Document of

The World Bank

Report No. 16867-BR

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$20 MILLION

TO THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR A

CENTRAL BANK MODERNIZATION

TECHNICAL ASSISTANCE PROJECT

October 23, 1997

Finance, Private Sector and InfrastructureCountry Management Unit 5Latin America and the Caribbean Region

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CURRENCY UNIT - Real (Rs.$)US$1 = Rs.$1.09

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

BBA Brazilian Bankers AssociationBIS Bank for International SettlementCAS Country Assistance StrategyCB Central BankGDP Gross Domestic ProductIBRD International Bank for Reconstruction and DevelopmentICB International Competitive BiddingIFC International Finance CorporationMERCOSUR Common Market of the Southern Cone (Argentina, Brazil, Paraguay,Uruguay)NCB National Competitive BiddingPCU Project Coordinating UnitQCBS Quality-and-Cost-Based SelectionSOE Statements of ExpenditureTA Technical AssistanceTOR Terms of ReferenceUNDP United Nations Development Programme

Vice President Shahid Javed BurkiDirector, Country Management Unit Gobind T. NankaniDirector, Finance, Private Sector & Infrastructure Unit Sri-ram AiyerTask Manager Stefan Alber

FOR OFFICIAL USE ONLY

Project Apirail Docueat Project Tide: Canbta B-nk Modernization Tecluaia Aaisance LoanCemaby Brazil

BrazilCentral Bank Modernization Technical Assistance Project

TABLE OF CONTENTSPage No.

BLOCK 1: PROJEcT DEscRIFrnoN ............................................................. 21. Project development objectives ............................................................ 22. Project components ............................................................. 23. Benefits: ............................................................. 44. Institutional and implementation arrangements: ............................................................. 4

BLOcK 2: PROJECT RAnONALE ............................................................ 5S. CAS objective supported by the project ............................................................. 56. Main sector issues and Government strategy: ............................................................. 67. Sector issues to be addressed by the project and strategic choices: ............................................................. 78. Project alternatives considered and reasonsfor rejection: ............................ ................................ 79. Major related projectsfinanced by the Bank and/or other development agencies ..........................................810. Lessons learned and reflected in the project design: ............................................................. 811. Indications of borrower commitent and ownership: ............................................................ 812. Value added of Bank support: ............................................................ 8

BLOCK 3: SUMMARY PRojECr ASSESSMENTS ................................ 913. Economic/FinancialAssessment: .............................. 914. TechnicalAssessment: .............................. 915. InstitutionalAssessment: ............................. 916. SocialAssessment: ............................. 917. EnvironmentalAssessment: ............................. 918. Participatory Approach: ............................. 1019. Sustainability: ............................. 1020. Critical Risks: ............................. 1021. Possible ControversialAspects: ............................. 10

BLOcK 4: MAIN LOAN CONDmONS .............................. IBLOCK 5: COMPLIANCE WnTH BANK POIJCES ............................... 11

List ofAnnexesAnnex 1: Project Design SummaryAnnex 2: Detailed Project DescriptionAnnex 2 Attachment 1 Agreed First Year Work ProgramAnnex 2 Attachment 2 A Guide to Annual Evaluations ofBanking SupervisionAnnex 2 Attachment 3 Complementarity ofPresent and Proposed ActionsAnnex 2 Attachment 4 Strategic Vision for the Banking and Financial Industry in BrazilAnnex 3: Estimated Project CostsAnnex 4: Procurement and Disbursement ArrangementsAnnex 5: Project Processing Budget and ScheduleAnnex 6: Documents in Project FileAnnex 7: Status of Bank Group Operations in BrazilAnnex 8: Brazil at a Glance

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Project Awaial Docunet Pioject r.ie: Central Bank Modenizat Technical Aidaibce LoanC-: Bazil

NTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION

Latin America and the Cafibbean Regional Office

Project Appraisal Document

BrazilCentral Bank Modernization Technical Assistance Loan

Date: October 23, 1997 [1 ] Draft [XI FinalTask Manager: Stefan Alber Country Manager: Gobind T. NankaniProject ID: BR-PE-48357 Sector: Financial SectorLending Instrument: Technical Assistance Loan PTI: I Yes [X] No

Project Fnancing Data [Xi Loan [ Credit 1 Guarantee [ Other[Specifyl

Amoun!!t_(U gJ _ US$20.0 millionProposed Terms: [XI Single Currency (US$)Grace Period (Years) S [Xm Libor-BasedYears to Maturity 15Commitment Fee (%/o) 0.75

Financing plan (USSm):Source Local Foreign Total

Central Bank 4.6 4.6IBRD 20.0 20.0

Total 24.6

Borower: Federative Republc of BrzilResponsible agency: Central Bank of Brazil

Esfimated disbursements (Bank 1998 1999 2000FY/US$M):

Annual 1.5 13.0 5.5

Cumulative 1.5 14.5 20.0

Expected Effectiveness Date: March 31, 1998 Closing Date: December 31, 2000

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Project Appraisal Document Project Title: Central Bank Modernization Technical Assiatancc LoanCountq: Brazil

BLOCK 1: PRoJEcT DESCRIPTION

1. Project development objectives(see Annex 1 for key performance indicators):

Major bank failures and restructurings since the 1994 introduction of the Real stabilizationPlan have exposed institutional weaknesses of the Central Bank, particularly of its bankingsupervision and enforcement functions. Motivated by bank intervention and restructuringcosts, the Central Bank has begun a long-term modernization effort to help itanticipate/prevent major bank failures, allow it to manage failures more expertly, and make thefinancial system more crisis-resilient. A major reorganization study, covering all Central Bankfunctions, has been completed and is currently under review.

The Project's development objective is to complement the Central Bank's modernizationeffort at this crucial juncture when its motivation is high. The Project will support a three-year improvement program with the primary focus on professionalizing banking supervisionand mainstreaming international best practices. Financial regulation and supervision play anessential role in fostering the robustness of financial systems. Better banking supervision willbe achieved via training in advanced methods (moving away from rule-based to riskmanagement approaches), applying a ladder of enforcement tools, upgrading the CentralBank's information quality and analytical capacity and using new information technologyequipment.

Other Project components include laying the foundations (legal and financial feasibilitystudies, to determine inter alia, the viability of private sector participation) for the creation of aframework allowing the management of the disposal of failed banking assets outside theCentral Bank. The surge of bank failures, having added significantly to the Central Bank'sinventory of assets of failed banks, has burdened its already limited capacity to manage timelyliquidation and disposal at least cost.

The Project will also assist with a diagnosis of the financial sector structure and considerchanges in public policies and instruments to reduce the financial sector's complexity and tofoster a growing and profitable private banking system. Finally, the Project will allow theCentral Bank to continue to rapidly expand its training programs and improve its managementsystems in a few key areas outside banking supervision.

2. Project components(See Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):To achieve its development objectives and to maintain flexibility, the Project has been designedwith a "process" character, defining the broad direction of project expenditures but withoutdetailing each project component for the entire implementation period of three years.However, for the First implementation year, project components have been defined in detailamounting to about US$6 million, or 27% of estimated project costs (see Attachment 1 ofAnnex 2). For years Two and Three, detailed project components will be agreed during theannual reviews in mid- 1998 and mid- 1999 respectively.

In banking supervision, emphasis will be given to the introduction of market-based tools suchas more public disclosure of banking information and increased collaboration with external

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Project Appraisal Document Project Title: Central Bank Modernization Technical Aasistnce LoanCountry: Brazil

auditors. The scope and timning of supervision strategies (on-site/off-site, off-shoreinspections, consolidated supervision of financial groups, public banks) are expected to beprioritized according to risk rather than calendar or procedural considerations. Also, the ladderof enforcement tools will be reviewed as well as the decisions/procedures to apply those tools.Key project expenditures will include on-the-job training, exchange of qualified personnel, jointventures with the best international supervisory agencies, specialized training courses, thehiring of selected experts to jump-start new approaches, the acquisition of informationtechnology equipment, quality assurance mechanisms and continuing evaluations of theeffectiveness of banking supervision.

As to asset liquidations, project expenditures will include the legal and financial feasibilitystudies to establish an appropriate framework which may include forming one or more entitiesseparate from the Central Bank. Crucial will be the identification of all legal hurdles toeffective asset recovery and the development of the corrective legal instruments. Another keyissue will be the design of an institutional framework to attract private sector management andinvestment.

Component Catesorv Indicative % ofCost Total

(US$M)(i) Upgrade Banking Supervision: Institution Building 14.0 57- training- improvement of information- development of best practices, particularly inenforcement- test quality assurance systems

(ii) Enhance Asset Liquidation and Institution Building 1.0 4Disposition:- establish legal infrastructure- establish business/financial plans

(iii) Financial Sector Review and other selected Institution Building 1.0 4research

(iv) Training Central Bank-wide Institution Building 3.0 12

(v) Other Institution Building 1.0 4

(vi) Project Management and other Project 4.6 19modernization initiatives Management

Total 24.6 100

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Project Appraisal Document Project Title: Central Bank Modernization Technical Assistance LoanCountry: Brazil

3. Benefits:

The Project can be expected to facilitate initial progress in the Central Bank's effort to enhanceits credibility and effectiveness primarily in its banking supervision function. Sustained resultswill hinge on follow-on actions being carried forward after Project completion, perhaps over aperiod of as many as five additional years. In a broader sense, heightened Central Bankcredibility and effectiveness would boost the performance of the banking system, promotefinancial market confidence in Brazil and improve access to international financial marketswhich in turn may allow reductions in funding costs. Thus, Brazil's banking system willeventually be more successful in mobilizing resources for renewed and major productivelending at more affordable lending rates. Longer term, lower fiscal costs would result fromimproved banking supervision as more banking failures would be anticipated/prevented, thusreducing the need for fiscal resources. Further, fiscal costs would also be reduced by applyingbest international practices to the management of distressed banking assets, which should yieldan increase in disposition proceeds.

4. Institutional and implementation arrangements:

Implementation Period: Three years, with the objective of disbursing about 70 percentof the Bank loan during the first two years. This is to take advantage of the Central Bank'scurrent sense of urgency, and is not an ambitious target given the size of the institution (6,000staff) and the nature of the proposed reforms. For procurement and disbursement procedures,see Annex 4.

Executing agencies: The Central Bank of Brazil would be the executing agency for allProject components . In respect of the feasibility studies for asset disposition, the CentralBank will be expected to work cooperatively with that Government Ministry (most likely theMinistry of Finance) which is expected to take over this responsibility from the Central Bank.

Project coordination: The Central Bank has set up a Project Coordinating Unit (PCU)headed by a manager with a rank of Head of Department. This Unit has been staffed withappropriate accounting, procurement and administrative personnel. The PCU is supported bya Central Bank coordinating committee which draws on participants from all departmentsbenefiting from this Project.

Project oversight : The Project has been prepared in close consultation with the topmanagement of the Central Bank and other Central Bank board members. It is expected thatthis framework of oversight will continue.

Accounting, financial reporting and auditing arrangements: The design of theappropriate accounting and internal control systems for the Project is being finalized, and willbe further confirmed by the external auditors. The accounting system would also cover alltransactions of a procurement agent, the contracting of which is in the final stages. TheProject Account's external audit would be made available to the Bank no later than six monthsafter the end of each financial year.

4

Project Appraisal Document Project Title: Central Bank Modernization Technical Aistance LonColmtrg: Brazil

Monitoring and evaluation arrangements: Implementation progress and impact will bereviewed on a continuous basis by the Project Coordinating Unit of the Central Bank. Toallow for changes in the work program in light of changing circumstances, the Bank will bevetting terms of reference for studies, consulting assignments and specific project componentson at least a semi-annual basis. While more frequent supervision contacts may be useful, videoconferencin will also be used to reduce costs on both sides.

BLOCK 2: PROJECT RATIONALE

5. CAS objective supported by CAS discussion: The Board discussed the CAS on Junethe project 12, 1997 (Report No. 16582).

As part of the private sector development strategy, the Bank Group will concentrate selectivelyon capital market development and on strengthening the banking system. Capital marketdevelopment will be addressed by IFC, while the Bank will focus on strengthening baningsupervision and asset liquidation mechanisms, as well as the restructuring/privatization ofselected state banks.

5

Project Appraisal Docwnent Project Title: Central Bank Modemization Technical Assistancc LoanCountry: Brazil

6. Main sector issues and Government strategy:

The diagnosis of main sector issues is primarily based on the Bank's long-standing financialsector work which culminated in a Green Cover report of July 30, 1996. The conclusions ofthat confidential report were discussed with the authorities in August 1996.

The main current issues are: i) stability of the banking system, now at an advanced stage ofrestructuring to continue to adjust to macroeconomic stability and marked by major bankfailures and restructurings since 1994; and ii) a Central Bank which, while having acted withskill in containing the banking crisis, has been suffering from a loss of credibility.

Stability of the Banking SystemThe stimulus to structural change is a dramatic shift of bank revenues as a consequence of thesharp fall of inflation following the introduction of the Real Plan. Whereas in 1994, banksearned 47 percent of their revenues by reinvesting their non-interest earning deposits in high-yielding financial instruments, this percentage had dropped to 2 percent by the fourth quarterof 1995. Numerous private banks, burdened by high-cost structures, non-performing loans andfew earnings alternatives, could not adjust and failed. Among the private banks, the majorfailures included Banco Economico and Banco Nacional. The restructured assets and liabilitiesof both of these institutions were merged into other banks. In 1996, Bamerindus, the fifthlargest bank in the country, also encountered problems and was sold in early 1997 to a majorinternational bank. Among the major public banks, the state banks in both Rio de Janeiro andSao Paulo were subjected to Central Bank intervention, and restructuring actions are at anadvanced stage. The state bank of Rio has since been privatized (July 1997), while the statebank of Sao Paulo will likely be placed under private sector management for about one yearand then privatized. Banco do Brasil, the country's largest bank which also has suffered fromstructural deficiencies, has been recapitalized (about US$8 billion) and is now engaged in amajor restructuring effort.

The Credibility and Effectiveness of the Central BankTo support adjustments in the banking system and assist in the major bank failures, the CentralBank instituted in 1995 a program of incentives to allow the restructuring of banks (PROER -Programa de Estimulo a Restructuracao e ao Fortalecimento do Sistema Financeiro Nacional)and created a private deposit insurance scheme. Restructuring incentives included special linesof credit, regulatory forbearance and fiscal benefits. What caused a drop in the credibility ofthe Central Bank was its seeming unpreparedness to resolve the major bank failures, and thediscovery that the huge bank losses were the result of massive fraud and mismanagementwhich might have been corrected years earlier. The Central Bank's capacity again came underscrutiny in early 1997, when 15 broker-dealers were closed because of fraudulent placementsof state and municipal bonds. All this reinforced the authorities' and the public's view that theCentral Bank needed to be strengthened and to refocus its mission. It is now recognized thatBrazil's financial system is overly complex (with some 2,000 financial institutions of all typesand 230 private and public commercial banks) and too unwieldy to supervise. The search forand implementation of new approaches to banking supervision, especially enforcement, isgaining broad public support.

6

Project Appraisal Document Project Title: Central Bank Moderization Technical Assistance LoanCouny: Brazil

Government StrategyDeep concern about a failing banking system threatening macroeconomic stabilization causedthe Government and the Central Bank not only to implement special programs and actions tostabilize the banking system, but also to dedicate major resources to stabilizing the system. Thefederal financing assistance for restructuring of private banks as well as the injection for Bancodo Brasil amount to some US$40 billion, or about 6 percent of the country's GDP. Further,the Government is fully supportive of the Central Bank's institutional renewal and its proposedcooperation with the Bank.

7. Sector issues to be addressed by the project and strategic choices:

Extensive research on the causes of banking crises indicates that weak banking supervision andregulations are one of the frequent and central ingredients, next to macro-economic factors,bank management incompetence and fraud, of banking systems in difficulty. Experience alsoindicates that government authorities are at the height of their motivation to improve bankingsupervision after the faDlout of a banking crisis has just been felt, particularly its fiscal cost. Forinstance, the high standard of Chilean banking supervision today is credited to the bankingcrisis of the early 1980s. Brazil has just battled serious banking difficulties of its own and isnow at a motivational highpoint. Thus this Project is well timed. The other two majorcomponents, the financial sector study and asset liquidations, also reflect the authorities'eagerness for corrective actions. If this Loan proves successful, the Bank may be requested toassist in other financial sector reforms in the future.

8. Project alternatives considered and reasons for rejection:

Ever since the introduction of the Real Plan, the Bank has offered far-reaching support for thefinancial system, including adjustment loans addressing, for instance, major public bankrestructuring actions. The Government chose, however, to direct the Bank's assistancetowards the privatization (or closure) of state banks in some key states. Bank support for statebank restructuring is included in several State Reform Loans (e.g. Rio de Janeiro and MatoGrosso) which have been recently approved by the Bank's Board. The federal authoritieshave so far preferred to conduct wider reforms on their own, believing that a Bank presence ina sector - so sensitive to abrupt and sudden swings in market confidence - could harboradditional risks and unknowns.

On asset liquidation and disposition, the Project includes feasibility studies but not more. Whileauthorities are clearly motivated to make progress on this issue, governmental actions have sofar been slow (the appointment of a high-level executive to take responsibility for this issue isstill outstanding) and political sensitivities will likely determine the speed at which the searchfor an appropriate framework and creation of any new entities will proceed. Therefore, anyinstitutional support for the actual functioning of any new system is unlikely to be tackledunder this Project.

7

Proct Apraiual Documt Pnoiect Title: Cetral Bank Modenization Teohnical Auistance LoanCmWy: Bnzil

9. Major related projects financed by the Bank and/or other development agencies

Past financial sector lending included development banking loans and financial intermediationloans in various sectors. This would be the first loan addressing broad financial sector issues.

10. Lessons learned and reflected in the project design:

The principal lesson is to proceed only with this TA operation provided it is demand-driven.TA loans are only successful when their goals are clearly shared by the borrowers, which isnow the case of the Central Bank of Brazil.Other lessons applied include:

* limiting scope of work to a few defined areas (human resources, information &information technology);

* developing TORs for key project components as part of loan preparation;* focusing on core Central Bank operations - Bank Supervision - and not trying to

influence all aspects of the institution's mandate;* having a clear need for proposed technical assistance agenda (high staff turn-over and

retirements increase need for training; changes in macroeconomic environment and bankingindustry structure require new supervisory tools; recent bank failures and costs of bail-outs forgovernment have created a sense of urgency in the Central Bank to respond to critics andforesee further bank closures, etc.).

11. Indications of borrower commitment and ownership:

All functional areas of the Central Bank which would be involved in this Project, including thedepartments for enforcement and supervision of banks, research, asset liquidation and training,have shown keen interest and have energetically participated in project preparation. Thesedepartments have developed detailed project outlines for the activities which they plan to fundthrough the Loan. Interest in banking supervision issues is clearly deepening, as evidenced bythe increasing participation of Brazilian representatives in the formulation of internationallyagreed core principles. In terms of financial commitments, the Central Bank has agreed to payfor the full costs of project administration, including staffing, procurement agent fees,communications and related expenses, such as travel. In addition, the Central Bank has alreadyallocated US$2.6 mnillion to project-related modernization efforts. This results in a costsharingof 81% which is satisfactory. Further, there is a strong undercurrent of private sector supportfor the proposed initiative. Particularly, prime Brazilian banks feel that better bank supervisionin Brazil will help them to achieve higher ratings and lower funding costs in internationalfinancial markets.

12. Value added of Bank support:

In line with its emerging role as mandated by the Group of Ten Countries, the Bank will drawon its world-wide experience and help in identifying international best practices in carrying outregular diagnostics, in designing institutional development programs and in applying tested

8

Project Appraisal Document Project Title: Centrl Bank Modemization Technil Assistance LonCoumty: Brazil

supervision and asset disposition practices. Supported by an intense supervision process (withfrequent visits by senior Bank staff and high-level consultants), the Bank is also expected toadd speed to the reform process, at a time when special vigilance is required considering therapid changes in the financial system, and to provide rigor and discipline to the timelyimplementation of the proposed actions under the Project. The cost of supervising this Projectare expected to be a multiple of regular technical assistance loans.

BLOCK 3: SUMMARY PROJECT ASSESSMENTS

13. Economic/Financial Assessment:

The technical assistance character of this operation makes a quantitative economic and financialanalysis impossible. However, if successfully carried out, this Project will enhance thecredibility and effectiveness of the Central Bank. Greater credibility will help restoreconfidence and will support its future policies and actions more forcefully. Also, an improvedCentral Bank effectiveness will contribute to the lowering of any future emergency financing toresolve banking issues.

14. Technical Assessment:

The technical merits of the broad project components have been reviewed by high-levelconsultants and Bank staff and are considered to be sound. The essential ingredients ofinstitutional renewal and professionalization, include training, better quality information,application of modem information technology equipment and intensified learning from the bestinternational sources available. Technical assessments will continue throughout implementation.

15. Institutional Assessment:

a. Executing agencies: While the Central Bank's credibility has suffered, it is still amongthe better public institutions in Brazil. Its senior executives appear competent and motivated tomodernize approaches and practices. The aggressive recruitment drive which is necessary tofill the void created by retirements and turnover related to changes in the compensationscheme, would be reinforced by the training component of this project.

b. Project management: A competent project coordinator has already been nominated atthe level of Head of Department. Staffing of the coordinating unit is at an advanced stage.

16. Social Assessment:There are no social issues.

17. Environmental Assessment: Environmental Category [ ] A [ ] B [X] CThere are no environmental issues.

9

Prect Appaisal Document Project Tide: Central Bank Modemization Technical Aaijonce LounCounhy: Brazil

18. Participatory Approach:

There are no participatory approach issues.

19. Sustainability:

All project expenditures will continue to be designed in such a manner that their outputs can beproductively applied. For instance, staff trained abroad would be required to pass on suchtraining upon their return. Careful and intense project monitoring will be a vital element in themaximization of sustainability.

20. Critical Risks

Project outputs to development objectives

Risk Risk Risk Minimization MeasureRatine

* Loss of the Central Bank's commitment to the Low Virtually continuous contact,project would be the major risk. This is supported by detailed semi-considered low during the next three years, annual consultations.given the current sense of urgency tomodernize. However, once public pressuresubsides, it is possible that energetic projectmanagement may decrease.

* Lack of political will to proceed with the High Regular Bank reminders thatestablishment/operation of a new asset extensive delays will lower thedisposition entity. proceeds of asset recoveries.

* Failure to mainstream within the banking Medium Intense Bank supervision.supervision function, the benefits of theProject components.

* Overall project risk rating. Medium

21. Possible Controversial Aspects:

There are no controversial aspects.

10

Pgw*ct ATisalD t Pmdojct rdTi CutrW Bank X_dmzWtn Tacknac Amaimu LAmCcm*wr Bffa

BLOCK 4: MAIN LOAN CoNDmoNs

22.- The Project Coordinating Unit would be managed by at least a Head of Departnent, or

equivalent. It would be fully staffed thirty days after loan effectiveness;- External audits would be submitted within six months after the end of the financial year,- Project expenditures and expenditure-specific performance indicators would be reviewed

in consultation with the Bank during the months of June and December of each year. AnnualImplementation Plans would be submitted by May 31 of each year,- The financial sector study would be completed by September 30, 1998;- A mid-term review would be carried out 18 months after loan signature to also gauge the

progress in achieving the objectives of the Project.- Retroactive financing of up to 10 percent of the loan amount is recommended to allow for

Bank financing of modernization expenditures which have been incurred since December 16,1996, or since the Project has been identified.

BLOCK 5: COMPLLNCE WrrH BANK POLICIES

This project complies with all applicable Bank policies.

v~t'>A /kA-

ask Manager Co6try anagement Unit DirectorStefan Alber Gobind T. Nankani

11

AkNNEXEES

Annex 1

BrazilCentral Bank Modernization Technical Assistance Project

Project Design Summary

Narrative Summary' of Key Monitoring and Critical AssumptionsSummary Performance Indicators Supervision and Risks

CAS Obiective

Strengthen banking For banking supervision and Banking supervision and Critical assumption issupervision, asset liquidations see asset resolution will be that anticipation andsupport asset indicators below. For the followed with this TA prevention of bankliquidations, and restructurng of public loan (see below). failures and thepronote banks, significant reduction reduction of a publicrestructuring of by CY 99 of public banks in bank presence willpublic banks. terms of percentage of total lower the quasi-fiscal

banking system assets deficit.(including those specificbanks covered under Rio,Minas and Mato GrossoState Reform/ PrivatizationLoans).

ProiectDeveloDmentObiectives

Complement the (1) Increased market Maximum use of market Major Assumptions:Central Bank's confidence in the banking indicators and rating- Maintenance oflong-term system as measured by: agency reports. macroeconomic andmodernization (1.1) decreasing incidence of Use of external political stability;effort by bank failures; consultants to evaluate Absence of majorsupporfing a first- (1.2) improvements in bank progress on indicators events destabilizingphase action ratings assigned by not easily measured. financial markets (e.g.programn, private rating agencies; major bank failures,particularly in the (1.3) access of banks to bank panics, stockstrengthening of capital market finance market crashes);bankdng (cost, maturity, etc.); Maintenance ofsupervision. (1.4) positive qualitative Central Bank's

evaluation performed by an strong motivation inoutside consultant. favor of

modernizationactions.

In addition, each project component will be measured by indicators as well as the improvement ofbank supervision overall. See Attachments 1 and 2 of Annex 2.

ANNEX I

Narrative Summary" of Key Monitoring and Critical AssumptionsSummary Performance Indicators Supervision and Risks

Proiect (2) Increased effectiveness of Annual reviews of Major risks are:Development banking supervision. banking supervisory * delays inObjectives function (to be completed implementation of(continued) (2.1) Increase the number of by December 1998, 1999 Central Bank

bank supervisory personnel and 2000). actions and Bankand improve their training project;and professional * Project componentsqualifications less effective than-meet targets regarding anticipated.training in on-site inspection;-hire outside practitioners(foreign or from privatesector) to strengthensupervision.

(2.2) Develop a risk-management supervisionapproach, codified inprocedural manuals andreflected in training andinformation systems- complete evaluation of aminimum number of banksusing risk-managementapproach;- reduce incidence of multi-level downgrading underinternal problem bank rating;- reduce incidence of non-compliance by banks withlaws/regulations.

(2.3) Institute new publicdisclosure requirements andaudit reforms- take enforcement actionsagainst auditors who did notperform their duties;- Increase number of bankspublishing consolidatedaccounts.

2

ANNEX 1

Narrative Summary of Key Monitoring and Critical AssumptionsSummary Performance Indicators Supervision and Risks

Proiect OutputsImproved Asset - Appointment of senior Bank supervision Existence of clearLiquidation and executive; missions at least every political will by theAsset Disposition. - Creation of task force; six months. Otherwise, Ministry of Finance

- Creation of legal and virtually continuous to take over thefinancial infrastructure for communication. Central Bank'sthe establishment of an current liquidationappropriate framework and responsibilities.any entities outside CentralBank;

Fostering of Contract high-level Bank monitoring to Main risk is loss ofconsensus within consultant(s); cause such research interest by Centralthe Central Bank - Completion of research paper to be completed by Bank management inand Ministry of paper(s) to visualize future September 30, 1998. preparing a vision toFinance about market developments; develop the privatefinancial sector - Completion of seminar to banldng system.changes to allow debate above research paper;growth of the - Publication of findings ofprivate banking seminar;system. - Biannual updates.

Improve banking - Adopt risk-management Bank supervision Maintenance of high-supervision. supervision approach missions supported by quality Project

- Complete training goals experts specialized in Coordinating Unit andyear-by year; training, information continued support of- Modernize information; technology and best Central Banktechnology systems and data international practices. management andbases; Progress will be especially of Director- Simplify information flow monitored at least yearly of Supervision.between Central Bank and in the context of Budgetary problemsthe banking system; implementation plans. in funding effective- Procure information Project Coordinatingtechnology equipment; Unit are considered- Complete other high- unlikely.priority actions(enforcement);- Continue evaluatingstrategic banking supervisionareas.

3.

ANNEX 1

Narrative Summary of Key Monitoring and Critical AssumptionsSummary Performance Indicators Supervision and Risks

Professionalize - Inproved managerial Bank supervision Commitment toCentral Bank staff practices; supported by specialized trainiDg by Centralin areas other than - Improved management of consultants. Bank.banking foreign reserves;supervision. - improved foreign Major risk is that

borrowing practices. training does notachieve its objectivesbecause other humanresource policies(career paths,salaries) foster hightumnover or hindertransmission ofknowledge.

Project Maintain continuity and Virtually continuous Appointment ofCoordination. high-quality project Bank contact. unqualified or poorly

management. motivatedmanagement and lossof purpose.

4

Annex 2

Brazil

Central Bank Modernization Technical Assistance Project

Detailed Project Description

Introduction

1. The Project has been designed to assist with a first modernization phase of theCentral Bank of Brazil, with the primary focus on improving bank supervision. Otherproject components address urgent initiatives in areas such as asset liquidations anddisposition, a comprehensive review of the reform needs of financial sector and otherselected financial sector research, and basic, specialized and continuing training in areasother than banking supervision. Project components have been defined in terms of broadand indicative categories which have been examined for soundness and impact. Specificproject definitions and performance indicators for the First implementation-year have beenagreed and are shown in Attachment 1. The annual implementation plans for the Secondand Third implementation-year will be agreed in June 1998 and June 1999 respectively.Progress in implementing project components and in achieving the objective of better banksupervision will be monitored on the basis of at least six monthly reviews. For a guide toevaluate progress in improving bank supervision overall, see Attachment 2. This flexibleproject design approach was selected to take account of a major lesson of past technicalassistance loans; namely to avoid a detailed, multi-year, task-specific implementationprogram which can quickly lose touch with the dynamics and speed of change.

2. The criteria for the selection of tasks within the broad project components wouldbe that their rationale is clearly consistent with the objectives of the broad projectcategories, their cost reflect least-cost solutions, and are of a nature that the ultimateproduct can effectively be used. For example, if legal changes are being sought, theultimate product would have to be draft laws which then can be submitted to Congress. Ifspecialized training is being proposed, provisions will be made that the trained personneleffectively pass on such training to a wider professional group within the Central Bank. Ifstudies and seminars are being proposed, provisions would be made that these effortswould promote major financial sector decisions. Consultation with the Bank is expected tobe on a continuous basis, using to the maximum extent possible, modem communicationtechnology such as the internet and video conferencing.

ANNEX 2

Detailed Description

A. Banking Supervision

3. The historic focus of bank supervision has been, as in many other countries, oncompliance with laws and regulations. As a result of the recent bank failures, seniorCentral Bank management has realized that banking supervision must become moreforward-looking and preventive. According to private sector observers, new approachesto bank supervision have already begun, and a few of the best banks have been hostingscores of supervisors for training in modern risk management models and changes ininternal controls. New approaches are also required in the area of enforcement. Currently,there is no culture of applying a full range of enforcement actions, such as powers toremove management or to apply monetary penalties, that are necessary to avoid banksslipping into troubled conditions that become irreversible. Bank supervisors have practicedonly two extreme measures: largely ineffectual informal memoranda and the threat ofbank liquidation. Neither measure exerts an effective deterrent on bank managers. Otherkey weaknesses in banking supervision include massive and abrupt losses of senior bankinspectors and senior managers, due to changes in the Central Bank compensation scheme(change-over to a civil service scheme); outdated training techniques; poor monitoring ofbanks because of an information flow which is so overwhelming that it does not lenditself to ready analysis (over 70 financial performance indicators are being reported bybanks); uneven quality of accounting and auditing standards, a disorderly rule-makingprocess; and institutional weaknesses such as poor internal communications andorganizational layering which discourage bank supervisors from pressing for correctiveactions. Virtually all of the foregoing weaknesses will be addressed by the followingbroad Project components:

i) Enhanced Training in Supervisory Tools

4. This is at the heart of any change in the direction in bank supervision, and willcomplement the Central Bank's own basic training (see also section C of this Annex).Together with the recruitment of new junior as well as senior staff and modernized careerpaths, to permit staff retention, effective training will make the difference in the success ofimproving bank supervision. The focus of the training will range from principles of modernbank supervision and strategies (on-site, off-shore, consolidated supervision of financialgroups, public banks) to advanced/specialized and continuing training in risk-managementmodels, auditing of banks' information technology systems, and new financial productssuch as derivatives. Training is anticipated to be transmitted via the hiring of experts tojump-start improved practices, internal seminars, cooperative arrangements with banks,and, most importantly, extended studies abroad and twinning arrangements with reputablebank supervision agencies in other countries.

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ANNEX 2

ii) Data Base and Systems Upgrading

5. The Central Bank has had systems in place for more than 20 years that manage aconsiderable amount of information. Understandably, these systems have become outdatedbecause of advances in information technology and because data have not been keptcurrent. The information systems to be modernized include principally the Central Bank'scentral information database SISBACEN which includes the financial institution referencesystem (CADINF), the legal reference system (CAPEF) and a series of other databases.Key objectives of modernization will include harmonizing various networks, changing thesystem-architecture to allow the generation of reports which facilitate managerialdecision-making, and allow the sharing of such information across all systems. At present,information is often highly compartmentalized, yielding divergent and conflictinginformation which sharply lowers its credibility. New data bases are being consideredwhich would permit better measurement of credit risks and market risks. Concerningcredit risks, as banks move back to the business of credit underwriting, it again becomesimportant to know the aggregate borrowings of companies and individuals within thebanking system. The Central Bank sees its role as adding the composite riskclassifications for each borrower. More reviews will be required to confirm the benefits ofa public sector role. Concerning market risks, the proposal is to establish the capability toanalyze and model major shifts in financial markets such the banks' move away fromearning revenues in trading of public securities to credit operations and other new financialproducts. Also, there is a need for an improved analytical capacity to measure internationalcapital flows.

iii) Acquisition of Information Technology Equipment

6. Laptop computers have become the standard tool of bank supervision.Requirements for data storage, communication with the Central Bank's informationsystems and analysis have dramatically increased. Laptops and associated software arebeing increasingly used in commercial banks to model and assess risk management issues.It is proposed to increase the number of bank inspectors over the next three years to 700and to equip all with laptops of appropriatedly designed standards.

iv) Other Modernization Initiatives

7. During Project preparation, a variety of other initiatives were identified which areconsidered to have a high payoff. First, there is the proposal to establish a QualityAssurance Center and/or ombudsman to assist in the continuous improvement ofsupervisory practices and procedures and to foster the development of best practices.Second, starting from ongoing reviews by banking supervision staff and externalconsultants, there is agreement to engage in a continuous evaluation of the effectiveness ofthe banking supervision function. For a guide to annual evaluations, see Attachment 2.Further, there are proposals to foster a closer cooperation with external auditors(developing a joint cooperation protocol), to study particularly non-judicial enforcementactions given the delays in legal enforcement, and the development of more effectiveoutreach initiatives to close the expectation gap among major decision-makers (Congress,banks and the public).

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ANNEX 2

8. Attachment 3 illustrates the complementarity of the initiatives of Central Bank andthe Bank under the Project. Initially, the Project focus will be on strengthening humanresources, information technology and enforcement tools. Once the Central Bank hasconcluded its internal reviews of current mission/objectives and managerial andorganization structures, the Bank's technical assistance project is expected to assist in thefurther refinement and upgrading of the overall issues of mission/objectives andinstitutional structure through continuous evaluation in the form of highly targeteddiagnostic reviews.

B. Other Central Bank Functions

9. Central Bank management is strongly in favor of being relieved of its bankliquidation and asset disposition functions. These tasks have become particularlyburdensome over the past two years. Major bank failures have added significantly to theCentral Bank's inventory of liquidations. It is proposed that the Project assist in thecreation of the legal infrastructure for the establishment of an appropriate frameworkwhich may include the establishment of one or more entities to take over the CentralBank's inventories of failed banks. There is also consensus to devote more resources toselect high-quality research to develop a vision of the financial sector, including selectedissues such as constraints to small business lending. (see Attachment 3 for agreed draftterms of reference). Finally, a minor Project allocation is proposed to allow Central Bankmanagement to learn from other international experiences in the area of state bankrestructuring.

C. Strengthening of Training throughout the Central Bank

10. The objective is to enhance the basic institutional and operational capacitythroughout the Central Bank. Major emphasis will be given to improving the CentralBank's capacity to manage its foreign reserves, to improving borrowing strategies abroad,and to enhancing managerial and human resources skills applying, inter alia, bestinternational practices.

D. Project Coordination

11. The Project will be managed by a Coordinator appointed by the Central Bankboard. The level of the Coordinator has been established as Head of Department, orequivalent. The Coordinator will be supported by suitably qualified staff, particularly inthe area of procurement and accounting and auditing. External auditors will becontracted as per the 1996 Brazil/Bank Audit Protocol. External auditors will bereviewing and confirming the accounting and internal controls of the Project CoordinationUnit. Annual external audits shall be submitted to the Bank within six months as of the endof the financial year. UTNDP is being contracted as procurement agent to allow for a timelyprocurement process. All project coordination costs, including salaries, costs of theprocurement agent and the external audit, communications and travel, will be borne by theCentral Bank.

4

October 23, 1997 ANNEX2Attachment I

CENTRAL BANK MODERNIZATION TECHNICAL ASSISTANCE LOAN

AGREED FIRST YEAR WORK PROGRAM : Total Cost of US$6,025,000

(December 1, 1997 - November 30, 1998)

Projet Component CB Person Cost Financing CB Date of Prcuremt IBRD Prior Procuremt. Timing Performance Indicators

Responsibk f (S,000) Approval Procedures Review Manager SMrf/End (for thefirstyer)

L Asset Management & Resolution........................ . ....... .................... . ... ............... ...... .... .......... ..... ...... ............... ..... .. r---.-.... ......... ....... _.._._ ....

I.A Legal studies C. Arraes 135 IBRD 12/97 QCBS Yes LUNDP 3/98- 7/98 Timely completion;Legal guidelines for asatisfactory assetresolution mechanism;Draft legalinstruments created.

I.B Studies for private C. Arraes 100 IBRD 12/97 QCBS Yes UNDP 8/98- Timely completion;sector participation 12/98 Draft business plan

for private/publicventure; Identifyrincentives for privatesector partners.

I.C Learning trips C. Arraes 40 IBRD 12/97 Other No PCU 12/97- Timely completion;/Seminar 4/98 Report of positive

lessons leamed;Participation of high-level Ministry ofFinance officials.

I.D Consultant to C. Arraes 70 IBRD 12/97 QCBS Yes UNDP 6/98- Timely hiring; Draftprepare asset 12/98 of institutionalresolution framework blueprint which

includes:

I

October 23, 1997 AANNEX2Attachment I

Project Component CB Person Cost Financing CB Date of Procurest LORD Prior Procuremnt rning Performance IndcatorsResponsible (S1,000) Approval Procedures Review Manager Staut/lfnd (for thefistyear)

-management/organi-zation structure;

-procedures;

-financing program;

-personnelrequirements;

-responsibilities,rights, role ofinstitution.

- identify potentialprivate sectorpartners

II. Financial Sector C. Arraes 300 IBRD 12/97 QCBS Yes UNDP 3/98- 9/98 Timely completion;Vision Study Final report

distributed;Disseminationseminar being plannedwith date set; Outsidecomments requested.

m. Banking Supervision............................................... ............. .............. .............. ............ ................... ...... ...... .... ................ .............................. .. . ......... _.... ... .................. .. . ...........

M.A Risk managemt. R 370 IBRD 12/97 Other & No UNDP 3/98- Risk-managementmodelling Fatorelli Shopping 11/98 methodology and

I I ~~~~~~~~~~~~~~~~Procedural manualsunder development.

2

October 23, 1997 AAWEX 2Attachment 1

Project Component CB Person Cost Financing CB Date of Procuremt JBRD Prior Procuremt. Timing Performance Indicators

Responsible ($1,000) Approval Procedures Review Manager Start/End (for thefrst year)

L.B Bond-trading R. 40 IBRD 12/97 Other No UNDP 3/98- Complementarymonitoring Fatorelh| 11/98 equipment installed.

mI.C Development of R. 270 IBRD 12/97 Other No UNDP 3/98- Training of staff inskills for audit of Fatorelli 11/98 electronic systernelectronic systems audits completed;

Procedural manualsunder development;Electronic systemaudits performed onlimited number ofinstitutions on a trialbasis.

m.D. Database T. Dutra 300 IBRD 12/97 Other No UNDP 3/98 System reengineeringReplacement 12/98 completed. New(CADINF) system under

development.

M.E. Database T. Dutra 250 IBRD 12/97 Other No UNDP 3/98- System reengineeringReplacement (CAPEF) 12/98 completed. New

system underdevelopment.

3

October 23, 1997 ANNEX 2Attachment 1

Project Component CB Person Cost Financing CB Date of Procurenm IBRD Prior Procuremt Timing Performance IndicatorsResponsibk (S1,000) Approval Procedures Review Manager Start/End (for thefrst year)

III.F. Training of G. Bonani 500 IBRD 12/97 Other No UNDP 3/98-9/98 Staff training inbanking supervision progress; Review ofstaff training programs

under way;Evaluations oftraining activities bystaff, managers &external consultantwhen appropriate.

IH.G. Risk J. Katsumi 40 IBRD 12/97 Other No UNDP 3/98-9/98 Staff trained;management Procedural manual inaccounting development;

Exchanges withforeign regulatorscompleted.

Ill.H. Derivatives L. 30 IBRD 12/97 Other No UNDP 12/97 Training completed inTraining Benevides 6/98 advanced financial

instruments; Reviewof norms/proceduresfor trading operationsunder development;Policy changespresented to CBmanagement.

4

October 23, 1997 ANNEX 2Attachment 1

Project Component CB Person Cost Financing CB Date of Procuremt IBRD Prior Procuremt Tiinug Performance Indicators

Responsibl (Sl,OOO) Approval Procedures Review Manager Start/End (for thefirstyear)

1.I. Coop. Protoc. Sergio 150 IBRD 12/97 Other No UNDP 4/98-9/98 Protocol finalized andwith auditors Darcy distributed widely to

supervisors in CB andbanking sectorexecutives.

IH.J. Communication C. Mauch 50 IBRD 12/97 Other No UNDP 3/98-9/98 CommunicationStrategy activities conmmenced.

I.K. IT Equipmentfor:............................................................ .............................. ...................... ...............................................................................................................................................................................

(i). Electronic systems R. Ozu 120 IBRD 12/97 ICB Yes UNDP 3/98-9/98 Equipment receivedauditing and in operation.

~~~~~~. ............................... .......................... ...... ........ .............................. .............................. ................ .............................. ............................. .....(ii). Notebook R. Ozu 1,500 IBRD 12/97 ICB Yes UNDP 3/98-9/98 Equipment receivedcomputers for banking and in operation;supervision Equipment integrated

into supervisionfunctions.

(iii). Software for R. Ozu 500 IBRD 12/97 ICB/NCB Yes UNDP 3/98-9/98 Software receivednotebook computers and in operation; All

necessarymodificationscompleted.

S

October 23, 1997 ANNEX 2Attachment I

Project Component CB Person Cost Financing CB Date of Procuremt | IBRD Prior Procuremt Timing Performance IndicatorsResponsible ($1,000) ApprovalI Review IIIProcedures Manager Start/End (for thefirstyear)

IV. General C.B. Functions.............................................................. .............. ................. .............. ....... ............................. .............................. ...... ........................ ...... ...... .................. ............. ......... ....... ............ ..................................IV.A. State Bank J. Magro 100 1BRD 12/97 Other Yes UNDP 3/98-9/98 Travel completed;Research Report on

applicability oflessons learned;Policy proposalspresented to CBmanagement.

IV.B. Asset R. 300 IBRD 12/97 QCBS/ No UNDP 4/98-9/98 Training and researchmanagement Fernandez Other completed;

Implementationbegun.

IV.C. English language G. Bonani 250 IBRD 12/97 Other No UNDP 4/98- Training completed;training 10/98 Proficiency tests

passed.

IV.D. Human G. Bonani 30 IBRD 12/97 Other No UNDP 4/98- Report onResources Policies 10/98 applicability of

lessons learned;Policy proposed toCB management.

IV.E. Training Aids G. Bonani 320 IBRD 12/97 ICB/NCB Yes UNDP 1/98-9/98 Equipment receivedand functioning;Equipment used intraining activities.

6

October 23, 1997 ANNEXC 2Attachment I

Projed Component CB Person Cost Financing CB Date of Procurent IBRD Pror Procuremt Tining Performance IndicatorsResponsible (51,000) Approval Procedures Review Manager Start/End (for thefirst year)

IV.F Attend Seminar C. Arraes 20 IBRD 12/97 Other No UNDP 1/98 Report onon Credit Information applicability of

lessons learned forBrazil.

IV.G Project Launch C. Arraes 20 Central 12/97 Other No PCU 11/97 Project launchSeminar Bank seminar completed.

V. Procurement Agent C. Arraes 200 Central 12/97 Other No PCU 11/97- Agreement effective;Bank 9/98 Procurement

proceedingsatisfactorily duringfirst year.

VI. External Auditor Luis 20 Central 12/97 Other No PCU 1/98-6/98 Contract effective;Pereira Bank Audit for 1997

completed on time &satisfactory to IBRD.

7

ANNEX 2Attachment 2

A Guide to Annual Evaluations of Banking Supervision

Preface

The management of the Central Bank has initiated a number of steps and programsaimed at improving the supervision of banks, correct identified deficiencies and restorepublic confidence in the regulatory system. In doing this, improvement programs will bedeveloped for implementation over the next three years or so. Integral to the design ofsuch programs is the identification of indicators of performance which can be used inevaluations of progress in the achievement of the desired improvements within the timeperiods contemplated.

It is assumed that the management will be looking to very widespread changes inthe operations of banking supervision carried out by the Central Bank. It can further beassumed that quality evaluation reviews will be carried out at the end of 1998, 1999 and2000. In order to assure the requisite independence and expertise, it is suggested thatthey should be conducted with the assistance of an outside consultant.

Performance indicators fall into two general categories:

1. Objective, quantifiable measures that focus largely on process.These measurements can be taken on a current basis as eachyear passes;

2. Judgment-based, qualitative measures that focus largely on results. Itmay be some time, perhaps years, before it can be determined thatthe quality of the work done by supervisory staff has significantlyimproved with visible impact on the banking system.

Program Improvement Areas

The programs will likely be focused in five main areas:

1. Human resources development, including hiring new people, trainingprograms at various levels, job descriptions, staff assignments,compensation arrangements and the use of consultants.

2. Changing the focus of supervision from checking adherence to rulesand regulations to assessments of the major risk areas and the banks'capacity to manage them. Essential to this is the clarification of thecriteria to use in evaluating risk management practices and in thepublication of standards of safe and sound business and financialpractices. Essential also is the development of a bank quality(such as CAMEL) ranking system for use by the CB.

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ANNEX 2Attachment 2

3. Expanding and improving the use of enforcement powers with banksseen to present safety and soundness problems. A ladder of regulatorycompliance identifying various kinds of interventions depending onparticular circumstances should be developed and made public.This sets up standards against which the use of enforcement powerscan be evaluated.

4. Development of information strategies and plans to expand the usage ofcomputers at all levels, to improve the handling of data taken in and,most importantly, expand the uses of information for supervisorypurposes. The objective is to bring the Central Bank's informationsystems up to international standards.

5. Improvements in the quality of audited financial statements issued tothe public. This involves strengthening both the application of goodaccounting to bank operations and the independence and quality of thefinancial statement audit work. Both the Central Bank and thefinancial markets should be able to use these statements with confidence.

6. Monitoring market feedback on trends in the quality of bank supervision.

The CB should develop and document its performance improvement strategies andplans in a way which identifies the program components, their priorities and estimatedimplementation dates. An important function of this documentation is to providevisibility to the senior management commitments to improvement to restoreconfidence in banking supervision and enhance its role in strengthening the banking systemof the country.

Built into this document should be a mission and mandate statement whichplaces the challenge of dealing with problem banks in the context of the primary duty ofthe supervisor to maintain public confidence in the health and integrity of the bankingsystem.

Performance Benchmarks

General

Year One

1. Has the Central Bank developed a documented improvement strategy as describedabove.? Has this strategy been made public?

2. Does this strategy include programs dealing with all five areas set out above?

2

ANNEX 2Attachment 2

3. Have improvement programs in each of the areas been initiated?

4. Is the management of the CB still comnnitted to the need for real improvement andthe strategy and program?

5. Have extemal consultants or agencies been engaged to assist in the designand implementation of the strategy?

Years two and three

1. Have amendments been made to the improvement strategy document to reflectexperience gained in the first year? This presumes that the CB managementdoes its own systematic review of its strategy and related planning and measuresprogress each year.What changes in priorities have been made?

2. Is the work on any part of the strategy falling behind? What plans are there to catch up?

3. Based on interviews with bankers, the Brazilian Bankers Association (BBA) and othersis there a better and more realistic public understanding of the mission andmandate of banking supervision?

4. If consultants are being employed, do they believe that the CB is making progress inall areas of work? Do they believe that progress is uneven, or that some tasks are,in effect, stalled?

Human resource development

Year one

1. Compared to the start of the improvement program, how many people are employedin banking supervision?

- new people hired?- promotions and reassignments?- retirements and resignations?- head office bank financial analysts?- examiners at all locations?- people involved in supervision of various institutions

- private sector banks?- state banks?- federal banks- affiliates of private sector banks?- co-operative banks?- other institutions?

3

ANNEX 2Attachment 2

- training personnel?- lawyers and economists?- finance professionals?- policy, rulings and interpretations?- specialists, particularly in systems and risk management areas (credit, market,

derivatives, foreign exchange, etc.)?- full time?- part time?

What are the staff numbers in various categories (particularly examniners) relatedto the number of institutions being supervised?

Repeat this in years two and three.

2. Have formal training strategies and programs been developed (and existing programsimproved) in

the following areas?- entry level?- examiners with 2, 5 and 10 years' experience?- financial analysts with 2, 5 and 10 years' experience?- loan examinations?- bank accounting practices?- bank internal controls?- market risk controls, including derivatives?- bank internal audit programs?- using a systematic rating system (such as CAMEL) to assess financial condition

and identify problems that should be dealt with?- early warning systems?- computers and information systems?- human resource management, including performance evaluations?- enhancements of on-site learning experience?- bank auditing standards?- implementation of new guidelines and rules issued by the CB?

3. How many have attended each of the programs set out above?

4. Evaluate the performance of those hired during the year. How many are not performingsatisfactorily?

5. Have knowledge objectives and related training requirements been identified for eachstaff member?

6. Is the balancing of human resources appropriate to the banking risks that have to bedealt with?

4

ANNEX 2Attachment 2

7. What use has been made of outside instructors in these training programs?- universities and other education institutions?- bankers?- systems specialists7

- market specialists?- foreign bank examiners?- retired bank credit officers?

8. How many people have been sent to other countries (e.g. US Federal Reserve) fortraining?

9. What, if any, changes have been made in compensation policies and levels?

10. Do all professional staff receive a performance evaluation each year?

Years two and three

1. Repeat of (1), (3), (5), (6) and (7) above.

2. What changes have been made to these training programs?- have any new programs been introduced during the year?

3 In the judgment of CB senior management, what improvements in peopleperformance have been achieved with this training?

4. What is the evaluation of the instructors of the effectiveness of these courses?

5. Have people in the supervised banks seen improvements in staff performance?

ChanRin2 the focus of sunervision

Year one

1. Has the CB prepared and issued documented standards of sound and safe riskmanagement practices in the following areas?- capital management?- credit risk?- interest rate risk?- foreign exchange risk?- securities portfolio management?- market risk?- liquidity risk?- real estate appraisals?- internal controls and internal audit?- related party transactions?

5

ANNEX 2Attachment 2

Have such standards been developed with input from bankers?

(I have previously sent to the CB the Standards of Sound Business and FinancialPractices published by the Canada Deposit Insurance Corporation to consideras a model).

2. Has the CB a loan quality classification system for the use of examiners?- satisfactory- specially mentioned, less than satisfactory, but still performing- doubtful, non performing- loss

3. Has the CB reviewed Brazilian Generally Accepted Accounting Principles and theaccounting and asset valuation rules already issued by it?- Have any new accounting rules or guidelines been issued by the CB?- what differences are there between Brazilian bank accounting rules and practices

and those in place in the US and Canada?- Has the CB initiated steps, including consultations with the BBA, banks and the

accounting profession to improve bank accounting?

4. Have any changes been made to the regulatory minimum capital requirements forbanks?- what levels of capital are held by the banks?- are there any banks with capital less than 8% of risk-adjusted assets (BIS level)?- is the required level of capital the same for all classes and sizes of banks?- do the rules address the problem caused by a bank with a financially weak

controlling shareholder? Are higher capital levels mandated if the capitalstrength of the holding company is weak?

5. Has the CB developed a documented risk dassification system for banks followinga model such as CAMEL?- has it prepared guides for examiners and analysts to help them identify early

warning signs of trouble?- has the CB documented a classification ranking such as the following?

(The A, B, C, D, E ,F ratings set out here are illustrative; there are othermodels that can be used effectively.)

- A. No solvency problem, a normally profitable, well-managed andwell-capitalized bank.

- B. Some evidence of problems indicating some deterioration and lessthan good condition, but as yet not a serious threat to solvency.

- C. Deteriorating condition, indicating that unless the situation iscorrected, a solvency problem is likely.

6

ANNEX 2Attachment 2

- D. Seriously deteriorated situation with bank capital below prescribedminimum regulatory levels, but still ostensibly solvent.

- E. Bank with negative net worth, in niminent danger of failing

- F. The bank can no longer pay its debts as they fall due and must beliquidated.

6. Have the examiners' manuals been redone to incorporate the above systems asstandards against which the banks' management of risk and financial conditioncan be measured?- are such manuals (or equivalent documentation) in use in bank examinations?

7. Has the banking industry (the banks, the BBB) been informed as to the standards,guidelines and classification systems described above?

Years two and three

1. Is the CB continuing to develop and improve its documentation of the kinds ofstandards, rules and guidelines described above?

2. How visible and well-understood by banks are these new risk-focused supervisoryapproaches?- have they been well received?- do the bankers interviewed have any suggestions for further improvement?

3. Have all examiners received and use revised manuals?- what do they think of them? Are they useful?

4. Using a risk classification system such as that outlined above, does CB managementhave lists of those banks in classifications B, C, D, and E?- have any banks classed as C not been previously classed as B?- have any banks classed as D not been previously classed as C (or even B)?

Does each bank classified as a B or below know that it has been so identifiedby the CB?

Have any bank failures or near-failures come as a surprise to the CB?Have examiners' evaluations of credit exposures for banks about to fail been

overly optimistic?

5. Do the examiners' reports on a bank following the inspection reflect an appraisal ofperformance and condition using a CAMEL or similar risk and problemidentification format?- do they clearly identify corrective actions required?

7

ANNEX 2Attachment 2

- what are the time delays between the completion of an examination and thepreparation of the report?

- how soon after the report has been prepared has it been delivered to anddiscussed with bank management and board of directors?

6. In the opinion of the examiners, are banks generally complying with documentedstandards of sound business and financial practices?- have the exceptions been identified and communicated to senior CB personnel?

7. Statistical records should be kept of the numbers and identities of banks examinedand analyzed on this new approach and the results. Such records should be informats that permit CB management to identify progress over time. If the systemis working well, the seriousness of safety and soundness problems identifiedshould diminish. They should also provide evidence as to the effectiveness ofearly warning signs and the avoidance of surprises.

8. By the end of two or three years, CB management and the BBA should be able toidentify significant improvements in bank risk management practices and in theoverall financial quality of banks.- based on interviews, it should be possible to see whether the credibility of the

supervisory process has improved and the standing of the CB enhanced.

Enforcement

Year One

1. Has the CB developed a listing of its regulatory interventions and actions, ranked inorder of severity related to a classification system of banks presenting problems(such as the A to F classification set out earlier as an illustration)- has this been published so that banks and the financial markets can see it?- B banks - examination letter recommendations and requirements for change

with a timetable for bank actions in response. The bank is required toconfirm undertakings to take corrective actions within a specified time-frame.

- C banks - as above, but now requiring a formal undertaking signed by theboard of directors and a business plan acceptable to the CB. It is possiblethat directions of compliance (cease and desist orders) will be issuedif the bank is not cooperating. One of these could be an order to ceasemaking any dividend or other payments to shareholders. Another might beto prohibit such a bank from paying interest rates on deposits higherthan those paid by its competitors.

- D banks - as above, but the CB will require the injection of more capital andthe adoption of a business and capital plan that could include downsizingand selling off parts of the business. Alternatively, the CB might requirethat the bank be sold or merged. Directions of compliance will be issued.

8

ANNEX 2Attachment 2

The CB might require a change in management. It will require a formalrehabilitation plan.

- E banks - at this stage, it is likely that new owners must come in or a formalcurator or rehabilitator appointed to restructure the bank. The CB shouldhave the power to take control even if the bank is continuing to meet itsobligations as they fall due.

- F banks - the CB or another government agency will take control of the bankand place it in liquidation.

Making this transparent is one of the best ways of improving the market'sconfidence in the regulatory process (unless it is seen to fail in any case where itappears the CB has been caught off guard). It is not contemplated that the names ofany banks where regulatory actions are taken will be made public, and the CB isbound by its confidentiality rules with respect to particular banks.

There are a number of ways where actions taken become public. For example:- it will not be possible to keep secret the fact that the CB has required

a change of management;- the audited annual financial statements may disclose formal commitments

made to the CB and any enforceable orders issued by the CB;- taking control of the assets of a failing bank is a public event.

Publication of such a listing usually makes it easier to take necessary actions inparticular situations.

The annual evaluation should verify the ability of the CB to develop enforcementprocesses and disciplines along the lines set out above, and whether it isfollowing them.

2. In addition to the actions identified above, the CB should make it clear that it has thepower to take actions to hold officers, directors, auditors and owners accountablein the event of a failure costing the taxpayer money, and that it will do so ifcircumstances warrant.

3. The CB should document its standards in the granting of banking licences and inapproving transfers of ownership or control. This should include the criteria tobe used in determining who is a "fit and proper" person to own a bank.- this should be made public.

4. The CB should maintain internal review procedures to ensure that the rulings andinterpretations made with a variety of situations with a variety of banksare consistent. The evaluator should try to identify instances of inconsistentrulings and interpretations issued during the year by the CB.

9

ANNEX 2Attachment 2

Years two and three

1. The CB should have a quality assessment process encompassing a case by case reviewof the supervisory handling of banks identified as B to F in the second and thirdyears of the program. Depending on the number of institutions involved, thismight be done on a sampling basis. A postmortem focusing on what thesupervisors did should be done in the case of all bank failures

Such a review will be qualitative in nature.

One indicator of the quality of supervision and the effectiveness ofinterventions is the percentage recoveries of assets, and amounts of losses and costsrelated to the management and liquidation of failed banks. Since one of thepurposes of a sound supervisory regime is the containment of such losses, oneshould expect to see improvement in this area over a period of time. (It is admittedthat asset recoveries are affected by market conditions over which the supervisorhas no control.)

2. A quality evaluation reviewer could do the following:- identify any failing banks not identified previously by the CB and where actions

taken were late or too weak or misdirected;- review actions taken with respect to various classified banks looking for any

obvious inconsistencies;- determine if, in particular situations, powers available to the CB were not used.- identify any situations involving banks owned by conglomerates where the

GB's powers were inadequate to deal with the problem?

3. A review should be made of all new banking licences and ownership transfers todetermine if the quality criteria have been followed in all cases.

4. A sampling of other rulings and interpretations should be made to see if any conflictwith any of the standards implicit in the other improvements being made in theoverall program, and that there are no significant inconsistencies in them.

Information systems

Year one

1. The first, and perhaps most important step in the development of IT strategies is theneed for senior management to define its goals and information requirements.In other words, before technical work is started, the required and desirableinformation outputs and the uses of such outputs need to be identified and welldocumented.

10

ANNEX 2Attachment 2

- what information do we need? One must distinguish between what informationis truly needed and what would be useful to have.

- why do we need it?- how often do we need it?- who will use it?- what will be done with it?- how long will it take to get this information?- how much will it cost to develop the systems?- how will the quality of banking supervision be improved as a result?

It is recognized that the banking industry in Brazil is very advanced in terms of theits uses of advanced information technology (IT) and it is important to thecredibility of the CB that it too is capable of using advanced IT effectively,and that this be visible.

2. Has an information technology (IT) plan been developed based on identified needs andmanagement requirements with a timetable for implementation.- does the plan cover the acquisition of new laptops by staff,- does it include training in their use?- does it include other hardware?- does it identify all the important data inputs into the system, their sources

and frequency?- does it identify how new systems will meet the required information outputs?- does the plan involve users in the decisions to be made?- does it build effectively on IT systems already in place? ("Supersystem")

- have actions taken under the plan been taken within the specified timetable?

3. How does this plan compare with systems in use by banking supervisors in othercountries?- are any gaps or deficiencies apparent when this comparison is made?

4. How is IT being used in practice?- in analyzing information returns from the banks?- in identifying non-standard information or indicators of trouble?- in examinations?- in the communications between analysts and examiners?- in preparing examnination reports, in identifying items requiring follow-up,

and in ensuring that findings are in fact being followed up?

5. The CB should develop the capacity to monitor on a systemwide basis trendsthat can adversely impact the banking system. These can cover the following:- loan exposures by industry, geographically, to particular borrowers or

groups, by size classification, etc.;- exposures to real estate - commercial and residential;

I1

ANNEX 2Attachment 2

- levels of non-performing loans;- levels of loans to related parties;- similar information for long term investments;- exposures to interest rate, foreign exchange and related risks;- bank capital trends by class and size of bank;- liquidity information;- interest rates paid on deposits;- profitability indicators - spreads, fee income, loan losses, operating costs,

taxes, net earnings, dividends, cost of capital, etc.

Without substantial investments in IT, this aggregate form of analysis willnot be possible. A quality review could assess the relevance of this informationand the ways it is used.

Years two and three

1. Reviews will be necessary to see whether this IT development work is proceeding onschedule and within budget. (Most IT developments run late and over budget).

2. Specific bank examination programs should be reviewed to identify the uses made oflaptops and the communications with analysts and come to judgments abouttheir effectiveness. These reviews should include interviews with examinersand with the banks.

3. There should be an assessment of the uses made of the masses of information collectedeach month ("Supersystem");- does it flag problems promptly and in ways that something can be done quickly?- does it contain too much data to be used effectively?- are findings communicated promptly to examiners, and is this information put

to use quickly?- is it useful in identifying trends on a timely basis?- have statistics of financial performance for the banking system as a whole

been prepared in order to give CB management a picture of majortrends?

4. Has the CB used information produced by its systems to prepare system analyses ofkey performance and safety indicators for the banking system as a whole - or forparticular segments of the system? A review should be made of the uses of suchinformation and the actions, if any, taken as a result.

12

ANNEX 2Attachment 2

Public financial information

Year one

1. The CB should develop a program to improve the ability of the market to requireincreasing levels of safety and soundness:- better and more credible audited financial statements of banks and companies

controlling banks;- improved auditing of these statements;- more information for the securities markets;- quarterly financial information;- more information for rating agencies;

In an earlier section I referred to programs to improve financial accounting rulesand practices for banks. In addition to the strengthening of the underlying bankaccounting rules, the CB should do what it can to improve the quality offinancial disclosures, particularly with respect to:

- related party transactions;- market values of security positions;- non-performing loans and loan losses;- loan exposures to particular industry and geographic segments

(e.g. real estate);- derivatives, including the credit risk exposures.

The program should ensure that the accounting principles applied to thepublished financial statements are consistent with those used in thepreparation of financial information filed with the CB by the banks.

2. A review should be made of the progress of such a program in the first year.- the reviewer should identify the level of financial reporting, the underlying

accounting and disclosures and make comparisons with internationalstandards;

- interviews should be conducted with leading auditors, financial analysts and withrating agencies to confirm progress made, significant continuing problemsand gaps and the most critical problems to be dealt with;

- changes in banking operations and their impact on bank accountingshould be made to see if there are any gaps and areas where morework is required.

3. A review should be made of selected published bank financial statements to identifydeficiencies.

4. Do the banks publish interim results on a quarterly basis?

13

ANNEX 2Attachment 2

5. A review should be made of the various ways that the CB interacts with outside bankauditors, and an assessment made as to:- their effectiveness in identifying problems early;- inconsistencies in accounting bank to bank;- the capacity of auditors to evaluate loans (the impression is that they just

accept the application of the CB rules);- the reporting of evidence of non-compliance with CB rules and guidelines;- the understanding or lack thereof of the role of the auditors in ensuring

bank safety;- potential use of auditors by the CB to make special examinations.

6. A review should be made of the financial transparency of conglomerates with bankmembers, and consideration of what, if anything, the CB can do to improvethe situation using its present powers.

Years two and three

1. A review should be made of published bank financial statements to see if there havebeen significant improvement.

2. Interviews could be held with rating agencies and financial analysts to obtain viewsabout the adequacy of published financial information to enable them to come toconclusions about the strength of individual banks in the system.

3. Examination files for a selected group of banks could be reviewed to assess:- judgments as to improvements in the quality of the work done by auditors;- whether auditors' formal and informal communications with the CB have

brought to light problems that might otherwise have been missed ornot discovered until later;

- whether auditors' management letters have identified weaknesses in internalcontrols;

- the ability of bank examiners to use the information contained in bank publicfinancial statements.

Market feedback

It will take some years before the effects of improved supervision are identifiedin the financial markets. The most important indicators include the following:

1. A decreasing incidence of bank failures and visible near-failures resolvedthrough mergers, and a lowering of the public costs related to bankingproblems.

It is recognized that the most important factor leading to failures is thecondition of markets of underlying assets, particularly real estate. Thus,

14

ANNEX 2Attachment 2

reductions (or increases) in the incidence of bank failures are notcompletely tied to the changing quality of bank supervision.

What is important is that the costs of dealing with failure are, and areseen to be, reasonable in the circumstances, and that they are confined tothefailed banks themselves and have not contaminated others.

2. Positive feedback about the performance of bank supervisors from people theydeal with or who are familiar with their work: bankers, auditors, BBA,financial analysts, rating agencies. It should be possible to interviewsuch people to whom improvements reflected in performance is visible.This should yield useful information related to hiring and trainingprograms, the adoption of risk focused supervision, the more effective useof enforcement powers and more effective use of IT etc. It is important togain this feedback each year, and an independent consultant is likely thebest person to do this.

3. The costs of banking regulation, and the related costs of meeting regulatoryinformation requirements should be accepted by the banks as reasonable.This discipline works best when the costs of banking supervision arecharged back to the industry instead of to the taxpayers. (In this regard,it is the experience of regulators in North America that the ability tocharge supervisory operating costs to the industry assists rather thanimpedes obtaining the resources needed to do a good job.)

4. The BBA should be persuaded to publish annually aggregated financialstatistics, by banks classified by size, of assets, non-performing loans,interest margins, loan losses, operating costs, earnings and capital levels. Ifnecessary, the CB itself could publish such information to provide a profileof financial strength of the system and significant trends. The CB could not,of course, publish the identities of banks presenting problems or evenaggregate statistics related to them.

Over time one would expect to see improving trends in these areas.

5. There should be no significant bank failures which appear to have come as asurprise to the authorities. Regulators are generally forgiven if it isapparent that they were forewamed and took appropriate actions evenif they did not succeed in avoiding the failure.

6. There should be no failures or other significant bank-related problemsresulting from fraud (or at least, from fraud undetected by the CB). Themarket must have confidence that bank resources cannot be used forfraudulent purposes and that the system has integrity.

15

ANNEX 2Attachment 2

This is one of the reasons why many bank supervisors now are settingout guidelines designed to assist banks in the control of money laundering.

7. There should be evidence of a number of situations where failure has beenaverted as a result of supervisory intervention. This information, of course,is not public (although there could be reasonable accurate publicspeculation), and must be gained through discussions with CB personnel.The files of a number of banks rated C, D or E which did not fail could beselected and made the subject of an internal quality assurance review.

8. The real test is the ability of the banking system to emerge substantially intactfrom a period of financial stress or crisis. The ability to handle seriousstress reflects directly on the financial strength of the banks and their riskmanagement systems. Strong banks weather storms; weakly managedbanks do not.

16

ANNEX 2Attachment 3

CENTRAL BANK OF BRAZIL - BANEING SUPERVISION MODERNIZATION PROGRAMCOM?LEMENTARITY OF PRESENT AND PROPOSED ACTIONS

Strate c Improvement AreasTime- Mission / Organization / Human Resources Information / Supervision ToolsLine Objectives Management Information

Technologyv _

Central World Central World Bank Central World Central World Central World BankBank Bank Bank Bank Bank Bank Bank Bank

Present + On- + Re- + Policy + Acqui- + Enhancegoing view of review of sition of enforcementintenal report of -recruit- 300 powersreview external ment notebook (MP 1470)

mngmt. -career com-consul paths puters +tant -com- Upgrading(Boucinhas) pensation off & on-site

inspection

+ Developmnanuals

derivatives-treasury

Year I + Ac- + Con- + Ac- + Con- +Recruit + Basic/ + Deve- + Up- + Upgradetions to tinuing tions to be tinuing ment specialized lop grading risk mgmt.be evalua- defined evaluation training in strategic key programsdefined tion risk informa- databases

+ Forma- manage- tion + Fostertion of ment techno- + Sim- cooperationQuality logy plan plify / with foreignAssurance + Ex- rationa- supervisorsGroup changes lize

with infonna- + Establishforeign tion flow cooperativesupervisors between protocol with

Central auditorsBank andbanks + Review of

non-judicial+ Acqui enforcementsition of actionsaddi-tionalnotebookcom-

I_putersYear 2 + Ac- + Con- + Ac- + Con- +Recruit + Con- + Con- + Outreach

tions to tinuing tions to be tinuing ment tinue tinue initiativesbe evalua- defined evaluation training actions -Congressdefraed tion from -press

+ Monito- year 1 -financialring sectorperformance -publicof QualityAssuranceGroup

Year 3 + Con- + Con- + Con-tinuing tinuing tinueevalua- evaluation trainingtion

ANNEX 2Attachment 4

Aereed Terms of Reference for aStrateeic Vision for the Banking and Financial Industry in Brazil

Rationale: This project component would elaborate a strategic vision for thestrengthening of the privately-owned banking system in BraziL The vision which isdeveloped should be consistent with changes occuring throughout thefinancial sector,since banks are increasingly part offinancial conglomerates and non-bank financialinstitutions are competing with banks in a variety of areas. The work would take intoaccount policies already adopted by the Brazilian authorities to further this goal andreduce the dominance ofpublicly-owned banks, which now control approximately 50%of system assets.

Obiective: To provide recommendations for changes in instruments and publicpolicies, so as to foster a sound banking system. In order to identify the public policyissues, the project should begin with an evaluation of the enabling environment forfinancial services, with a focus on the "infrastrucutre" needed for well-functioning creditmarkets, such as access to accurate information on potential borrowers. The study shouldthen address how both the public and private sector can contribute to a stronger bankingsector, including the following topics: (1) incentives for sound bank management, bothfrom market forces and public policies and instruments; (2) policies which promotecompetition, including developing a level regulatory playing field for the financial servicesindustry (bank and non-bank institutions) and the role of foreign capital and banks; and (3)access to financial services for sectors of the population which are currently underservedsuch as small business and rural and low-income communities. The study should provideinsights as to the adequacy of the current regulatory framework for banking and financialservices and the division of responsibilities between different Government agencies, giventhe growth of financial conglomerates in recent years. In addition, the study shouldidentify other public policy issues, such as tax policies and legal reforms, which affect thefunctioning of banks and especially, credit markets.

Issues to be covered: The study should broadly outline the desirable characteristics andgeneral nature of a progressive banking system, which would be appropriate for Brazil,attainable within the five to ten-year time frame and within the context of a concertedinternational strategy to promote financial stability. This vision of a future bankingindustry should include - but not be limited to - the types of institutions, available financialproducts, their prices and costs, the market structure and role of foreign capital andforeign institutions. The assumptions and baseline measurements used in creating thisvision should be clearly noted. As appropriate, reference should be made to other financialmarkets, with particular emphasis on emerging market economies, which have undergonea reorganization of their banking and financial sectors, to place in context the projectionsprovided for Brazil. The study would then identify those public policies which arenecessary to provide the framework for this new banking marketplace. A more detailed listof items to be included in the study is provided on the next page.

1

ANNEX 2Attac}unent 4

The enablinz environment & credit cultureDevelopment of a credit culture

-availability of reliable information on potential borrowers (credit bureau data)-protections on access to data

Suggesting improvements in legal protections for credit contracts-development of national registries for property-legal framework for taking possession of collateral

Promotinf sound bank mana-aementIncentives for prudent bank management

-professionalization of bank management, incentives for bank managers &directors-incentives for consumers to demand prudent management

Measures to deal with problem banks (public and private)-state bank restructuring/closure or privatization-asset resolution for bad assets

Controls on connected lendingAutonomy of bank supervisorsSensitivity of private banking sector to monetary policy, macroeconomic policy

Promotin2 competitionCreation of a level regulatory playing field

-reduced opportunities for regulatory arbitrage-issues related to universal banking, the link between banks and capital markets

Suggesting a strategy for increased foreign participation in the sector, taking into accountissues of reciprocity

-defining the investment regime for foreign investment in banking-impact of regional integration (Mercosul)-impact of increasing openness on competition in banking services

Simplified, transparent, non-stifling regulatory environment for credit markets

Access to financial servicesSuggesting strategies for improved access to financial services for marginalized segmentsof the population

-rural communities-microfinance initiatives for low-income communities-finance for small and medium-size enterprises

MethodologvThe consultant should present a work plan which clearly presents the methodology to beused. Interviews with key market participants and an analysis of financial sector datashould be included in these plans. In addition, the consultant should possess asophisticated understanding of international trends in banking and finance which can beapplied to this project, as well as have experience in banking supervision.

2

ANNEX 2Attachment 4

Products/Results: The consultant should produce a preliminary report half-way into theproject to allow for discussion and modification of the work plan as necessary. At theclosure of the project, the consultant should provide a detailed written report andcorresponding electronic file, documenting the findings and policy prescriptions. Thereport should provide full references and key assumptions on which conclusions are based.The sequencing of changes and their timing over the five-year horizon should be clear inthe presentation, as well as the timing of appropriate supervisory and public policyresponses. Comments on the consultant's findings will be solicited from other financialsector experts. The consultant should be prepared to discuss the report in a public seminaror conference within six months of the conclusion of the project. If the review processindicates that the study was successful, this effort would likely be repeated biannually.

3

Annex 3

Estimated Project Costs

Project Component Local 1 Foreign j Total------- -$ million----------

I. Asset Resolution/Disposal 1.0 1.0............................................................................................................................................................II. Financial Sector Vision/Other Selected Research 1.0 1.0

............................................................................................................................................................HI. Improvement of Banking Supervision 14.0 14.0

(total of subcomponents listed below)3.0 3.0

i) Trainingii) Information technology equipment 5.5 5.5iii) Upgrading of data bases 2.0 2.0iv) Rationalize information flow between Central Bank 0.5 0.5

and banks they supervisev) Review accounting standards and develop 0.3 0.3

cooperation protocol with external auditorsvi) Develop permanent quality assurance process 0.5 0.5vii) Continued evaluation of supervision strategies ___ 0.8 0.8viii) Develop outreach activities 0.2 0.2ix) Review of non-judicial enforcement actions 0.2 0.2x) Other activities 1.0 1.0............................ i~ ..................................................................................................................

IV. State Bank Restructuring 0.25 0.25.............................................................................................................................................................VI. Training other than Bank Supervision/Other 3.00 3.00

V. Other Activities 0.75 0.75...........................................................................................................................................................VII. Project Management and other modernization 4.6 4.6initiatives

Total Proiect Cost 4.6 20.0 24.6

ANNEX 4

Annex 4

Brazil: Central Bank Modernization Technical Assistance ProjectProcurement, Disbursement, and Accounting/Auditing Arrangements

Procurement

1. Consultant's services would be procured according to the provisions ofthe "Guidelines: Selection and Employment of Consultants by World BankBorrowers" (January 1997) and of goods according to the provisions of the"Guidelines for Procurement Under IBRD Loans" (January 1995, revisedJanuary and August 1996). A specialist in procurement would be hired by theProject Coordination Unit (PCU) to expedite project implementation. TheBorrower is also planning to administer part of the project under the auspices ofthe United Nations Development Programme (UNDP) to facilitate procurementof larger and more complex goods and services contracts. The administrativeexpenses for the PCU, including UNDP fees, would be fully paid by theBorrower. Table A presents the project costs (excluding project administration)by procurement arrangements and Table B provides the thresholds forprocurement methods and prior review, both of which are discussed below inthe specific context of goods and consultant services.

2. Procurement of Goods: Goods, primarily computer hardware andsoftware, would be purchased using International Competitive Bidding (ICB)procedures when the sum of the contract exceeds US$350,000. For contractsvalued between US$100,000 and US$350,000, National Competitive Bidding(NCB) procedures would be used based upon standard bidding documentsacceptable to the Bank. Goods purchases worth less than US$100,000 per orderwould be purchased on the basis of shopping (national or international asindicated by the item) from at least three eligible suppliers.

3. Procurement of Consultant Services: Letters of Invitation, contracts,short-lists, selection procedures, terms of reference and the technical evaluationfor consulting firms hired under the project will be subject to prior Bank reviewfor contracts greater than or equal to US$200,000. Contracts for consultingfirms valued between US$100,000 and US$200,000 require prior review asdescribed above, with the exception of the technical evalution. Prior review ofbidding documents is also required for consulting contracts made withindividuals for amounts greater or equal to US$50,000. For contracts which fallbelow these thresholds, ex-post review will occur on a sample basis. Exemptionfrom prior review does not apply to consultant contracts below the thresholds incases of single source selection of firms.

ANNEX 4

4. Prior Review: The project implementation plan identifies keyprocurement actions in the first year of the project. Semi-annual operating planswould indicate key procurement actions to be taken in the year described. TheBank would review all goods contracts using ICB with a value equal or greaterthan US$350,000; consultant firm contracts valued equal or greater thanUS$100,000; individual consultant contracts equal or greater than US$50,000;and consultant contracts not exempted from prior review as described in the texton procurement of consultant services.

5. Post Review: All procurement documentation, including that related tocontracts not subject to prior review would be kept by the Borrower for ex-postreview by the Bank according to Bank Guidelines.

Disbursement

6. Allocation of loan proceeds: The proposed Bank loan would bedisbursed over a period of three years. The project is expected to be completedby June 30, 2000, and the closing date is December 31, 2000. The allocation ofloan proceeds by project component is shown in Table C. Since this project isconceived as the first phase of a multi-phase modernization program at theCentral Bank in which the Bank would be involved, a relatively compactdisbursement schedule has been devised. Most project expenditures -approximately 80% of the total - are programmed for the first two years ofimplementation.

7. Use of Statements of Expenditures: Disbursements would be based onStatements of Expenditures (SOEs) for: (a) all goods contracts valued belowUS$350,000; and (b) consultant services valued below US$100,000 for firmsand US$50,000 for individuals and (c) training expenditures. Documentationsupporting SOEs would be retained by the PCU and made available forexamination by Bank staff as requested. All other disbursement requests wouldbe accompanied by full documentation.

8. Procurement Agent: The Borrower is considering to contract the UnitedNations Development Programme (UNDP) based in Brasilia for procurement oflarger and more complex goods and services contracts made through the project.The estimated value of goods and services to be procured through the UNDP isUS$14 million, or approximately two-thirds of the total loan proceeds. Theprocurement agent would make payments directly to consultants and suppliers.Detailed supporting documentation for expenditures will be kept by theprocurement agent and submitted by the Borrower to the Bank. Fulldocumentation for all contracts requiring Bank's prior review will be submitted.

2

ANNEX 4

9. Special Account: A Special Account will be established to coverexpenditures paid directly by the Borrower, with an authorized allocation ofUS$2.0 million. The authorized allocation would be sufficient forapproximately four months of financeable expenditures. The Special Accountwould be managed by the PCU which would be responsible for preparingdisbursement requests. These requests would be submitted monthly or when theSpecial Account has been drawn down by a third of the initial deposit,whichever occurs first.

10. Retroactive Financing: At negotiations, the need for retroactivefinancing of up to US$2 million (10% of the Loan amount) was reviewed andagreed for eligible expenditures incurred since December 16, 1996 (but notearlier than 12 months before loan signing). Retroactive financing isrecommended to allow for Bank financing of modernization expenditures whichhave been incurred since the Project was identified.

Accounting and Auditing

11. The Project Coordination Unit in the Central Bank would maintain theaccounts for the project and would be accountable for funds transferred to thevarious departments involved in project execution. These accounts would bemaintained in accordance with sound accounting practices, acceptable to theBank, and should be organized through an MIS system able to provide readyaccess to project financial data, including funds committed and disbursed byproject component.

12. Accounts, including the Special Account and related fmancialinformation (including supporting documentation for the SOEs), would beaudited annually by an independent auditor acceptable to the Bank, inaccordance with Bank auditing guidelines. Certified copies of the auditedconsolidated project accounts and audited Special Account (including a separateopinion on the use of SOEs) would be submitted to the Bank not later than sixmonths after the close of the fiscal year.

3

ANNEX 4

Table A

Project Costs' by Procurement Arrangements (US$ thousands)

Procurement Method TotalCategory 2 Cost

ICB NCB QCBS 2Single OtherSource

Consulting Services

Individual 1,000 500 1,500

Firms 7,500 500 8,000

Sub Total 8,500 1,000 9,500

Goods 4,850 400 2503 5,500

Training fees, 5,000 5,000Workshops andSeminars

TOTAL 4,850 400 8,500 1,000 5,250 20,000

NOTE: The Borrower is negotiating with UNDP for the procurement of most goodsand consultant services contracts.

I Table does not include costs of project administration related to the Project Coordination Unit (PCU) or-UNDP fees, since these expenses will be fully covered by the Borrower. Project administrationcosts are estimated at US$2 million over the life of the project. All other project-related expenseswill be funded through the loan, excluding taxes.

2 The maximum value for any single source consultant contract is US$200,000.

3 National or International Shopping Procedures.

4

ANNEX 4

Table B

Thresholds for Procurement Methods and Prior Review (thousands, US$)

Category Contract Value Procurement Method Contracts Subject(Thresholds) to Prior Review by

BankConsulting Services < 50 Selection according to None

Consultant GuidelinesIndividuals 2 50 Selection according to All

Consultant Guidelines...................... .......................................... ............................ ........... ............ ................................................... .. ............................................

Firms 2 100 and < Selection according to All (except technical200 Consultant Guidelines evaluation)

2 200 All (includingtechnical evaluation)

Goods < 100 National or NoneInternational Shopping

* 100 and < NCB None350

2 350 ICB All

Table C

Allocation of Loan ProceedsAmount of the Loan % of Expenditures to be financed

Category Allocated (Expressedin US Dollars)

(1) Consultant Serices 9,500,000 100%

(2) Training 5,000,000 100%

(3) Goods 5,500,000 100% of foreign expenditures, 100% oflocal expenditures (ex-factory-cost) and80% of local expenditures for otheritems procured locally.

TOTAL 20,000,000

5

Annex 5Brazil: Central Bank Modernization Technical Assistance Project

Project Processing Budget and Schedule

A. Project Budget (US$000) Planned Actual

218,000 218,000 278,000

B. Project Schedule Planned Current(At final PCD stage)

Time taken to prepare the project 6 months 10 monthsFirst Bank mission (identification) 12/16/1996 12/16/1996Appraisal mission departure 02/24/1997 02/24/1997Negotiations 05/05/1997 07/18/1997Planned Date of Effectiveness 09/30/1997 03/31/1998

Prepared by: Central Bank of Brazil

Bank staff who worked on the project included:1. Stefan Alber2. David Scott3. Margaret Miller4. Laura Ard5. Robert Clarke (Cons.)6. D. Cooke (Cons.)7. A. Berggren (Cons.)8. M. Mackenzie (Cons.)

Annex 6Brazil: Central Bank Modernization Technical Assistance Project

Documents in the Project File

Arthur Andersen, Bank of England, "Findings and Recommendations of theReview of Supervision and Surveillance", July 1996.

Atlantic Rating, "Brazil - Banking System Report, October 1996.

Banco Central do Brasil, PROER "Program of Incentives to the Restructuring andStren,-thening of the National Financial System", February 1996.

Banco Central do Brasil, "Carta Consulta", December 19, 1996.

Bank Watch, "Eamings Update - Brazilian Banks 1995 Results", April 2, 1996.

Clarke, Robert L., Mission Report to the World Bank, March 21, 1997.

Group of Thirty, "Defining the Roles of Accountants. Bankers and Regulators inthe United States", 1994.

IBCA Country Report, "The Brazilian Banking IndustrylPrudential Regulations",March 1995.

RBCA Selected Analyses, "Private Banks", 1995/1996.

MBCA, "Selected Analyses of Government/State Banks", 1994-1996.

Key Financial Sector Laws.

Miscellaneous Working Papers, 1996/1997

"Past Bank Failures", Selected Analyses, 1995/1996.

United States General Accounting Office, " Bank Oversight Structure: US and ForeignExperience may offer Lessons for Modernizing US Structure", November 1996.

MOP Schedule DGanmated: October22, 1997

Status of Bank Group Operations in BrazilEBRD Loans and IDA Credits in the Operations Portfolio

Difference Betweenexpected

Original Amount in US$ Millions and actualLoan or Fiscal disbursements a/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Number of Closed Loans/credits: 193

Active LoansBR-PE-35728 IBRD42320 1998 STATE OF BAHIA BAHIA WTR RESOURCES 51.00 0.00 0.00 51.00 0.00 0.00

BR-PE-39197 IBRD42110 1998 STATE OF RIO DE JANEIRO RJ ST.PRIV. 250.00 0.00 0.00 250.00 250.00 0.00

BR-PE-34578 IBRD41650 1997 RIO GRANDE DO SUL RGS HWY MGT 70.00 0.00 0.00 70.00 70.00 0.00

BR-PE-38896 IBRD41200 1997 STATE OF RGN R.POVERTY(RGN) 24.00 0.00 0.00 24.00 24.00 0.00

BR-PE-39196 IBRD41390 1997 STATE OF RIO GRANDE DO SU RGS ST.REFORM 125.00 0.00 0.00 75.00 75.00 0.00

BR-PE-42566 IBRD41220 1997 STATE OF PERNAMBUCO R.POVERTY(PE) 39.00 0.00 0.00 39.00 39.00 0.00

BR-PE-43868 IBRD41480 1997 STATE OF RGS RGS LAND MGT/POVERTY 100.00 0.00 0.00 100.00 100.00 0.00

BR-PE-43871 IBRD41210 1997 STATE OF PIAUI (PIAUI)R.POVERTY 30.00 0.00 0.00 30.00 30.00 0.00

BR-PE-43873 IBRD41690 1997 FED.REP.OF BRAZIL AG TECH DEV. 60.00 0.00 0.00 60.00 60.00 0.00

BR-PE-46052 IBRD41900 1997 CEARA WTR PILOT 9.60 0.00 0.00 9.60 0.00 0.00

BR-PE-48870 IBRD41890 1997 THE STATE OF MATO GROSSO MT STATE PRIV. 45.00 0.00 0.00 45.00 45.00 0.00

BR-PE-6475 IBRD41470 1997 FED. REP. OF BRAZIL LAND REM PILOT 90.00 0.00 0.00 90.00 90.00 0.00

BR-PE-6532 IBRD41880 1997 FEDERAL GOVERNMENT FED HWY DECENTR 300.00 0.00 0.00 300.00 300.00 0.00

BR-PE-6562 IBRD41400 1997 STATE OF BAHIA BAHIA MUN.DV 100.00 0.00 0.00 94.98 94.98 0.00

BR-PE-37828 IBRD40600 1996 STATE OF PARANA (PR) R. POVERTY 175.00 0.00 0.00 175.00 175.00 0.00

BR-PE-40028 IBRD40460 1996 FEDERATIVE REPUBLIC OF BR RAILWAYS RESTRUCTURG 350.00 0.00 0.00 167.69 167.69 0.00

BR-PE-6512 IBRD39240 1996 CVRD ENV/CONS(CVRD) 50.00 0.00 0.00 35.94 35.94 0.00

BR-PE-6554 IBRD40470 1996 FED. REP. OF BRAZIL HLTH SCTR REFORM 300.00 0.00 0.00 264.75 264.75 0.00

BR-PE-35717 IBRD39170 1995 GOVT OF BRAZIL RURAL POV. (BAHIA) 105.00 0.00 0.00 71.51 71.51 0.00

BR-PE-38882 IBRD39150 1995 FED REPUBLIC OF BRAZIL RECIFE M.TSP 102.00 0.00 0.00 98.72 98.72 0.00

BR-PE-38884 IBRD39180 1995 GOVT OF BRAZIL RURAL POV. - CEARA 70.00 0.00 0.00 58.44 58.44 0.00

BR-PE-38885 IBRD39190 1995 GOVT OF BRAZIL RURAL POV.-SERGIPE 36.00 0.00 0.00 24.93 24.93 0.00

BR-PE-6436 IBRD37890 1995 STATE OF CEARA ZIL CEARA UR.DV/WATER CO 140.00 0.00 0.00 117.26 117.26 0.00

Generated by the Operations Infomation System (OIS) Page 1

MOP Sciedule DGeneaAed: October 22, 1997

Difference Betweenexpected

Original Amount in US$ Millions and actualLoan or Fiscal disbursements a/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

BR-PE-6564 IBRD39160 1995 FED REPUBLIC/BRAZIL BELO H M.TSP 99.00 0.00 0.00 83.47 83.47 0.00

BR-PE-6452 IBRD36630 1994 MINISTRY OF EDUCATION NE BASIC EDUC III 206.60 0.00 0.00 99.52 99.52 0.00

BR-PE-6522 IBRD37670 1994 ST.OF ESPIRITO SANTO ESP.SANTO WATER 154.00 0.00 0.00 98.40 98.40 0.00

BR-PE-6524 IBRD36390 1994 ST.OF MINAS GERAIS MINAS MNC.DEVELOPMT 150.00 0.00 5.00 46.49 51.49 0.00

BR-PE-6543 IBRD37330 1994 GOVERNMENT M. GERAIS BASIC EDUC 150.00 0.00 0.00 84.90 84.90 0.00

BR-PE-6546 IBRD36590 1994 GOVERNMENT AIDS CONTROL 160.00 0.00 0.00 24.54 24.54 0.00

BR-PE-6555 IBR037130 1994 STATE GOVTS STE HWY MGT II 54.00 0.00 18.00 22.42 206.42 48.48

BR-PE-6555 IBRD37150 1994 STATE GOVTS STE HWY MGT II 79.00 0.00 18.00 21.63 180.63 48.48

BR-PE-6555 IBRD37140 1994 STATE GOVTS STE HWY MGT II 87.00 0.00 0.00 4.43 137.43 48.48

BR-PE-6558 IBRD37660 1994 REPUBLIC OF BRAZIL PARANA BASIC EDUC 96.00 0.00 0.00 51.76 51.76 0.00

BR-PE-6378 IBRD35470 1993 STATE GOVERNMENTS STATE HWY MGMT 50.00 0.00 0.00 7.61 45.61 17.54

BR-PE-6378 IBRD35480 1993 STATE GOVERNMENTS STATE HWY MGMT 38.00 0.00 18.00 9.95 77.95 17.54

BR-PE-6427 IBRD36040 1993 MIN. OF EDUCATION N NE BASIC EDUC II 212.00 0.00 0.00 66.35 66.35 0.00

BR-PE-6540 IBRD35540 1993 MINAS GERAIS ST. WTR Q/PLN(MINAS GERA 145.00 0.00 5.00 46.03 51.03 46.02

BR-PE-6541 IBRD35030 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 9.00 0.00 0.00 6.38 242.38 0.00

BR-PE-6541 IBRD35050 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 117.00 0.00 0.00 56.98 184.98 0.00

BR-PE-6541 IBRD35040 1993 S.PAULO/PARANA STS. WTR Q/PLN(SP/PARANA) 119.00 0.00 0.00 43.71 169.71 0.00

BR-PE-6547 IBRD36330 1993 FED.REP.OF BRAZIL METRO TRANSP. RIO 128.50 0.00 0.00 47.83 47.83 0.00

BR-PE-6368 IBRD34420 1992 GOVERNMENT WATER SECTOR MODERNI 250.00 0.00 0.00 81.42 81.42 0.00

BR-PE-6379 IBRD34570 1992 GOB BRAZI METRO TRANSP.SPAULO 126.00 0.00 0.00 7.55 7.55 0.00

BR-PE-6505 IBRD34920 1992 GOVERNMENT OF BRAZIL MATO GROSSO NAT RES 205.00 0.00 0.00 96.03 96.03 0.00

BR-PE-6364 IBRD33750 1991 STATE OF SAO PAULO INNOV BASIC ED 245.00 0.00 0.00 62.13 62.13 0.00

BR-PE-6492 IBRD33760 1991 PETROBRAS BRAZI HYDROCARBN TRNSP/PRO 260.00 0.00 0.00 17.42 17.42 0.00

BR-PE-6403 IBRD31350 1990 FEDERATIVE REPUBLIC OF BR NE BASIC HLTH SRV II 267.00 0.00 50.00 15.77 65.77 15.76

BR-PE-6442 IBR028831 1990 ELETROBRAS ITAPARICA 100.00 0.00 0.00 1.83 33.83 1.86

BR-PE-6446 IBRD31730 1990 FEDERATIVE REPUBLIC OF BR NAT ENVIRONMT 117.00 0.00 0.00 29.61 29.61 0.00

BR-PE-6453 IBRD31700 1990 FEDERATIVE REPUBLIC OF BR NE IRRIG I 210.00 0.00 69.00 50.79 119.79 50.81

BR-PE-6370 IBRD30130 1989 FEDERATIVE REPUBLIC OF BR NE IRRI JAIBA 71.00 0.00 0.00 6.81 6.81 0.00

BR-PE-6414 IBRD30430 1989 COMGAS, SAO PAULO NTRL GAS DIST 94.00 0.00 0.00 9.19 9.19 0.00

BR-PE-6360 IBRD29500 1988 GOVERNMENT OF BRAZIL IRR SUB-SECTOR 195.00 0.00 26.00 .46 26.46 .44

Genfeted by the Ope on nformaion System (OIS) Page 2

MOP Schedule DGenerated: October 22, 1997

Difference Betweenexpected

Original Amount in US$ Millions and actualLoan or Fiscal disbursements a/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

BR-PE-6431 IBRD28100 1987 FEDERAL REPUBLIC OF BRAZI SKILLS FORMATION 74.50 0.00 58.90 .35 59.25 .36

Total 6,890.20 0.00 267.90 3,454.58 4,711.88 295.77

Active Loans Closed Loans TotalTotal Disbursed (IBRD and IDA): 3,167.69 14,987.93 18,155.62

of which has been repaid: 338.94 11,870.43 12,209.37Total now held by IBRD and IDA: 6,283.36 3,192.86 9,476.22Amount sold 0.00 45.83 45.83

Of which repaid : 0.00 45.83 45.83Total Undisbursed : 3,454.58 75.38 3,529.96

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter

based system will be used (HS - highly Satisfactory, S - satisfactory, U - unsatisfactory, HU - highly unsatisfactory): see proposed Improvements in Project andPortfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

Note:Disbursement data is updated at the end of the first week of the month.

Gaeated b y te Operadios Infannion Sydem (OIS) Page3

MOP Schedule D

BrazilSTATEMENT OF IFC's

Committed and Disbursed PortfolioAs of 30-Sep-97

(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quas Partic1973/78/83 CODEMIN 0.00 4.34 0.00 0.00 0.00 4.34 0.00 0.001975/96 Oxiteno NE 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.001980187 Ipiranga 0.00 6.32 0.00 0.00 0.00 6.32 0.00 0.001980/88 OPP .93 1.64 0.00 .40 .93 1.64 0.00 .401980192 DENPASA .29 1.00 .12 0.00 .29 .96 .05 0.001981 Brasilpar 0.00 .04 0.00 0.00 0.00 .04 0.00 0.001982/84/86 PISA 0.00 3.90 0.00 0.00 0.00 3.90 0.00 0.001982/86 Cimento Caue 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001983 SOCOCO 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.001987/92196 MBR 12.67 0.00 10.00 14.83 12.67 0.00 10.00 14.831987/96 Perdigao 35.00 10.00 0.00 20.00 35.00 10.00 0.00 20.001987/96197 Duratex 22.00 0.00 0.00 78.00 22.00 0.00 0.00 78.001987/97 SP Alpargatas 26.60 0.00 5.00 .40 22.30 0.00 5.00 .401989 COPENE 4.55 0.00 0.00 0.00 4.55 0.00 0.00 0.001989 ELUMA 1.00 0.00 4.00 0.00 1.00 0.00 4.00 0.001989 Politeno Linear 3.10 0.00 0.00 0.00 3.10 0.00 0.00 0.001990 ENGEPOL 1.53 0.00 0.00 0.00 1.53 0.00 0.00 0.001990 Ripasa 7.14 5.00 0.00 0.00 7.14 5.00 0.00 0.001990/91/92 Bahia Sul 18.57 20.97 0.00 10.00 18.57 20.97 0.00 10.001991 Bradesco-AL 26.03 0.00 0.00 0.00 0.00 0.00 0.00 0.001991 Bradesco-Bahia 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.001991 Bradesco-Eucatex 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001991 Bradesco-Petrofl 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001991 Bradesco-Romi 2.78 0.00 0.00 0.00 2.78 0.00 0.00 0.001991 Rhodia-Ster 11.43 5.95 0.00 0.00 11.43 5.95 0.00 0.001992 Brazil Inv. Fund 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001992 CRP-Caderi 0.00 2.00 0.00 0.00 0.00 .75 0.00 0.001992/93 TRIKM 0.00 12.86 0.00 0.00 0.00 12.86 0.00 0.001993 BACELL 13.00 10.70 0.00 28.80 13.00 10.70 0.00 28.801993 Coteminas 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001993 CEBRACTEX 2.40 0.00 0.00 0.00 2.40 0.00 0.00 0.001993 Macedo Alimentos 19.25 0.00 0.00 0.00 19.25 0.00 0.00 0.001993 Votorantim 16.86 0.00 0.00 1.43 16.86 0.00 0.00 1.431993/96 CEVAL 58.57 10.00 10.00 131.43 58.57 10.00 10.00 131.431994 GAVEA 10.63 0.00 5.50 0.00 10.63 0.00 5.50 0.001994 GP Capital 0.00 18.50 0.00 0.00 0.00 17.60 0.00 0.001994 Para Pigmentos 30.00 9.00 0.00 35.00 25.50 8.14 0.00 29.751994 Portobelo 17.00 5.00 0.00 0.00 14.00 5.00 0.00 0.001994/95/97 Sadia 54.00 10.00 10.00 212.44 54.00 10.00 10.00 212.441994/96 CHAPECO 25.00 0.00 0.00 5.00 25.00 0.00 0.00 5.001994/96 S.A.I.C.C. 0.00 7.85 6.87 0.00 0.00 7.70 6.87 0.001995 Bradesco-Hering 7.50 0.00 0.00 0.00 7.50 0.00 0.00 0.001995 Brahma - BRA 35.00 0.00 0.00 98.40 35.00 0.00 0.00 98.401995 Cambuhy/MC 24.38 0.00 0.00 0.00 24.38 0.00 0.00 0.00

Generated by the Opeations Informaton System (OIS) on October 22, 1997

MOP Schedule D

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Lan Equity Quasi Partic1995 Lojas Americana 28.00 0.00 5.00 20.00 28.00 0.00 5.00 20.001995 LATASA - Brazil 18.33 0.00 0.00 4.00 18.33 0.00 0.00 4.001995 Politeno Ind. 19.00 0.00 0.00 0.00 19.00 0.00 0.00 0.001995 Rhodiaco/PTA 27.50 0.00 0.00 27.00 27.50 0.00 0.00 27.001995/96 Globocabo 35.00 18.06 0.00 118.00 35.00 18.06 0.00 118.001996 Banco Bradesco 40.00 0.00 0.00 60.00 0.00 0.00 0.00 0.001996 Banco Liberal 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 Mallory 8.00 3.96 0.00 0.00 8.00 3.96 0.00 0.001996 TIGRE 25.00 0.00 5.00 23.50 25.00 0.00 5.00 23.501996/97 Lightel 25.00 18.17 0.00 0.00 25.00 18.17 0.00 0.001997 Copesl 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 Rodovia 35.00 0.00 0.00 79.50 0.00 0.00 0.00 0.001997 Samarco 18.00 0.00 0.00 16.00 10.59 0.00 0.00 9.411997 Sucorrico 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.001997 Wentex 15.00 10.00 0.00 20.00 0.00 0.00 0.00 0.00

Total Portfolio: 897.04 199.26 63.99 1,004. 711.80 186.06 63.92 832.7913

Approvals Pending Commitment

Loan Eigiu Ouasi Partic1996 AGUAS LIMEIRA 17.00 1.00 0.00 23.001998 BANCO ICATU 30.00 0.00 0.00 0.001997 BOIRPRECO 25.00 0.00 5.00 0.001998 BSC 14.00 0.00 0.00 7.501997 COPESUL BLINC. 0.00 0.00 0.00 45.001997 CTl3C 35.00 0.00 0.00 150.001996 GLOBOCABO II 0.00 0.00 0.00 38.001997 GUILMAN-AMORIM 30.00 0.00 0.00 90.001997 IPIRANGA EXPANS. 35.00 0.00 5.00 150.001997 IPIRANGARI 0.00 .32 0.00 0.001997 NOVA DUTRA 0.00 0.00 0.00 10.00

BLINC1996 OXITENO/ETHYLO 0.00 5.00 0.00 0.001997 SP ALPARGATAS II 0.00 0.00 0.00 30.001997 UNIBANCO LIVESTO 50.00 0.00 0.00 0.001998 VARGA 20.00 0.00 3.00 15.00

Total Pending Commitment: 256.00 6.32 13.00 558.50

Generated by the Opeations Information System (OIS) on October 22, 1997

ANNEX 8

Brazil at a glance 8/28197

POEl a _ SOA =plbfc emenrllmon

Bsszl ~ Crib.IftCfl1~ Development diamond*

1976 1996 (LtS~ 1986 1995o 1996 Life expectancy

Agriutur e 12.6 11.5 14.4 14.4tL lo- .Z1

Privlateiosmton 66. 65.8 14.9 657 1

t.atjor~~~~~~~~~~~~~orae~~~~~~~~~ ~GNP Gross

General yevemm esfintat consumpaieationarava &ble,sioacapta enroilment

Imprts o gopatods (aandpervices11.5 7.1 746 7.9

Manufacturiny..... 2.6 .t . . 2 Services 2.9 Z8 5.3 3.3 _8,6,

Privabconsumal*)(ption e44Access to safe water

Genralgovmmetucnsumpt)o 1.2072408 -.

Gcmss doesaticinestmen -2. ofppaf 9.4 0. -20llImports(of goodsaUnd serie -4.0 0.9 168 5.1xotsI rr

Gros1ntioalrod5 14.1 4-Brazil- Upper-m1ddeu-Incore gmfup

GaTtwdiamondst shoiv four ky indicatornintthe coutry (In bol) compared .... its nc paverage. ffdata are misiny,vthesdamondtment

be Opcomple.nnesoecno

Grossnationahsavings/G~~~~~~~~~ 21.1 Uppr8m3d 11* ltrou

~~ntatesfpsymenta~~~~DI~ 1 7r 98.3 1 is 199 SaiGrotts o upI n nvestmentTalaof GDP)24 4.4 2. 8

Agriculture48485 12.1 484 1. t14. 148?4 5Industry 408 .2. 45.3 36. 464 5__

Manfactueringt 3.34 337 2.8 1. 0Uprm*l-noegoJ

Importsof goods and services I 5 1.5 7A.1 .

1975- 1985- '1995 1996(a% og GDP) lg-th Growth rates of exortsu and Invsmenrts(Agriculture 12.1 11.5 14.4 314. 10-Industry 40.2 45.3 36.5 236.

Manufacturing 30.3 33.7 23.8 0Services 47.7 43. 49.1 49.2

Private consumption 36.5 65.8 64.9 65.7 -0

General govemment consumption 10.6 9.9 15.9 1.8.1 93 9

Imports of goods and services 11.0 7.1 76.6 79 - Exprt -0--G port

Irs aindustr duct3.0 -1.1 42. 2.3

Manuf11W actauring hiey mts Fgrsi 2.6s ar .5 2.1er thrlahseseiid

Pbvae iconsmpltio . .. 1. .

Brazil

PRICES and GOVERNMENT FINANCE1976 1985 1996 1996

Domestic prices Inflation(% change) a,oooConsumer prices 25.0 226.9 67.0 15.5Implicit GDP deflator 33.9 231.7 74.9 11.1 2,000

Govemment finance 1 x

(% of GDP) 0 -Current revenue .. .. 31.5 32.4 91 92 93 94 95 96Primary surplus/defict .. .. 0.4 -0.1 - GDP def. -- CPIOperational surplus/deficit .. .. -4.8 -3.9

TRADE1875 1985 1908 1996

(millions US$) Export and Import levels (mill. USS)Total exports (fob) .. 25,638 46,508 47,746 60.0D0

Coffee .. 2,607 1,970 2,059Otherfood .. 2,545 3,896 4,666Manufactures .. 13,356 25,568 26,247 40,000

Total imports (cii) .. 13,153 49,663 53,286 rF1Food .3,535 6,044 20,000Fuel and energy 6. ,176 4,649 5,752Capital goods e. 2,480 19,688 19,804 2L

Export price index (1987=t100) .. 97 128 126 90 91 92 93 94 95 96Import price index (1987=100) 79 124 125 0 Exports 0 ImportsTerms of trade (1987=100) .. 123 103 101 I

BALANCE of PAYMENTS1975 1985 1996 1996

(millions US$) Current account balance to GDP ratio (%)Exports of goods and services 9,418 27,713 47,960 49,558 1Imports of goods and services 14,323 16,928 54,306 59,355Resource balance -4,905 10,785 46,346 -9,797 | Fl,Net income -2,106 -11,213 -15,419 -17,402 | 1 92 9 3 1 95 96Net current transfers -10 16 3,973 2,899 1

Current account balance, -2before official capital transfers -7,021 -412 -17,792 -24,300

Financing items (net) 5,956 1,826 30,779 32,935Changes in net reserves 1,065 -1,414 -12,987 -8,638 -4

Memo:Reserves including gold (mlii. US$) 4,166 11,613 51,469 59,663Conversion rate (tocalVUSS) 3.OE-12 2.3E-09 0.9 1.0

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996

(mtilions US$) Composition of total debt, 1995 (mill. USS)Total debt outstanding and disbursed 27,329 103.601 159,130 178,131 A c

IBRD 1,045 5,274 6,038 5,876 G 68142|IDA 0 0 0 0 G 34 142 D

30494 3327Total debt service 4,320 11,470 22,328 * E

IBRD 98 796 1,868 1,638 19451IDA 0 0 0 0

Composition of net resource flowsOfricial grants 9 34 64Official creditors 1,059 935 -1,378Private creditors 4,213 149 9,827Foreign direct investment 1,302 1,348 4,859Portfolio equity 0 0 4,411 .. F

World Bank programCommitments 538 1,525 404 858 A - IBRD E -BilateralDisbursements 249 765 838 1,500 a - IDA D -Other mutlaterat F -PrivatePrincipal repayments 26 406 1,377 1,222 C - IMF G - Short-termNet flows 224 359 -539 278 1 _

interest payments 72 391 491 416Net transfers 152 -32 -1,031 -138

Development Economics 8/28/97

IMAGING

Report No.: 16367 BRType: PAD