PUBLIC BANKS THE BRAZILIAN EXPERIENCE LATIN AMERICAN FINANCE NETWORK BUENOS AIRES – DECEMBER 2003

PUBLIC BANKS THE BRAZILIAN EXPERIENCE

LATIN AMERICAN FINANCE NETWORKBUENOS AIRES – DECEMBER 2003


INTRODUCTION THE REAL PLAN PUBLIC BANKS AT THE STATE LEVEL PUBLIC BANKS AT THE FEDERAL LEVEL BENEFITS TO THE FINANCIAL SECTOR LESSONS LEARNED

PUBLIC BANKS THE BRAZILIAN EXPERIENCE:

INTRODUCTION

Beginning of the 90’s– Major participation of public banks in the banking system– Different regulation and supervision for public banks– Implicit government deposit insurance– Poor management practices– High inflation leading to high profits in the banking system –

in 1993 inflationary income in the banking system reached 4.2% of GDP – public banks captured 63% of this amount


THE REAL PLAN

Effects of the Real Plan in the banking system– Loss of inflationary income– High and volatile interest rates– High reserve requirements– Diversification of activities as a means to

generate profits leading to high losses in the loan portfolio


THE REAL PLAN

Need to restructure the banking system Three different approaches to three different

problems– Program of Incentives for Restructuring and Strengthening

the National Financial System - PROER - 1995– Program of Incentives for the Reduction of States’

Participation in the Banking System - PROES -1996– Program for the Strengthening of the Federal Financial

Institutions - PROEF - 2001


PUBLIC BANKS AT THE STATE LEVEL

Objectives of the Program:– Reduce state government participation in the banking

system– Fiscal restructuring at state level

Characteristics of the program:– 100% long-term financing by the federal government, in the

case the state government decided to privatize, close or convert the bank into a development agency

– 50% long-term financing by the federal government, in the case the state government decided to keep the bank

– Privatization proceeds to amortize debt



Three steps to implement the program:– 1st Step

Preliminary discussion with the state government representatives to determine the state’s option

– 2nd Step Full scope examination of the bank by the supervisory

area of the Central Bank of Brazil to determine the net worth of the bank and the amount of financing needed to clean the balance sheet



Three steps to implement the program:– 3rd Step

Contracts and approval by the Senate Follow-up by the supervisory area of the adjustments on

the balance sheet as soon as bank was capitalized Monitoring of the financial condition of the bank up to

the end of the process (privatization, extinction or conversion into non-financial institution)



Results of the program:– Number of banks in 1996 – 35– Remaining banks at the end of 2003 – 12

Of which:– 4 are in the process of being privatized– 5 were restructured – 3 were not included in the program

– 16 development agencies were authorized



Results of the program:– Public banks are now subject to the same

supervisory procedures that apply to private banks

– Public banks now comply with the same prudential regulation that apply to private banks

– Improvement of internal controls and corporate governance structure



Cost of the program:– R$ 60 billion – equivalent to 5.7% of GDP– Privatization proceeds up to end of 2003 – R$

11.5 billion


PUBLIC BANKS AT THE FEDERAL LEVEL

Objectives of the Program:– Compliance with prudential regulation– Competition, transparency and efficiency

Characteristics of the program:– Transfer of credit risk to the Treasury or a Special Purpose

Company – government-oriented loans– Exchange of assets with low liquidity and low interest rate

for other instruments accruing market rates– Capitalization of the banks



Three steps to implement the program:– 1st Step

Full scope examinations in the federal banks to assess:– Quality of assets – Adequacy of loan classification and provisions for loan

losses– Capitalization needs– Organizational structure– Operational policies– Quality of internal controls



Three steps to implement the program:– 2nd Step

Federal Government, as the controlling shareholder, requested to present to the Central Bank of Brazil a plan to restructure the banks with the objective of complying with prudential regulation, specially capital adequacy rules

In the meantime, disclosure of bad assets and necessary capitalization on the publication of the balance sheet

Approval of the plan by the supervisory area of the Central Bank of Brazil

Federal Government launched the program in June 2001



Three steps to implement the program:– 3rd Step

Follow-up by the supervisory area on action plans presented by the banks on improvement of internal controls and management information systems

Follow-up on the recommendations for better corporate governance structure

Assessment of credit classification models and follow up on necessary improvements

Assessment of risk management structures and recommendations for improvement



Results of the program:– Federal banks complying with prudential

regulation and subject to the same supervisory procedures applied to private banks

– Improvement on the quality of capital, internal controls, management information systems, risk management structure and corporate governance structure

– Banking supervisors doing their job



Total cost of the program - R$ 62.4 billion

Increase in Treasury Debt – R$ 12.2 billion


BENEFITS TO THE FINANCIAL SECTOR

Strengthened banking system more resilient to crisis

Enhanced transparency in public accounts


LESSON LEARNED

More than one option to deal with weak public banks

Strong supervision needed Persuasion of key stakeholders of the need

for changes Stakeholders’ perception of the value of

changes Support by government officials


TEREZA CRISTINA GROSSI TOGNI

e-mail: [email protected]

Documents

PUBLIC BANKS THE BRAZILIAN EXPERIENCE LATIN AMERICAN FINANCE NETWORK BUENOS AIRES – DECEMBER 2003