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1
Banco Central do Brasil
Autonomous Central Banks in Latin America and
their Contributions to the Development of the
Financial Market What are the Lessons?
November 2002
2
Structural Reforms

• Monetary Responsibility Law aims to facilitate
  the task of introducing appropriate regulations.
  Requires the regulation of Article 192 of the
  Federal Constitution.
• Payments System a new system was implemented on
  April 22, 2002, aiming at reducing the systemic
  risk. The system is in line with BIS principles
  and recommendations.
• Corporate Law protection to the minority
  shareholders
• Bankruptcy Law acts at the recuperation and the
  judicial liquidation of the commercial and
  economic civil corporations. The current
  legislation applies only to commercial
  activities.
• Corporate Governance (New Market) new rules in
  order to guarantee greater transparency and
  security to the investors

3
Structural Reforms

• Prudential Regulations Central Banks
  initiatives aim at providing a more transparent
  and sound structure to the financial system
• Deposit Insurance Fund - FGC
• Internal control system and liquidity risk
  framework
• Credit risk bureau and new credit risk
  classification 9 categories (AA to H)
• Banking and non-banking consolidated balance
  sheet
• Improvements of the accounting rules of financial
  and derivatives instruments enhancing
  transparency and accountability
• Requirement of independent auditing of financial
  statements for banking and non-banking
• Basle Agreement Principles Minimum Capital
  Requirement (11)
• establishment of a maximum of 70 of total assets
  applied in the fixed assets, decreasing to 60 on
  June 30, 2002 and 50 on December 31, 2002
• banking customers code
• Off-Site Supervision Department and Semestral
  Supervision Program - PFS Global Consolidate
  Inspections (IGC)
• PROER and PROES sanitation process of either
  state public and private Brazilian financial
  institutions.

4
Structural Reforms

• Banking Spread measures that aim at the
  reduction of the banking spread in Brazil
• soundness of the banking system
• tax reform
• increase of the competition between financial
  intermediaries
• improvement of risk control and of banking
  supervision mechanisms
• improvement of the credit instruments
  derivatives of credits and mutual funds of
  credits
• Transparency improves the communication of the
  Central Bank with the market participants
• Improves the two-way communication of the CB with
  the market
• Investor Relations Group Focus Report - English
  and Portuguese versions, Survey on Market
  Expectations, meetings with foreign and domestic
  investors
• Periodical meetings with chief-economists
  (quarterly)
• Working Papers e Technical Notes
• Inflation Report (quarterly) and Press Releases
  Fiscal Policy, Monetary Policy, Foreign Sector
  and Open Market (monthly)
• Copom Minutes (5 working days after the meeting)
• External auditing at the Central Bank
• Improvements at Central Bank website Time Series
  ( www.bcb.gov.br )

5
Inflation Targeting Regime
After
Before
(19944 -
(19961 - 19992 -
(19993 -
19992)
shorter period)
20022)
Volatility - Coefficient of Variation
Inflation
0.9
0.8
0.4
GDP Growth (seasonally adj.)
3.2
2.5
1.5
Interest Rate
0.4
0.2
0.1
Average (Annualized)
Inflation
10.3
5.8
7.1
GDP Growth (seasonally adj.)
2.0
2.0
2.4
Interest Rate
35.4
28.2
18.0
Inflationary Inertia (monthly data)
Inflation (t-1) - significant
0.6
0.2

• standard deviation/average, quarterly data
• Data 199508 - 200206 (equation also includes
  the exchange rate change in the previous 12
  months and the unemployment rate)

6
Exchange Rate Pass-Through
Exchange Rate Pass-Through to Administered
Prices, to Free Prices and to the IPCA (in 12
months) Real Plan
Administered
Free
Estimation Model
IPCA
Prices
Prices
Structural Model and Information
25
12
16
regarding Administered Prices
VAR Model
20
8
14
7
Inflation Expectations Under Control
12-Month Ahead Expected Inflation and Inflation
Target
9
8
7
6
5
p.a.
4
3
2
1
0
Jul-00
Jul-01
Jul-02
Jan-00
Jan-01
Jan-02
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
May-00
Nov-00
May-01
Nov-01
May-02
Central Target
Upper Limit
Lower Limit
Inflation Expectation