five year retention period.
- Banks must appoint a senior officer (normally a statutory director) responsible for AML compliance and reporting to COAF (Circular 3461).
- Monitoring and reporting process:
  - AML software (in-house or third-party) used to select transactions for analysis;
  - specialized compliance units analyze selected transactions and may demand assessments from relationship managers;
  - if deemed atypical, a report is referred to an AML Committee (senior managers, including the money laundering reporting officer);
  - once AML Committee decides to report as suspicious, a report must be made to COAF no more than 24 hours after the committee decision;
  - all analyses of selected transactions must be recorded for five years.
- BCB oversight:
  - Annual SRC verifies senior management commitment to ethics, laws and regulations;
  - compliance inspections based on the Annual Supervision Plan (PAS) plus ad hoc checks; 65 inspections conducted in 2011;
  - specialized AML unit conducts inspections, horizontal reviews, and follows up on FATF recommendations and AML system implementations.
- EC5 (correspondent banking): banks must gather sufficient information to understand respondent banks’ businesses and supervision; not establish/continue correspondent relationships with banks lacking adequate controls or effective supervision or with shell banks.
- Complementary Law 105 allows BCB to sign agreements with other supervisors and central banks for supervising branches/subsidiaries and information exchange; BCB has signed agreements based on BCBS model ("Essential elements of a statement of cooperation between banking supervisors").

### Supervisory powers, enforcement and information sharing (EC6–EC12, AC1)
- BCB has enforcement powers to take supervisory action for AML violations; 13 sanctions (fines) applied in past years.
- BCB must notify competent authorities of signs of crimes or evidence of irregularities observed in supervisory duties (Complementary Law 105).
- BCB must send to Coaf information on customer identification data and value movements related to operations listed in Law 9.613.
- Complementary Law 105 and Law 9613 provide that communications to competent authorities and suspicious activity reports made in good faith do not constitute breaches of secrecy or result in administrative/civil liability.
- BCB can cooperate and sign agreements with domestic supervisory entities and foreign central banks/supervisory entities for joint supervision and mutual cooperation/information exchange.
- AC1: Not applicable for in-house criminal expertise—criminal violations are addressed by COAF.

### SRC and overall supervisory framework (Principles 18–22)
- SRC is central to risk-based supervision: an institution’s supervisory cycle (12 or 24 months) uses SRC as a stocktaking inspection reviewing all accumulated information and targeted inspections; Corec validates and amends supervisory results and planning.
- Supervision organization and tools:
  - specialized teams for credit, liquidity, market, operational risk, legal/fiscal, Validation, Basel II/III, corporate governance/internal controls, IT, accounting, AML, foreign exchange, clients/users;
  - continuous off-site monitoring (SIM/Variations) fed by regulatory reporting and data feeds from BM&FBOVESPA, CETIP, and SELIC;
  - Memory System and Comment System record supervisory history and provide inputs for decision-making.
- Reporting and information powers:
  - Banking Law and Circular 3402 / Resolution 2723 / Resolution 3490 / Cosif provide powers to require solo and consolidated data, including non-financial companies in groups;
  - supervisory reporting periodicities: DDR (daily, capital components—only banks/institutions with large exposures), DLO (monthly, operational limits—all institutions; smaller institutions with total assets or credit provided below R$100,000,000.00 report less detail), daily/monthly market/liquidity reports, monthly credit reporting via SCR; Cosif reporting monthly or quarterly depending on total credit provided threshold R$100,000,000.00.
- Validation and audit:
  - Cosif and Circular 1273 define accounting standards; Resolution 3786 requires IFRS-based consolidated statements for certain institutions as of December 31, 2010;
  - external auditors must follow ISA-consistent standards; Resolution 3198 sets external audit rules and requires auditors to inform BCB in up to three days of identified errors/fraud (Resolution 3.198);
  - Circular 3467 grants the BCB power to direct complementary examinations and to require review of external auditor work in specific cases.
- Enforcement on reporting and data integrity:
  - Failure to provide or incorrect information subjects institutions and administrators to penalties (Resolution 3883 and Resolution 1065);
  - BCB has remedial powers and regular contact to clarify reports.
- Supervisory assessments:
  - Supervisory rating systems (CAER, institutional AML risk rating 1–4) and Score Monitoring Reports support prioritization and planning;
  - SRC, continuous monitoring and targeted inspections create a forward-looking supervision methodology (AC1).

*Source: _cr12207 - 3461. These strengthened procedures also apply to the initial relationship with customers*

### Section 22 of the Cosif (Elaboration and Publication of Financial Statements of basic norms)

### Section 22 of the Cosif (Elaboration and Publication of Financial Statements of basic norms)

### Disclosure requirements (EC9)
- Circular 3.477 (annex 4) requires disclosure of risk management structures and functions, regulatory capital, minimum required capital by type of risk and exposures (market, credit, operational risks and IRR).
- Circular 3.477 requires banks to have a disclosure policy with defined responsibilities.
- Different frequencies of disclosures: some information must be disclosed quarterly (quantitative), others semiannually or annually.
- Resolution 3464 (annex 5) requires implementation of a market risk management structure and publication (at least annually) of information on the market risk structure together with the financial statement.
- Resolution 3380 (annex 6) requires implementation of an operational risk management structure and publication (at least annually) of a description together with the financial statement.
- Resolution 3721 (annex 7) requires implementation of a credit risk management structure and publication (at least annually) of a description together with the financial statement.
- Resolution 3988 (annex 8) requires implementation of a capital management structure and disclosure (at least annually) of a description of its capital management structure.
- Required disclosures include both qualitative and quantitative information on a bank’s financial performance, financial position, risk management strategies and practices, risk exposures, transactions with related parties, accounting policies, and basic business, management and governance.
- The scope and content of information provided and the level of disaggregation and detail should be commensurate with the size and complexity of a bank’s operations.

### Enforcement and review of disclosures (EC10)
- Circular 2804 empowers the Supervisor to demand the republication of financial statements that were not made according to the established rules.
- Circular 3477 holds a (executive) director responsible for the information disclosed.
- The BCB adopted IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, effective from 1.1.2012, by Resolution 4007.
- If the Supervisor determines that significant adjustments to the disclosed financial are required, most likely through an onsite inspection, the bank is required to notify the public about such an event.
- In practice, such notifications have occurred through a note to the financial statement rather than through republication of the statement itself.

### Aggregate publication and transparency (EC11)
- The BCB releases on its website analytical accounting information aggregated by type of institution.
- The Financial Stability Report of the BCB presents aggregate data.
- The BCB also publishes registry information and financial statements of individual institutions and financial conglomerates on its website.

### Additional criteria on disclosure and external audit (AC1–AC5)
- AC1: The Supervisor meets with the external auditor during on-site examinations to examine paperwork and understand auditing procedures; during continuous monitoring, Supervision has periodic meetings with external audit executives.
- AC2: Resolution 3198 (Annex) establishes that the external auditor and the Audit Committee must formally communicate to the Supervisor, within three working days of identification, evidence of error or fraud identified in specific situations. Supervision verifies such reporting.
- AC3: Resolution 3198 (amended by Resolution no. 3606/2008 and Circular-Letter 3367) requires financial institutions to replace the technical person in-charge (akin to auditor-in-charge), director, manager, supervisor and any other professional in a managing position involved in the relevant institution’s external audit work after the issuance of five complete annual reports. The Supervision Manual directs that the Supervisor should verify the rotation of the staff.
- AC4: Circular 3477 requires institutions to have a formal disclosure policy approved by the Board specifying: the information to be disclosed, the internal controls system applied to the information release process, the establishment of a continuous assessment process of the reliability and adequacy of the information released, and the relevance criteria applied to the releasing information.
- AC5: Resolution 3198 states that contracts between financial institutions and external auditors must include a clause granting access to the BCB, at any time, to external auditors’ workpapers and any other document used in issuing bank related reports. In practice, Supervision requests auditors’ workpapers to assist in scoping and review of on- and off-site analysis.

### Assessment
- Assessment of Principle 22: Compliant

---

### Corrective and remedial powers of supervisors (Principle 23)

### Early intervention and enforcement powers (EC1)
- The BCB has enforcement powers: corrective; prudential (preventive measures); sanctioning and intervention/resolution.
- Law 4595 establishes that the BCB is responsible for banking surveillance to identify and require corrective action for violations and unsafe and unsound banking practices, including inadequate risk management and internal control deficiencies.
- Resolution 4019 establishes preventive enforcement measures to preserve soundness, stability, and regular functioning of banks, enabling requiring correction based on judgmental views on adequacy of internal controls and corporate governance.
- Resolution power is based on “temporary special administration regime”, “intervention” and “extrajudicial liquidation” prescribed in Law 6024, Decree-Law 2321 and Law 9447.
- The sanctioning (punitive) process is initiated by supervisory staff via a “Punitive Administrative Process” regulated by Law 9784.
- Penalties established by federal laws (Banking Law, Law 9613 and Law 4131) include: (i) warnings; (ii) fines; (iii) suspension of managers; (iv) temporary disqualification to hold executive positions; and (v) cancellation of the license to operate.

### Supervisory tools and procedures (EC1 continued; B)
- Minor deficiencies are addressed through an “inspection letter” with required corrections.
- More severe cases involve an “attendance order” summoning managers and majority shareholders to define a corrective action plan with deadlines; the plan and timeline must be approved and followed-up by BCB.
- Supervisory staff may directly contact any department or employee of the financial institution.
- Preventive prudential measures BCB may determine include:
  1. Adoption of additional controls and procedures.
  2. Reduction of the risk of exposures.
  3. Increase of the minimum capital level.
  4. More restrictive operational limits.
  5. Increase of liquidity level.
  6. Restriction to manager’s income, as well as to payments to shareholders. However, existing law requires that banks pay a minimum of 25 percent of their net profits as dividends. The BCB cannot reduce that floor in a supervisory action.
  8. Restriction to operations, acquisitions and opening new branches.
  9. Sale of assets.
- Supervision tools may be applied independently; decisions consider nature, extent, severity, relevance and contumacy of the situation.
- Authority to take decisions varies by instrument (e.g., attendance orders require approval of Head of Division; administrative punitive processes decided by a committee).
- For severe and continuous breaches, inconsistent information, or non-conformity to foreign exchange procedures, BCB may impose penalties established by Banking Law and Law 9613.
- In extreme cases (severe asset impairment or continuous breaches), BCB can adopt resolution tools and declare “intervention”, “extrajudicial liquidation” or “temporary special administration regime” (Law 6024, Decree-law 2321, and Law 9447).

### Resolution and coordination (EC2–EC4)
- EC2: The BCB is responsible for initiating resolution of an institution and coordinating the involvement of the FGC.
- EC3: BCB has applied enforcement tools under Resolution 4019 in advance, imposing dividend restrictions and requiring managers to restore liquidity levels. Banks under enforcement are placed on a watch list and subject to increased monitoring (observance of corrective action deadlines, implementation of regularization plan, monitoring by independent auditor, timely reporting).
- If deficiencies persist, resolution measures include “intervention”, “extrajudicial liquidation” or “temporary special administration regime”.
- EC4: Resolution 4019 allows BCB to require additional regulatory capital, to restrict current or new activities, acquisitions and payments to shareholders as preventive measures. BCB is implementing capital premiums based on its risk rating system (CAER).
- Resolution measures decided by BCB’s Board and decreed by the Governor include:
  i. Actions requiring controlling shareholders to take measures (capitalization, transferring control, merger, restructuring).
  ii. Temporary special administration regime conducted on a “going concern” basis by a Directors Council appointed by the BCB.
  iii. Intervention regime conducted on a “going concern” basis by an intervenor appointed by the BCB.
  iv. Extrajudicial liquidation regime conducted by a liquidator appointed by the BCB.
- After special resolution measure is decreed, the Department of Bank Liquidation conducts the subsequent process.
- In the past five years, one bank was closed and four were resolved through the merger and acquisition process.
- Resolution 4019 also referenced implementation of capital premiums based on SRC.

### Capital deficiency and sanctions (EC5–EC6)
- EC5: Regulations authorize the BCB to require additional capital injections and to require a bank to hold capital above regulatory minimums.
- EC6: Article 44 of the Banking Law extends penalties and sanctions to managers, directors and auditors. In liquidation, assets of controlling owners, directors and management can be frozen. BCB may propose to the CMN to have assets of members of the audit committee frozen (Article 36 of Law 6024). Seized property will make up the bankruptcy estate after due legal process (Articles 41 and 45 of Law 6024). Law 9613 sets administrative penalties for money laundering violations; Law 4131 sets administrative penalties and fines related to foreign exchange operations.

### Additional criteria (AC1–AC3)
- AC1: Emphasis on early remedial action in enforcement regulations promotes early action by the BCB. Criminal charges can be brought if intentional and undue delays are verified (Brazilian penal code).
- AC2: Resolution 4019’s broad and flexible enforcement powers enable responses to contagious risk arising from related parties’ activities.
- AC3: Cooperation between BCB and other Brazilian supervisors is conducted through Coremec (established by Decree 5685) to coordinate supervisory actions; insurance, banking and securities supervisors share information bilaterally.

### Assessment and recommendation
- Assessment of Principle 23: Compliant
- Comment: Banks are subject to corporate law which requires that companies payout a minimum of 25 percent of their profits as dividends. It is recommended that banks be exempted from this requirement as it will limit the BCB ability to preserve bank capital in a weak bank situation.

---

### Consolidated supervision (Principle 24)

### Understanding group structure and activities (EC1)
- The BCB maintains detailed information and organizational charts on all conglomerates, including cross-border operations.
- Monthly, the bank files a report of all transactions between members of the banking group.
- Cross-border activities are monitored and frequent communications with home/host supervisors are maintained, including cross-border inspections.

### Powers to supervise consolidated activities (EC2)
- Regulations and supervisory procedures allow staff to fully understand the structure of a banking conglomerate and its main activities, for individual companies and the whole group.
- Resolutions 2804, 3380, 3464 and 3721 require financial institutions to implement frameworks to manage liquidity, operational, market and credit risks, identifying, assessing, monitoring and controlling risks for each institution individually and the banking group as a whole.
- Frameworks must identify and monitor risks related to non-banking companies in the conglomerate.
- Banks must prepare consolidated financial statements, including investments in companies in Brazil and cross-border, and provide in the statements information about management centers, decision making trees, and identify operational and corporate control.
- Resolution 2723 establishes BCB must have total access to information, data, documents and verifications necessary for assessing assets, liabilities, and risks associated to subsidiaries, regardless of their operational activities.
- Prudential regulations and supervisory requirements are applied on a consolidated basis to banks and their subsidiaries and all members of the conglomerate.
- Resolution 3490 establishes that financial institutions part of a conglomerate must determine regulatory Capital and set risk diversification on a consolidated basis.
- Determination of the Base Capital, or Tier I, must be conducted on a consolidated basis for institutions that are part of a financial conglomerate (Resolution 3444).

### Assessing risks from non-banking activities (EC3)
- The BCB performs a formal “contagion risk” assessment estimating risks that holding companies or affiliates may pose to the bank.
- The BCB analyzes bank exposure to risks associated with conglomerate activities not under BCB direct supervision (primarily insurance activities) by reviewing strategic plans, internal audit reports, management information systems and communicating with other supervisors.
- Communication with other supervisors includes joint meetings with the bank’s board of directors to discuss monitoring of non-banking activity and strategic plans.
- The contagion risk assessment is divided into three parts (text ends at this point in the source).

*Source: Section 22 of the Cosif (Elaboration and Publication of Financial Statements of basic norms), _cr12207 - Section 22 of the Cosif (Elaboration and Publication of Financial Statements of basic norms)_*

### 1.   Economic/financial position.  A review of capital invested and future capital needs.

### 1.   Economic/financial position.  A review of capital invested and future capital needs.

### EC4 — Consolidated prudential standards and supervisory powers
- Supervisor has power to impose prudential standards on a consolidated basis covering capital adequacy, large exposures, exposures to related parties and lending limits; collects consolidated financial information for each banking group.
- Legal bases and tools:
  - Banking Law: power to examine financial reports and documents from any person or company that exerts control over financial institutions.
  - Law 6024: BCB may impose identical regimes on corporates integrated with or attached to supervised institutions (includes cases where corporates are debtors of the entity under intervention or extra-judicial liquidation; where partners or shareholders participate in its capital with more than 10 percent; or where they are spouses or relatives up to the second degree, related by blood or akin, with managers or committee members).
  - Resolution 4019: when a risky condition to the regular functioning of the SFN or to a supervised entity is identified, BCB can determine prudential measures such as limiting or suspending distribution of dividends above the minimum legally established.
  - Circular 30 and the Banking Law prohibit banks granting loans to specific related parties.
  - BCB can apply consolidation to any financial institution not directly controlled when entities are linked by ownership or effective operational control, common management, or market performance under the same brand.
- Supervisory reach: powers extend to all subsidiaries composing a conglomerate.

### EC5 — Cooperation with other supervisors (domestic and cross-border)
- BCB cooperation mechanisms:
  - COREMEC (Committee on Regulation and Supervision of Financial Markets, Capital Markets, Insurance, Pension Plans and Savings Bonds), established by Decree 5685, to propose coordinated regulatory and supervisory actions.
  - Specific MoUs between BCB and: the Securities Commission, the Superintendence of Private Insurance, the National Complementary Pension Superintendence, and the Secretariat of the Federal Revenue of Brazil.
- Cross-border collaboration:
  - Close working relationships with home/host supervisors: participation in supervisory colleges, cross-border onsite reviews, regional supervisory groups, and information requests under MoUs or informal channels.
  - Annual supervisory planning is coordinated with other domestic supervisors.

### EC6 — Power to limit activities and locations of the consolidated group
- BCB can limit conglomerate activities via approval processes for new activities.
- Resolution no. 4,019, of 2011 authorizes prudential actions over institutions to limit risk exposure, including restrictions on opening new units or operations and directives to sell assets; applicable to national or foreign units.

### EC7 — Oversight of foreign operations by supervisor
- Supervisory approach is company-wide and includes foreign operations.
- Annual supervisory plans highlight risk areas and include offsite and cross-border activities.
- Ongoing supervision information: bank internal reports, credit registry, and onsite access.

### EC8 — Requirements for management oversight of foreign operations
- BCB ensures cross-border activities are approved only in jurisdictions that will collaborate on consolidated supervision.
- Supervisory program analyzes risk management for cross-border activities to ensure same standards as domestic operations.

### EC9 — Powers to require closing or limiting foreign offices
- BCB can take measures under Resolution 4019 to arrest deterioration of financial situations; measures are valid for the whole conglomerate and may include reduction of risk exposures, restrictions on operations and acquisitions, including cross-border effects.

### EC10 — Closer oversight when foreign activities have higher risk profile
- Cross-border activities must be approved by BCB and established in countries that conduct consolidated supervision and abide by international standards as determined by BCB during approval.
- International operations are considered an extension of domestic activities and do not include higher risk products.

### Additional Criteria — AC1–AC3 (corporate ownership, host assessment, on-site visits)
- AC1:
  - Banks may be owned only by individuals and financial holding companies, not by non-financial corporations.
  - Supervisory powers extend to all subsidiaries composing a financial or economic and financial conglomerate.
  - Supervisor can review parent and affiliated company activities and enforce fit and proper standards for owners and senior management of parent companies.
- AC2:
  - Home supervisor assesses quality of supervision in countries where its banks have material operations through internal reports, onsite visits, and exchanges with host supervisors.
- AC3:
  - BCB conducts periodic onsite inspections of significant foreign operations; examples include offshore centers, Luxembourg, Spain and United States.

### Assessment of Principle 24
- Compliant

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### Principle 25 — Home-host relationships: essential criteria and findings

#### EC1 — Adequacy of information exchanged
- BCB has frequent communications with home and host supervisors.
- All jurisdictions where Brazilian banks have important operations are covered by MOUs with host supervisors.
- As host supervisor, BCB has signed MOUs with home supervisors; assessor review found contacts frequent and substantive.

#### EC2 — Identification of relevant supervisors and arrangements
- MOUs signed with Argentina, Bahamas, Cayman Islands, Germany, Indonesia, Mexico, Panama, Paraguay, Portugal, Spain, USA, and Uruguay.
- Information exchanged includes inspection reports, participation in joint examinations and supervisory colleges, and sharing BCB assessment of the bank.
- Information on the agreements is listed on the BCB website.

#### EC3 — Home supervisor provides timely information to host supervisors
- During authorization processes host supervisors require extensive information on regulatory framework, scope and role of Brazilian supervision, and group information.
- BCB provides information routinely during on-site inspections of subsidiaries abroad; meetings held at start and conclusion of inspections, and inspection reports provided.
- Scope and frequency of exchange depend on relevance of foreign subsidiary to the Brazilian group.

#### EC4 — Host supervisor provides timely information to home supervisors
- Authorization for foreign-linked institutions to operate in Brazil requires information from home supervisor about regularity and intended investment.
- BCB updates home supervisors when requested or when relevant facts occur affecting subsidiaries or the group.
- BCB informs home supervisor when significant problems that may endanger safety or soundness of foreign institutions operating in Brazil are verified and on actions taken in Brazil.
- Information on supervision results (ratings, inspections) is provided eventually if no serious problems exist.
- Participation in supervisory colleges enhances perspective on foreign banks operating in Brazil; information sharing is subject to each country’s confidentiality legislation, with consent typically required for disclosure.
- BCB representatives in colleges usually disclose at least SRC assessments and provide further information on request.

#### EC5 — Host laws require similar prudential and reporting requirements
- All banks in Brazil are subject to the same regulatory and supervisory requirements.

#### EC6 — Host checks home supervisor non-objection and consolidated supervision
- Circular 3317 requires information from home supervisors to determine the applicant is subject to consolidated supervision, has systems to manage cross-border operations, and that the home supervisor evaluates AML compliance on a global basis.

#### EC7 — On-site access for home supervisors
- Home supervisors are granted on-site access to local offices and subsidiaries; only one bank in Brazil is significant in relation to global assets and is visited annually by the home supervisor.

#### EC8 — Supervision of shell banks and booking offices
- Not Applicable

#### EC9 — Consultation before consequential action based on another supervisor’s information
- Consultations would take place before taking action.

### Additional Criteria — AC1 (communication strategy)
- Beyond MoUs, BCB develops closer, often unwritten, communication strategies with foreign supervisors of banks with significant presence in Brazil, exchanging letters, e-mails, and meetings to collect and provide supervisory information.

### Assessment of Principle 25
- Compliant

*Source: _cr12207 - 1.   Economic/financial position.  A review of capital invested and future capital needs.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12207.pdf_