Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 25116-BR

IMPLEMENTATION COMPLETION REPORT(FSLT-70530)

ONA

LOAN (Loan No. 7053 - BR)

IN THE AMOUNT OF US$404.04 MILLION

TO

THE FEDERATIVE REPUBLIC OF BRAZIL

FOR A

FIRST PROGRAMMATIC FINANCIAL SECTOR ADJUSTMENT LOAN

December 17, 2002

Brazil Country Management UnitFinance, Private Sector and Infrastructure DepartmentLatin American and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUWVAL2NrTS

(Exchange Rate Effective Dec 15, 2002)

Currency Unie = Rezl (R$"R$3.6 = US$ 1US$ I = R.Z3.5

FISCAL YEARjanuary 1 Decenber 31

ABEREVIATIONS AND AC..CY1V'S

AAA Atividades Analiticas e Consultivas _ Analytic xid Advisory AcfivitiesBNDES Banco Nacional dc Desenvolvunento Econ6rico e Social Nattor- -3znk for Economic and Social

Dcvelopmaent

BNDESpar BNDES Partcipa$oes National Bank for Economic and SocialDevclopnmnt - 3quity Branch

BOVESPA Bolsa de Valores de Sao Paulo Stockc E xchange of BraLil - Sao PauloCAIXA Caixa Econ6mica Federal tNational infrastructurc/H{ousing BankCAMELS Sistema de Ratins Bancanos lBank Rating SystemCAS Estrat6gia de Assistencia para o Pais CouTntIy Assistance StrategyCBTAL Empr6stimo de Assistancia Tecnica a Modernizzaeo dc Ccntral Bank Modernization Tec; nical

Banco Central lAssisLarcc TLoan __ _ -CETIP Central de Cust6dia - de Liquidacao Financeira de Titulos Central Cu.stody end Settleinent of SecuntiesCMN Conselho Monotano Nacional _ National Monetary CouncilCPM!F Contibui,ao Provis6ria sobre Movimenta,ao Finarceira iTemporary Tax on Financial TransactionsCVM Comissao de Valores, Mobilianos do Brasil Brazi! Securities & Exchange Com=missionFDI Investimento Direto Estrangeiro |Foreign Direct InvestmentFGC Fundo Garantidor de Cr6dhtos Credit Insurance FundFSTAL Segundo Emprestimo de Assistencia Tcnica __|_ csnd lechn.cal Assistancc LoanGCI Inspec,o Global Consolidada |l1bal Consolidated InspectionGDP Produto Interno Bruto Gross :'omestic PhductIBRD 0 Banco Internacional para Reconst-ug,co e lLnteoationel Bank for Reconstruction and

Desenvolvimento _I,zvclopmcntICR Relat6rio da Concluslo da Execu,cao JLzplementation Coin0letion Rep3rtIMIF Fundo Monetrio Internacional jinternatioial Monctary FundPFSECAL Emprestimo PrograirAtco para Ajuste ao Setor Financiero jorTvnrac Fianrcial Seetor Adjustment LoanPROES Programa de incentiN o A RcduqAo do Setor Publico Estiual Reduction of State Level Partcipation in

n a Atividade Bancana zrBanin ActivitiesRTGS Sistema de Transferencia de Reservas Rce-time Gross SettlementSAL Empr6stimo pam Ajtstamento Estrutural Structural Adjustrment LoanSPC Secretana de Previdencia Complementar Secretariai of Comyplementary Social SecurityTA Assistencia T6cnica Tcchnical Assistance

Vice President: aic.w2 de Ferranti

Countr,' Manager/Director: V.ned T-horuasSecto -Manager/Director: Semnaco Morntes-RNegreifDanny M. Leipziger

Task Tea m Leader of Loan: stefazn Al'erTask Team Leader of XCL1: Aja!i 'Kunar

BRAZILFirst Programatic Financial Sector Adjustment Loan

CONTENTS

Page No.

1. Project Data 1

2. Principal Performance Ratings 1

3. Assessment of Development Objective and Design, and of Quality at Entry 2

4. Achievement of Objective and Outputs 12

5. Major Factors Affecting Implementation and Outcome 20

6. Sustainabihty 21

7. Bank and Borrower Performance 22

8. Lessons Leamed 23

9. Partner Comments 24

10. Additional Information 27

Annex 1. Key Performance Indicators/Log Frame Matrix 29

Annex 2. Project Costs and Financing 34

Annex 3. Economic Costs and Benefits 36

Annex 4. Bank Inputs 37

Annex 5. Ratings for Achievement of Objectives/Outputs of Components 38

Annex 6. Ratings of Bank and Borrower Performance 39

Annex 7. List of Supporting Documents 40

Annex 8. Matrix of Policy Actions 41

Annex 9. Comments Received from the Central Bank (Portuguese original) 46

Annex 10. Comments Received from the CVM (Portuguese original) 48

Project ID: P070640 Project Name: First Programatic Financial SectorAdjustment Loan

Team Leader: Anjali Kumar TL Unit. LCSFF

ICR Type: Core ICR Report Date: December 17, 2002

1. Project Data

Name: First Programatic Financial Sector Adjustment Loan L/C/TF Number FSLT-70530

Country/Department: BRAZIL Region: Latin America andCaribbean Region

Sector/subsector: Banking (43%); Payment systems, securitiesclearance & settlement (13%); General financesector (38%); General industry and trade sector (6%)

KEY DATESOriginal Revised/Actual

PCD: 01/08/2001 Effective. 06/22/2001

Appraisal: 04/24/2002 MTR:

Approval: 05/24/2001 Closing: 03/31/2002

Borrower/lmplementing Agency: Federative Republic of Brazil/Banco Central do Brasil (Central Bank of Brazil)

and Comissao de Valores Mobiliarios do Brasil (Brazilian Securities and

Exchange Commission)Other Partners:

STAFF Current At Appraisal

Vice President: David de Ferranti David de Ferranti

Country Manager: Vinod Thomas Gobind T. Nankani

Sector Manager: Fernando Montes-Negret Fernando Montes-Negret

Team Leader at ICR Anjali Kumar Stefan Alber-Glanstaetten

ICR Primary Author: Anjali Kumar; Manuel Lasaga

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU-=Substantial, M=Modest, N=-Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: HS

QAG (if available) ICR

Quality at Entry: S S

Project at Risk at Any Time: No

I . Introduction-Role of ICR in the Present Operation: The present implementation report on the

First Programmatic Financial Sector Adjustment Loan (PFSECALPI) reports on the performance of

a single trannche ldnustmenmt loan, e bedded wnIMD[n a lange2n ProgrMraa4iC De td.ig firn ewo rk of asernes of such sinnge tmrnobe opeimaones. leuce m 1ke rc:e of tlne IICI should Roceosarily e nconnnss an evaluation of both the ninvLdUu loan as wen ns oveirulf progrm objec&ves, desngu, eonelltionn aindlessonns learnmed to dlate. Given that broad components of the overall program have been designed anddescribed in the context of the First operation, this present ICR will therefore represent not only the ICR ofthe First Programmatic Financial Sector Adjustment Loan (PFSECAL-I) but also the foundational ICR forthe subsequent programmatic financial sector operations for Brazil within this program. At the time ofpreparation of this ICR, the Second programmatic loan has also been taken to the Board and is now closed.Hence a second updating -[CR, closely related to the present report, will follow shortly, which will permit amore comprehensive evaluation of programmatic progress to date.

3. Assesmnent of llDevelojpnmennt Objective anrd Deo2Sig, zind of QuDty at ZEl2ury

3.1 Original Objective:2. Economic Con text: Tle olbjecitve of the lrst irogram nntic IFhnacmcal Sector AdsimemntLo,an was to suppeut a prognmass of broad-based nFD oomnnprekenslve fDuDnmenta gnmgDDe sector0refornsn embarked ulpon by tEne nutlhorites in DirnaL, to consolidte growoth wvith stabity and tDhereduction of poverty. The series of loans presented under the programmatic umbrella for the financialsector are best viewed in the context of the overall economic context and the Bank's financial sectordialogue with the Brazil govemment and its agencies in the year 2000. World Bank support was proposedat a strategic juncture which was favorable to meaningful progress in fundamental medium term reform.

3. Macroeconomsnc stabity, nDitEted with the RS3 illeal RlEIM, dram ily rediced D filnDitonand tius permntted a cDea;r focus oDn structural reorems. With the initiation of the Real plan, thel 2-monthconsumer price inflation fell dramatically from over 2,477 percent per annum at end-1993 to less than 2percent at end-1998. The disinflation process benefited initially from a favorable extemal environment.This favorable external financing environment contrnbuted significantly to the success of theexchange-rate-based anti-inflation program through 1998. Portfolio flows dominated total capital inflowsin the early stages and thus displayed high volatility, with a massive reversal in 1998 causing intemationalreserves to fall by US$24 billion between their peak in end of 1996 and the end of 1999. By contrast,foreign direct investment (MDI) inflows increased steadily and steeply since 1994-a trend that was notreversed by the currency devaluation in early-1999.

4. ¶1Dne bold steps takein towards devaunation in early 21BP esunred thant mnacroecoinomista2bilintion endulred and was codnsolidted despite te seve;re inimnanDclel !Tzir emRe and tqhe enchlangerate crisis. This resulted in considerable credibility gains for economic policy and policy makers, both athome and abroad. After the 1999 devaluation, a new inflation targeting fiamework was adopted formonetary policy and macroeconomic management. Inflation targets of 4.0 percent and 3.5 percent wereestablished for 2001 and 2002, respectively, which at the time of loan preparation were realistic. Lowerinterest rates also reduced the risk premium through their salutary effect on the balance sheets of debtors.The fall in nominal interest rates contributed in part to the observed narrowing of the (still very high)spreads between deposit and lending interest rates. A credible Iernational Monetary Fund (HOF) programwas in place and Brazil had demonstrated an ability to consistently achieve and exceed fiscal targets. Theassociated reduction in the level and volatility of interest rates created conditions and favorableexpectations for the deepening and broadening of financial intermediation, and the resumption of a focus ongrowth and poverty reduction. GDP grew by about 4.5 percent in 2000, following an average of only 0.8percent per year during 1998-99. The year 2000 was viewed by Bank staff as the beginning of a newphase of sustainable and robust poverty reducing growth, but only if Brazil continued with its

- 2 -

macroeconomic stabilization and structural reform efforts and provided that the external environment

remained reasonably benign. Bank staff analysis also indicated that a strong domestic financial

environment was a necessary condition to stimulate sustainable employment-creating growth, thus reducing

poverty.

5. Ambitious reform programs had been simultaneously launched in the fiscal, financial sector,

and privatization fields. Important steps were taken to address the structural sources of the fiscal deficit.

Most notable in this latter respect was the approval in May 2000 of the Fiscal Responsibility Law, a major

move towards institutionalizing fiscal discipline. The Bank provided reform support for the fiscal area with

a Programmatic Fiscal Reform Structural Adjustment Loan for US$750 million. Progress achieved

towards institutionalizing fiscal discipline paved the way for market optimism that similar

institutionalization would be forthcoming with respect to monetary and financial prudence. Recognizing

that growth and especially stability and crisis prevention are an important bulwark against crisis-induced

poverty, the Program's overall objectives of the Bank's first Programmatic Financial Sector Loan to Brazil

were formally defined as: (i) underpinning economic growth; (ii) contributing to poverty reduction in the

long-run; and (iii) avoiding the reversal of growth and poverty reduction through financial crisis prevention.

6. Status of the Financial System: Brazil's banking sector, which forms the backbone of its

financial system, had undergone substantial and rapid structural change and consolidation processsince the 1994 Real stabilization plan, and was in a relatively robust situation at the time of loan

preparation. The initial surge in bank consolidation climaxed in 1995-96 with the closure and resolution

of 3 of the then 10 largest banks in Brazil-Econ6mico, Bamerindus, and Nacional. Subsequently, the

structural change process continued-much less marked by private bank failures but featuring an almost

complete phasing out of state (provincial or municipal) owned public banks and a sharply increasing

presence of foreign-owned banks. The banking system (total assets of US$500 billion, or 95 percent of

GDP in 2000) remained highly concentrated and was still dominated by public banks, at the time of loan

preparation. However this domination by public banks was almost entirely accounted for by two first-tier

(federally owned) banks (Banco do Brasil and Caixa) which are the largest banks in the country, jouitly

accounting for 35 percent of the system's assets. Following in size are three very large private banks,

(Itau, Bradesco and Unibanco), jointly representing 18 percent of assets. Foreign-owned banks increased

their share from 7 percent of the system's assets in 1993 to about 26 percent today (including the purchase

in 2000 of a former state-owned bank, Banespa, by Banco Santander Central Hispano of Spain).

7. On average, Brazilian private banks appeared profitable, liquid, and well provisioned and

capitalized. Liquid assets represented about 30 percent of total assets, thus providing a strong cushion

against systemic shocks. The other side of the coin of this high liquidity was, of course, high spreads and a

low share of credit in total assets. Loan-loss provisions were very strong-they represented almost 200

percent of non-perforning loans. And with capital well in excess of what was required to meet the

mandatory minimum ratio (11 percent) of capital to risk-weighted assets, banks had considerable room to

increase credit to the private sector. Assets of the banking system amounted to about US$ 500 billion (95

percent of GDP). However, credit to the private sector accounted for only 35 percent of GDP (only 33

percent of banking system assets) which, albeit similar to the Latin American average, denotes very low

credit depth compared to developed market economies. Furthermore, about one half of bank credit to the

private sector was provided by the state-owned institutions. Thus, low overall intermediation was identified

as a major medium term issue.

8. At the time of Loan preparation, risks to systemic stability in the Brazilian banking sector

were considered low. This was because of the dominant presence of federal banks (whose

- 3 -

creditworthiness is ultimately that of the govemment), the financial strength of the largest Brazilian-ownedprivate banks, and the growing presence of highly-rated international banks. ln addition, the unsound majorprivate banks were already removed in the context of the 1995-96 wave of bank failures. The relativestability of the banking system permitted the loan to focus on such medium term banking system issues asthe strengthening of supervision, the improvement in the system of failure resolution, deposit insurance andcontingency planning.

9. AMOtngb EMtereot rnate gn weg -V, _ I2J been ante flAP9 mu OM ezyblRelBome o thae Mghest lmleres rate spredla is a e wortd; both measured on the ex-ante as on the ex-postbasis at the time of loan preparation. As of December 2000, average spreads (measured ex-ante) wereabout 35 percentage points, with spreads for corporate lending at 19 percentage point and for consumerlending at 51. The costs of credit contract enforcement-which raises overhead and perceived risks-wererecognized to be in part related to inefficient judicial processes for collateral repossession and corporatereorganization and bankruptcy. Although creditor rights are reasonably well specified in the law, Brazilscored low in their enforcement. These issues are also pertinent to the overall shallowness ofintermediation, noted above.

10. sDnalow kternmeEnton nM tne albm mg System waEno: connemagted by BianZVSa anp!tal2mnirkets. Despite relatively high ratios of domestic market capitalization of equity securities (US$ 230billion or around 40 percent of GDP) and domestic debt on issue (US$270 billion or 50 percent of GDP),equity markets were illiquid and debt securities dominated by government paper. Capital markets did notyet represent a significant atemative to banks as a source of finance for private enterprises. There was nomeaningful private market f.or long-term finance in Brazil. Aside from the long-term (subsidized) creditgranted by the main govemment's development bank (BNDES), saving and borrowing contracts were, andare still of very short duration. A key reason identified for shallow capital marktets in Brazil was the poorstandard of corporate govenance, discouraging minority shareholders. Improving standards of corporategovemance was hence a recognized priority area for financial system reform.

11. Status of Financial Sector Dialogue: 71le D3ZaMn wan wel P0osn0med to parSrezr Ba nfi se!zethne window of opportunty foir te accelertionm and c esaHddIM oT ammdn etor reffb=29 dne Xo LZacdve daogue onm Mmacia recoir mmetterm with the Brazilian authorities over the years preceding thisoperation. Technical assistance lending to the Central Bankc of Brazil was a major instrunent for dialogue(the Central Bank Modemization Technical Assistance Loan-Loan BR-4245 of 1997), which providedresources for a major upgrading of bank regulation and bankcing supervision standards, and for theundertaking of studies on the financial system's structural concerns, such as bank spreads (see endnote).Following the Russian crisis in 1998, capital outflows from Brazil prompted the preparation of a SpecialSector Adjustment Loan fo:r Banking Reform, but as pressures against the currency marklet quicklysubsided following the devaluation in January 1999, the Bank did not need to proceed with the loan (seeendnote). Nevertheless, the proposed Special Sector Loan's thematic core endured the need to take steps toprevent banking crises. Analytic work on bank stress testing and crisis prevention, and the investigation ofappropriate designs for ensuring the adequacy of the banking system safety net, were incorporated into thisProgram. Additionally, follovwing a high level mission in early 2000, extensive analytical financial sectorwork was carried out on jointly identified priority reform areas leading to a series of FY00 targeted policynotes, on the overall efficiency of financial intermediation, regulatory issues, bank safety net issues, ruraland housing finance, debt management and debt markets, as well as capital markets. Additionally, as partof a multi-country Western Hemisphere Initiative on payments systems and securities clearance andsettlement. Issues concerning poverty and the financial secto;r were broached through parallel workc focusedon small and medium enterprises and rural and micro finance, through both Analytic and Advisory

-4 -

Activities (AAA) and a micro-finance loan.

12. Bank policy advice and expertise was sought in order to enhance the efficiency of

Government actions in the financial sector, in view of the Government's efforts to address critical issues

of financial sector safety net as well as institution building for regulators. Officials interviewed for this

report said that the Govemment was looking for Bank advice regarding state of the art thinking on many of

the reforms and how they had been successfully implemented in other countries. At a macroeconomic level,

the value of Bank finance for extending the maturity of the government's overall financing needs was also

clear. Thus the Program helped to promote an ongoing policy dialogue between the Bank and the

Government, combined with balance of payments and fiscal financing, which were needed to support

macroeconomic stability.

13. Country Dialogue and CAS Strategy: The PFSECAL-I was designed as a single tranche

financial sector adjustment loan, which would be the first of two to three programmatic adjustment

loans supporting the Government's overall reform agenda for the financial system. The second and

third adjustment loans would be triggered by a critical mass of reforms outlined in the Program matrix (see

endnote). Support in each loan would be extended for actions already completed. The Government and the

Bank jointly confirmed the financial sector as a priority area for assistance through progranmuaticadjustment lending, for a total amount of up to US$1.2 billion, spread over a period of two to three years.

Overall Program objectives were reasonable and consistent with the Bank's country strategy. Specifically,

the CAS, which was discussed by the Board of Directors together with the present operation on May 24,

2001, also highlighted the low level and high cost of financial intermediation in Brazil as a key obstacle to

higher growth and thus faster poverty reduction.

14. Loan Instrument Selection and Design: A programmatic approach was adopted for a number

of reasons - the mutual acknowledgement of the need for a longer time horizon for some reforms to be

effected and the uncertainty attached to the timing of some of these actions; the flexibility permitted by the

programmatic instrument in terms of loan timing and amount, depending upon actual achievement of

reform, and the maturity of the dialogue with Brazilian authorities, which permitted the mutual

identification of potential programmatic areas and a consultative approach to reform. Finally, on political

grounds, programmatic lending was acceptable to the government, in contrast to the Bank's more

traditional adjustment lending instruments. The Government's medium term program for the financial

sector was outlined in the Letter of Development Policy annexed to the President's Report (see endnote).'

The present ICR is intended to evaluate the first of the series of adjustment loans that make up the overall

Program (see endnote).' A traditional evaluation of the present loan as a single tranche operation could fail

to capture the significance of the overall program design, and thus the present ICR makes a strong effort to

present the overall programmatic context.

15. Government officials expressed the belief that the programmatic approach gave them greater

flexibility to introduce new items to the agenda, as the reform agenda expanded. Thus, at the time of

the first loan, the prospect of significant initiation of federal bank reform appeared low; however this

reform area accelerated significantly soon after this loan went to the Board, permitting the incorporation of

these areas with significant new emphasis in the second loan. For the Bank the flexibility of a

programmatic approach also appeared to afford the possibility of an instrument to bridge a major change in

government, from January 2003. However the extent to which the last aim is met remains to be seen. Given

the changes in macroeconomic circumstances, there may need to be significant changes in emphasis in the

discussions which will be opened with the new Government.

- 5 -

16. The first piragrnmmndctic loan mnde n ffE -. EL betweenn the Goverru ent's overll reTrnmpirogroun, nad the onlbset of Eses am sea g tEtee wYnchb cmpirne=1 tlne D3Egn'ss progrrs TheGovernment's program was defined to include areas where the Bank was not a direct participant in policydiscussions, notably, fundamental financial system legislation including constitutional amendments toregulate the financial sector, and reform of the federal banks. Et was considered that refonns in these areascould take an unknown and possibly long time to accomplish, so that their incorporation in a time boundprograxn would be difficult. Moreover, there could also be political sensitivity to suggestions of Bankintervention in these areas which could in some circumstances be counterproductive. However, the Bankundertook to broadly monitor the progress in the implementation of the Government's overall financialsector reforrn program as described in the government's Letter of Development Policy.

17. RIsks to the IPraogrom aid its lesuenmtfiDon throughE tne pirogrUnmmotic iozoos were Ragnuriy

ideniffned by tne Bank in tne HIresaieatis Reaport. The risks included: (i) macroeconomic shocks with anadverse bearing on domestic interest rates, growth, and fiscal perfonance; (ii) weakening consensusunderlying financial sector reforns; and (iii) institutional weaknesses. in view of turbulent financial markettrends since the end of 2001, the Bank's foresight in terms of risk factors was influential in terms ofaverting a derailment of the Program through more realistic targeting of reforms.

18. TDDe Bank appuroprately enpressed coi eres regzrairg fintinnal we&Rmeooes in sonne of thDe

regulatoiry agencies. While the subset of program issues covering the banking system and overallintermediation were largely within the domain of the Central Bank, which had practical support from theBank in these areas through the CBTAL technical assistance loan, program issues dealing with securitiesmarkets necessarily entailed other regulators, such as the CVM, Brazil's Securities Commission. A newTechnical Assistance (TA) Loan was therefore prepared to support the CVM, in parallel to programmaticlending. The second Technical Assistance loan (FSTAL) was presented to the Bank's Board on September4, 2001, around three months after the first programmatic loan, due to the need for govemment approvalprocedures for investment loans. However this was well before the presentation of the SecondProgrammatic Loan on Jure 2002. Meanwhile, program objectives were substantially covered by theexisting TA Loan (see endnote).'

3.2 Revised Objective:19. The loan objectives remained unchanged

3.3 Original Components:Gverall I1esign of the PFSIECATHL1

20. The fnamciaD sector pro mmatic loans to BrE3 attemnptd Xo spam al areas of te fimnancIlsystem identfled by the govemmanent for its reform agendiaO. The areas covered had already been revealedby jointly undertaken analytical and advisory work to be areas where major reforms were desirable. Theseincluded issues dealing with overall financial intennediaticn and the shallowness of financial markets,access to financial services by the poor, the banking system's soundness and the adequacy of the banksafety net, the strengthening of capital markets primarily through improved governance, and protection tothe Central bank against payments systems risks, including failures, through the modernization andstrengthening of the payments system. As presented in the documentation for the First loan, significantactions already taken over the past one to three years were acknowledged in the first loan, including theinitiation of major reform programs, such as the payments system reform. Items on the agenda which had apossibility of being accomplished within a relatively short time frame, including some items of majorlegislation such as the passage through Congress of the amendments to the Corporate and CVM laws, and

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launching of the new payment system, were incorporated in the second loan. The third loan was left tofocus on progress in passing difficult and unpredictable financial system legislation, such as legislation oncorporate bankruptcy, and a new law which would institutionalize the independence of monetary policy andmodernize capital markets oversight. In general, the loan addressed key issues dealing with financial systemsafety and soundness as well as institution building.

21. One key area which PFSECAL-I did not address in its programmatic matrix was the area ofpublic sector banks, although the importance of reform in this area was acknowledged in the matrix ofoverall sector strategy. It was argued that given the unpredictable pace of federal bank reform and thepolitical sensitivity of this area, its inclusion was not appropriate in the programmatic matrix. Onecomment on this position is that sustained and substantial reform had already taken place in public banksunder the PROES program of the government, in the preceding three to five years, which included theprivatization of the majority of state-owned banks, culminating in the year 2000 in the sale of BANESPA,the largest state-owned bank to be privatized, for R$7.05 billion (US$3.6 billion). These reforms were notincluded in the programmatic matrix, due to the limited involvement of the World Bank in this process.However, by the time of the second programmatic loan, federal bank reform had accelerated rapidly, andthe Bank had strengthened its dialogue with the Central Bank to include detailed discussions on theseinstitutions. Public bank reform, both federal and private, was thus drawn into an expanded reformprogram discussed during the time of the second loan.

22. A second set of issues acknowledged in the overall reform matrix, but not included in theprogrammatic matrix of PFSECAL-I concerned reforms in financial system legislation linked to thepossibility of passing an amendment to Article 192 of the 1988 Constitution that would permit severallaws to regulate the financial system, as opposed to the current version of the Constitution which states thatonly one law would regulate all aspects of the financial system. The article also includes a number ofmiscellaneous items among others a ceiling on domestic interest rates. The proposed amendment underdiscussion would thus leave the agenda open as to the relevant pieces of legislation to regulate the financialsystem, permitting considerable strengthening and deepening of the legal and regulatory framework for anumber of areas in the financial system. Both the Government and the Bank agreed that it was premature atthe time of the PFSECAL-I to predict the timing of the constitutional amendmnent. In view of thesignificance of the other components, this area was largely excluded from the scope of PFSECAL-I (see

endnote).' After the passage of PFSECAL-I, there was rapid progress on the passage through Congress ofthe proposed constitutional reform, through the Senate and through major house subcommittees, and assuch it was brought into the ambit of the Second programmatic loan. However despite high expectations,final passage is still pending. The Second loan incorporated both these imnportant areas explicitly, and assuch the distinction between an overall matrix of sectoral policy, and the programmatic matrix, was thendropped.

23. With respect to the overall Program objectives, more emphasis could have been given to thedesign of components that directly addressed the goal of poverty reduction. While the rationale forlinking the improvement in the financial system to poverty reduction in the medium-term was clear andvalid, perhaps more attention could have been given to immediate outcomes for reducing poverty. Thisissue was recognized and given considerably greater emphasis in the Second programmatic loan.

Principal Components for PFSECAL-I:

24. The principal broad policy areas of PFSECAL-I were defined to include: (i) intermediationefficiency and access to financial services; (ii) banking system safety and soundness; (iii) payments system

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reform and risk reduction; and (iv) deepening of securities markets. The strategic initiative in the area ofenhancing efficiency and access to financial services reflected the govemment's ovm concerns with highbank spreads, and shallow and high cost financial intermediation, and also reflected jointly undertakeneconomic work which identified priority reform areas (see endnote).' The banking system safety and thepayments and clearing systems components were in line wfita the Government's Iceen interest in inprovingsupervision, strengthening regulations, and reducing fimancia' system risks. These were priority areas of theloan, which were also directly supported by the first (Central Bamk) technical assistance loan in terms ofregulatory staff training, conlsultancy to develop prudential regulations, the credit rating system, a bankrating system, and strengthering banking supervision. The acquisition of technology for the development ofnew payments systems was also supported by the technic&F assistance loan and through its advice to Brazilon the Western Hemisphere payments initiative the Bank vwas closely following the major payments systemsreforms which were underway. Governance issues in the development of capital markets had also beenidentified as a priority area, in advisory work, and importnt legal reforms in this area were under way inBrazil, through proposed modifications to the Companies law and Securities law; these formed the core ofthe Securities Markets component. Comments on the design of ezch policy area and the components withinit follow below.

leaagMn of ate IntermeEZdUrn lZaefciency 2-I& Access to 7- .'_'. ce CGMJP3En?

25. The Loan's efficiency and access to financial services component addressed two separate areas.The first was the efficiency of financial intermediation and the second, access by the under-servedpopulation to financial services. The issue of efficiency of financial intermediaticn is much broader than theconcept dealt with in the loan, which mainly addresses the problem of high intermediation costs in thebanking system, and particularly, high loan spreads which affected p-imarily consumer lending and a broadsegment of the business lending market.

26. The goal of the efficiency in intermediation component was to reduce the cost of capital, encouragebank lending, and as a consequence, improve economic activity. A series of studies by the Central Bankhad identified multiple factors affecting loan spreads, ranging from macroeconomic management andvolatility, the legal fiamework and within it the functioning of the judiciary, reserve requirements andfinancial sector taxation. Within the financial system, high banitng system costs, especially overhead costs,were also identified, although their incidence varied due to the high degree of segmentation in the creditmarkets. These could not all be addressed in the proposed loan. In this regard the Loan therefore sought tosupport significant incremental steps dealing mainly with initiatives to improve the legal system (throughbetter bankruptcy legislation) contract enforcement, bank credit costs (through better creditor information)and selective studies focusing on key issues identified to contribute to spreads (in partcular, financialsector taxation). Because of limited flexibility in terms of fiscal measures and recognizing that anotherBank progranmnatic lending cperation dealing with fiscal policy was under preparation at the time, theemphasis of PFSECAL-I was on reducing the incidence of default risk on bank lending spreads, whichrepresented the main factor explaining about 35 percent of the spread; followed by administrative expenseswith 22 percent; bank margins with 18 percent; indirect taxes with 14 percent; and direct taxes with 11percent.

27. The specific actions taken by the government in this area and acknowledged by the Bank amongactions already undertaken in support of the first programnnatic loan included: enhancing the quality andcoverage of the Credit Risk Center of the Central Bank; through increased disclosure of debtor information,and improved credit enforcemeat through creation of a new lending contract (:dudla de Cr6dito Banccrio).The loan also acknowledged new legislation submnitted to Congress to overhaul bankru ptcy laws. The core

- 8-

indicative action for a second phase included wide availability of enhanced debtor information and

confirmation by law of the new "Cedula" instrument (initially issued only through a provisional law). Core

action for the third phase would be publication of the amended bankruptcy law, and policy

recommendations on a new framework for financial sector taxation.

28. The second part of this component addressed directly the fact that access to financial services is

highly skewed in Brazil, with large segments of the population noticeably under-served or completely left

out of the formal financial system. Only around 20 percent of Brazilian households have access to bank

deposit instruments, and even less to bank credit. In view of the magnitude and diversity of the population

in need of greater access to financial services, the Bank took an incremental approach to the problem underthe mantle of the loan, acknowledging innovative steps taken by the government in this area including:

authorizing banks to use locations other than branches to reach under-served populations and reducingrestrictive membership rules for cooperatives to widen inclusion and thus access to financial services.

29. Subsequent phases of programmatic lending included the formulation of a strategy (e.g. via greaterparticipation of private bank and non-bank financial institutions) and action plans to further expandfinancial services, including the use of movable collateral to mobilize credit. This was paralleled by thelaunching of a major study on the access to financial services in Brazil, at the Bank, working in close

collaboration with a range of entities in Brazil.

30. A design innovation introduced in order to monitor broader poverty impact was the inclusion in the

loan of a series of indicators of progress in extending financial services, to be periodically reviewed by the

Central Bank through: (i) population served by region and by type of service (banking; non-banking); (ii)number of service points (full branches, other non-branch service points) by region; (iii) number of

municipalities without financial services; (iv) credit extended to small enterprises by volune and as

percentage of GDP; and (v) trends in lending interest rates and spreads. Information on the status of theseindicators is included in Annex I to the present document. The Central Bank had already been gatheringthese data, however, they are now being reviewed jointly on a regular basis.

Design of the Banking System Soundness and Safety Net Component

31. The PFSECAL-1 was designed to support bank regulation/supervision reforms including the

introduction of consolidated supervision of financial conglomerates, strengthening of capital adequacystandards, creation of a sound system of asset classification which supported more rigorous provisioningrules, major organizational streamlining within the supervision department of the Central Bank, progress incompleting new examination manuals and their disclosure via the internet, and contracting for the

development of a new bank rating system. A complex review program of the bank exit framework and therole of the deposit insurance was also supported. On bank crisis contingency planning, a work program was

initiated to develop an appropriate blueprint with the support of suitable international experts.

32. Progress with the improvement of supervision was relatively slow through 1997 but accelerated

significantly thereafter, with a qualitative jump in the on-site supervision function, associated with the

introduction of the Global Consolidated Inspection (GCI) program. From late 1999, GCI was extended tocover the federal banks-an unprecedented step. Also in December 1999, the Central Bank introduced new

asset classification standards which changed the approach to credit risk analysis by banks. These steps

were recognized in the Banking component of PFSECAL-I. However, it is necessary to train the

supervisory staff to apply these standards and to effect a reorganization of the supervision division to best

deploy staff in on-site and off-site surveillance functions. This cluster of reforms continues to full

-9-

implementation in subsequent loans under the Program.

33. Upgrading of prudential regulations included strengthened capital requirements - at least equal to11 percent of risk weighted assets - with additional capital required for swaps and unhedged foreignexchange and interest rate risks. Limits were set on deferred tax assets counting towards capital andadditional capital is required for bank equity investments in the non-financial sector. Loan classificationand provisioning rules were set on a sound footing in 1999, with 9 categories for classification andtightened provisioning requirzements. The recognition of these achievements in PFSECAL-l was appropriateand adequate.

34. The loan also gave recognition to reform momentum in the area of bank failure resolutionreflecting the Government's concerns about banking system soundness, particularly after the major bankfailures of 1995-96, including 3 of the 10 largest banks in Brazil-Econ6mico, Bamerindus, and Nacional.An important drawback of the Brazilian bank failure resolution fiamework relates to the process ofextra-judicial liquidation of failed banks, which has proven to be cumbersome and time consuming. UnderBank-financed technical assistance, a work program was initiated to amend the relevant legislation for bankfailure resolution, as well as enhance the role of the deposit insurznce fund (FCC). But more substantivework in this area has been prevented by the deadlock posed by Article 192 of the Constitution. ln view ofthis Constitutional restriction, this sub-component sought to identify the key issues that should be includedin any new legislation that would eventually be submitted to Congress once Article 192 of the Constitutionwas arnended.

35. The Fundo Garantidor de Creditos (FGC) was established in 1995 as a non-governmental,non-profit, tax-exernpt, industry-based organization where membership is obligatory for all banks. 2t isfunded from premiums assessed on its members, and the fund is supposedly managed by the banksthemselves (although its by-laws are required to be approved by the National Monetary Council). TheBoard of Directors is comprised of representatives from the larger banks. Article 192 of the Constitutionexplicitly prohibits the use of public funds to protect depositors.

36. Bank support in this area was aimed at realigning the role of FGC in the system in order toincrease its efficiency and reduce the cost of protection in the event of financial crises, through expandedaccess to contingent lines of credit. Although the deposit insurance system in Brazil, through the FGC wasconsidered by the Bank to reflect better international practices at the time the PFSECAL-1 was prepared, anumber of issues needed to be addressed dealing with an enhanced role of FGC in a reformed bankliquidation process. These would entail possible changes to the design of the deposit insurance mechanism,such as access by the fund to contingent lines to credit to confront failures by larger banks, the introductionof risk-based premiums and complementary monitoring powers.

37. The Central Bank also initiated work to develop a blueprint contingency plan to ensure adequatepreparedness to deal with early stages of an eventual financial crisis, should one unexpectedly arise. Thiswas an area where the Bank played an instrumental role in terms of including this issue in the policyagenda.

IDeaigM of the Paymeants system Componmemt

38. In the area of payments systems, Brazil had launched a landmark reform program, which wasaimed at reducing systemic risk associated with Central Bank exposure to loss in the settlement ofpayments. Partly to cope with past high inflation, Brazil's payment system had achieved a high level oftechnological sophistication and efficiency. However, the Central Bank shouldered virtually all the risks of

- 10-

payment failure by providing intraday overdrafts to ensure finality in settlement. These risks became

actual losses when failing banks abused these facilities. As the economy stabilized, attention shifted from

speed of payments to problems of risk management. A further weakness was the lack of a sound and

reliable legal framework for payments. Finally, the system has also suffered from risks due to limited

integration between payments and securities settlement procedures. The PFSECAL loans supported the

landmark reform, which included first the passage of enabling legislation providing a stronger and modem

legal basis for the new payments system. The new system provided the basis for a structural shift of the

role of the Central Bank from the direct assumption of risks, to the oversight of residual risks which were

transferred to private parties. Second, the loan supported the putting in place and launching of the entire

new real time gross settlement system, with parallel risk reduction and efficiency increase in government

and private securities clearance and settlement. This component was more akin to a project with specific

outputs and measurable impacts.

Design of the Capital Markets Component

39. In the area of securities markets, the Program supported a series of initiatives to enhance corporate

governance practices and strengthen the enforcement capacity of CVM, as well as the issuing of new

regulations dealing with disclosure and investor protection. At the center of the corporate governance

strategy was the submission to Congress of the revised Corporate Law, while measures to enhance the

executive capacity of regulators, strengthen surveillance and improve existing practices in auditing and

accounting were embodied in amendments to the law that govemed the Securities Commission (CVM).

Amendments to both laws were submitted to Congress simultaneously in a single bill. Additionally,

PFSECAL-I supported the issuance of good governance guidelines by the stock exchange, Bovespa, by the

investment banking affiliate of BNDES, BNDESpar, and by the pension fund regulator.

40. Most of the changes in the Corporate Law were intended to enhance the rights of mninority

shareholders, especially during transfers of ownership, and representation in management decisions.

Traditionally, many publicly listed companies had been dominated by controlling shareholders through the

issuance of non-voting shares. These companies were basically closely held with the controlling group

having little interest in diluting their ownership interest. The changes in the Corporate Law were aimed at

making ownership of corporations more attractive to minority shareholders and as a result, reducing the

cost of equity capital to the owners, thus encouraging greater use of outside capital in financing corporate

expansion.

41. In the past, CVM had limited enforcement powers and some of its regulatory functions were

assumed by the Central Bank. The revisions to the CVM Law were expected to advance the independence

of CVM (including the granting of fixed terms in office to the President and comrnissioners), especially in

terms of policy matters; provide greater enforcement powers; and give greater autonomy in terms of the

budget process, although the latter has been a contentious issue in view of the Government's fiscal

problems.

42. In the design of this component, the Bank acknowledged the importance of governance issues on

market development, but also recognized that governance issues alone could not account for market depth,

especially in the short term. Reforms in this area were not expected to have immediate material results in

terms of raising of capital in the market, but would establish the foundation for future orderly development

of the capital markets. The measures supported by the PFSECAL-I constituted a critical mass of reforms

when viewed in the context of a realistic outcome, but one that would be realized in the medium-term. It

was also recognized that changing regulations alone would not be enough, if major investors in the equities

markets did not support the new guidelines on governance. Thus the loan attempted to ensure sustainability

- 11 -

by incorporating actions by major investors - the equity investment arm of the BNDES bank, Brazil's largeand influential term lending wholesale bank; as well as by pension funds and by the stock exchange. Theoutcome of this component of the Loan was envisioned to be higher investor demand for Braziliansecurities, mainly equities, and a more effective regulatory structure.

3.4 Revised Components:43. Ths wns mat nm nmv-tmemn moam but a slmgle riam¢le nfjusfmema oznt!o Lozm compae=smmenniAmed uHnchanged as they were hased an aCtiOasS cEMELy MccOMpESed Piair ta 1OEaa I tlanof PIFSECAIL-If. The overall programmatic direction of the PFSECALs has also remained steady.However, within the programmatic context, the subsequent operation, PFSECAL-l, was able to introducein an explicit manner some areas of reforn which had lirrited prominence in PFSECAL4. As flaggedabove, these included public bank reformn, certain areas of fundamental financial legislation involvingconstitutional amendments, as well as more direct poverty and access targeted interventions. The flexibilityafforded by the programrnatic framework permitted the expansion and adaptafion of Icey components tofollow the enriched dialogue and escalation in reform.

3.5 Quality at Entry.44. (Quaity at enmty us godged tao be sfsactary. As explained in the previous section, the design ofthe Loan objectives was highly relevant in terms of the Bankc's Country Assistance Strategy. As the first ofthree programmatic adjustment loans, the PFSECAL-" could only constitute the first phase in terms ofinmmediate outcomes. A numbzr of the reforms supported by the Loan as well as the Program were alreadypart of the Government's agenda prior to the design of tis Loan. The structuring of the Loan, within theoverall goals of the Program to enhance economic growth, reduce poverty, and prevent fature financialsystem crises, was well balanced. Preparation of the Loan was done efficiently by competent andwell-experienced teams at the Bank and in the Brazilian Government.

4. Ac evemnent Of GE(eBctlve and (Otputs

4.1 Outcome/achievement of objective:45. T1hs NCR is anm evuatmiaon alT t ae I7§ECAI-ll ay, w aclm n tum is n2 lnr com memn in amseries oT proamganisatic dusnkTemnt Eaoms tmat coerAse Cle I?ragrEmL Evaluation of the outcome for thePFSECAL-I is judged in the context of the contribution of this loan to the yaasf fulfillment of theProgram objectives. The outcome is thus measured in increments, and in this case the evaluation refers towhether the incremental contribution of this loan is judged to be satisfactory in the context of a Programthat expects to make further progress in the achievement of these objectives through the sequels to thisLoan. A successful rating of this Loan is thus based on the judgment that partial achievement of theProgram objectives, based on a critical mass of outcomes associated with this Loan, is consistent with asatisfactory achievement of Program objectives in the medium-term, which in tun is conditional on thesuccessful implementation of policy reforms in the subsequent programmatic loans.

46. Tne outnomse oaT ¢te lF'IZCAI-I is comsZsdered sacTairy. his assessment is based on anumber of factors, including: (i) highly satisfactory marginal achieverment of loan objectives and on balanceuntil the present, satisfactory achievement of overall financial sector program objectives, as embodied inboth the program and policy matrices, and the government's Letter of Development Policy. At the time ofthis ICR, the second Loan (PFSECAl-l[) has already been approved, substantially based on the successfulcompletion of actions envisaged at the time of formulation of the series of programmatic loans, whichfiuther supports the satisfactory evaluation of the PFSECAL-I. (ii) Successful outcomes on specificprogram components. (iii) Expansion of ambit of the program and depth of dialogue with the governmenton financial sector issues, as demonstrated in PFSECAL-llJ. These confirm the benefits of the

- 12-

programMatic approach as a successful vehicle to engage in financial sector dialogue and partnership with

authorities in Brazil. (iv) High degree of commitmnent by the Borrower to reforms supported not only by

this Loan, but the commitment to the financial sector reform program as a whole. Despite highly

satisfactory marginal achievements of the present loan, overall program objectives remain satisfactory in

terns of financial sector outcomes, due to increasingly adverse macroeconomic circumstances, which have

impacted on the achievement of financial sector outcomes (such as spreads and interest rates) today (end

2002).

47. A series of factors contributed to the satisfactory and successful outcome of PFSECAL-I.

These include: (i) the relevance of the Loan's design and the balance between complexity of reforms and

tangible actions; (ii) parallel technical assistance through a first technical assistance loan which preceded

the operation (Central Bank Modernization Technical Assistance Loan) and was instrumental in supporting

the preparatory work for a number of reforns associated with specific Loan's components; (iii) launching

of a new technical assistance program to underpin the expanded reform agenda. (iv) close and collaborative

country dialogue overall and specifically in the financial sector. Govemment officials interviewed for the

ICR expressed appreciation stating that without the Bank's support, the reforms would have been less

comprehensive and of lower quality. (v) Quality Bank inputs in the form of the highest regional financial

sector skill levels combined with seasoned Bank staff with sound knowledge of country conditions.

4 2 Outputs by components:

The principal outcomes of the PFSECAL-I are summarized below.

Implementation / Output of Efficiency and Access to Financial Services Component

48. The govemment has also taken steps to improve the enforcement of credit contracts, which should

help narrow loan spreads in the medium-term. It strengthened an existing contract (4lienaVdo Fiducidria)

that provides for the automatic transfer to the creditor of the property title on the collateral, which is held m

a Trust, if the debtor defaults. This facilitates the execution of guarantees and repossession of collateral

where warranted. The government also created a new lending contract (Cedula de Credito Bancdrio),

which is a security that represents a bank credit - i.e., an asset-backed security where the underlying asset

represented bank claims. It fulfills requirements to permit execution of title (titulo executivo), i.e., the

underlying debt does not have to be recognized by a court. It also allows for secuntization of the claim.

which enables a more speedy enforcement of the creditor's rights, in the event of a default. Finally, creditor

rights would be further clarified and their enforcement further improved if and when the Congress approves

the recently submitted amendments to the Bankruptcy and Reorganization Law (Lei de Falencia). Even

after the submission of the present draft to Congress, Bank inputs have been valuable in proposing further

modifications to the proposed draft law. Nevertheless, progress on passage of the new Law has been slow.

49. Reforms have been underway in the area of debtor information. A major upgrading of the Central

de Risco is under implementation. With the first loan, the Central Bank will begin disseminating much

more detailed information on debtors to the banking system, including positive mformation that was

hitherto lacking. With the next loan, loan size thresholds were lowered, dramatically increasing the total

number of loans covered. The intensification of the progress towards greater availability and transparency

of information on debtors has been boosted a the recent provisional decree that modified the Secrecy Law

(Lei de Sigilo Banc6no), which facilitates the exchange of debtor information between banks and with the

Central Bank as well as other financial sector regulatory agencies, although there remain residual barriers

in this regard.

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50. The government has begun taking a number of important steps to extend the frontier of financialservices towards the under-served population. For instance, it has recently authorized banks to uselocations other than bank oranches-such as post offices, supermarlcets, and lottery points-to makefinancial services available to population in remote and poorer areas. It has also eased restrictions to widenthe membership for cooperatives while, at the same time, enhancing prudential oversight of cooperatives,via delegated supervision to cooperative associations. Bank analysis of the success of these initiatives hasbeen expanded under the recently approved PFSECAL-f.

Outcome of thIe EffneenDy and Access to Rinanc5J Se§ucas Compimemn - ACY`eveme.nl of O2Xectlves

51. The ouecome of the efficiency and access to Inancial services component has been supportive ofthe overall medium-term goals of underpinning economic growth, reducing poverty, and preventing futurecrises in the financial system. The principal outcomes in this component included:

0 raengtheang of tLte Credft fisk Cenqter, wNcEa amos conMbu2nefa to improved hbaruncngsuperv-siorn and better mznagement of credit risl- Gy =e2rrcniaL knoks. Full implementation of thesereforms is expected after the second and third programmatic loans. A successful impact is expected tolower lending costs and hence interest rate spreads, thus encouraging econornic growth through increasedinvestments, and as a consequence, reducing poverty. At the same time, better risk management should helplower risks of financial crises in the future.

O TNe introduciojmn of several unew legd hnstrnnhens tCEnInC imp rove c¢ullratc eanTor¢emelnt amdthus ohelp to reduce defl&ut risk The development of the Cedula de Cr&iito Bancdrio and theAlienaq o Fiduciaria should contribute to increased lending by commercial banks at lower spreads, whichwill in turn induce higher economic growth, reduce poverty, and through better credit quality help preventfinancial crises in the future.

O Submitt¢ing of nDew lmnnEkrptcy Law to Conngreos hDss enhanmcef Iae p3OSi1bly tat ha2Eandmark reform w i contriibute to a signufl¢canat reductIon in delsau]i ris Passage of the law was

anticipated for the Third programmatic Loan.

i Ellncreased access to flnanncEDa services aceomp .sed hr gD a astabks mant of sp eialarrangementls betweenm bganks nnd postal offleas zs weall as fLcaL retears. By increasing access to basicfinancial services these initiatives should support economic growth through greater efficiency in paymentsfor services by the under-served population and reduce poverty by offering an opportunity to increasesavings and thus wealth of the lower income strata.

52. One of the indicators of increased financial system efficiency was the reduction in inMteras raaespreads in the banking system. Until early 2001, the favorable macroeconomic environment of lowerinterest rates and non-inflationary growth had contributed to the lowering of both rates and spreads. Theaverage spread on loans to businesses had bottomed in July 2001 at 20.6 percentage points down from 33.3percentage points in December 2000, the corresponding spreads for consumer loans were 46.6 percentagepoints down from 80.2 percentage points (see endnote). Towards the end of 2001, with increasing externalfinancial pressures, spreads began to widen, and the trend continued. However, these increases were inresponse to measures the govemment was obliged to take, in an effort to tighten monetary policy inresponse to the potentially inflationary impact of the currency depreciation. Although efforts to decreaseinterest rates and spreads have clearly been less successful over the last months this can be ascribed largelyto macroeconomic volatility and uncertainty triggered by external events (Annex Figure Al.1).

- 14 -

53. Analysis by the Central Bank of recent increases in the short-term bank spread show that the

upward trend of 2001-2002 is largely due to temporary factors and that underlying trend behavior is not

affected. Despite these efforts, interest rate spreads in Brazil are still very high and a reduction in spreads

must remain prominent on the agenda for future reform. One factor that may not have been scrutinized

more fully within the Program is the issue of competition in the banking system as a cause of inefficiency in

intermediation. There is a high degree of concentration in the banking system, both among the public and

the private sector banks. It has been suggested that the relatively high rate of profitability of banks, even

with high capital ratios, may be an indication of such factors. However, there is also evidence to show that

bank lending is priced competitively. There is also a very low rate of customer migration between banks.

These issues should be given greater consideration. (Annex Figure A1.2).

54. On the other hand, without the measures supported by this Loan, interest rate spreads could have

widened even further as a result of recent market turbulence. This evaluation considers that reforms

adopted under the PFSECAL-I have been influential in terms of increasing market efficiency, and that in

the medium-term, with increased macroeconomic stability, they will contribute to a lowering of spreads as

well as greater offering of credits by the banking system to the private sector. Additional information and

insights regarding interest rate spreads and market efficiency will be feasible as a result of refonms to be

undertaken in the second Loan (PFSECAL-II) dealing with the Risk Center. This expanded data base will

provide more detailed information on interest rate spreads by market segment, as well as include more

information on non-interest costs such as loan fees and commissions.

Implementation / Output of Bankdng System Soundness and Safety Net Component

Bank Supervision and Regulation

55. The Central Bank has made significant strides towards strengthening bank supervision. Years of

policy dialogue and the involvement of Bank experts on these issues have been appreciated by the

Government. The Central Bank Modernization Technical Assistance Loan was considered fundamental to a

number of the tasks attached to this component of the Loan. Perhaps most visible in this reform process has

been the qualitative jurnp in the on-site supervision function, associated with the introduction of the Global

Consolidated Inspection (GCI) program - now extended to federal as well as private banks. On-site visits

also apply to foreign branches or subsidiaries of Brazilian banks abroad.

56. There has been a substantial upgrading of prudential regulations. Capital has to be at least equal

to 11 percent of risk weighted assets, and additional capital is required for credit risk in swap operations

and to cushion banks against un-hedged foreign exchange and interest rate risks. Loan classification and

provisioning rules were set on a sound footing in 1999, among other things, to emphasize ability to pay in

classifying a loan in one of nine categories, and to tighten provisioning requirements. With experience,

banks will begin to apply more consistent criteria to loan classifications in line with earnings capacity and

quality of collateral.

57. Reform momentum in this area has continued, particular emphasis was given under the second loan

to remedying important shortcomings in off-site analysis, with a view to strengthen capacity to detect

weaknesses at an early stage, to make projections of banks' financial positions and to conduct stress tests

and scenario analyses. As regards on-site supervision, key projects include the mainstreaming, in the near

future, of new examination manuals and the introduction of a CAMELS-type rating system to be integrated

into the on-site and off-site supervisory processes. Both of these outputs have been incorporated into the

PFSECAL-II. Furthermore, the reform program for the Central de Risco (see above) contemplates that,

once the enhanced information is up and running, the Central Bank would manage a model to assess

- 15 -

systemic credit risk, which would significantly enrich the supervisory process.

E&n, FeUnre lResolmsntffoa, Dsg s a d fOP,0osff9 ffvce, gd

58. Strongly motivated by the disappointing experience with extra-judicial liquidation, the CentralBank has initiated an intensive work program to amend the relevant legislation for bank failure resolution,as well as to adapt the role of the FGC in the new context. This review process will assess key issues suchas: (i) the reduction of the Central Bank role in the extra-judicial liquidation process and the increase of therole of the private sector; (ii) the balance of rules and discretion in the corrective phases of dealing withtroubled banks; (iii) the introduction of more efficient resolution techniques for closed banks-such as"purchase and assumption" operations; (iv) an enhanced role for FGC in a reformed liquidation process;(v) the strengthening of FGC financial position, particularly via access to contingent lines; and (vi) possiblechanges to the design of the deposit insurance (e.g., the introduction of risk-based premia andcomplementary monitoring powers).

59. FGC has now negoJiated access to a R$1.2 billion stand-by credit with the largest 11 banks in theBrazilian market. However, so far, the proposed amenidment to the statues of FGC by the NationalMonetary Council is still pending. However, questions still need to be addressed in the context of FGC'srole as part of the safety ret and its structure as a bank-run bank insuring mechanism. The focus oncontingent lines of credits from other banks in the system raises the question of regulatoxy forbearanceregarding the large banks which stand to supply a line of credit to the Fund. Currently the Board of FGC isdominated by the large banks, the issue will be how smaller banks could be adequately represented in thepolicy making of this fumd. As FGC takes on a more proactive role, there could be potential conflicts frombanks that are charged with 'supervising' other banks. Finally, so far the FGC has beere able to keep upwith the workload in terms of intervened banks. However, as its responsibilities increase it will require asubstantial increase in staff ir. order to perform its due diligen:ce work prior to the intervention of an insuredbank as well as managing the asset recovery process.

60. The Central Bank iritiated work to develop a blue print contingency plan-to ensure adequatepreparedness to deal with early stages of a financial crisis, should one unexpectedly arise. In developing acontingency blueprint, the work program would find solutions to ensure: (i) minimization and adequatemanagement of risks of contagion and systemic illiquidity; (ii) inter-institutional coordination and effectivedecision making processes; (iii) adequacy of existing legal powers and protection for supervisory actions;and (iv) suitable ex-ante special legal powers. It was intended that once a blue print was in place, dry runswould be practiced from time to time to test the system and correct any shortfalls. However, to date workon this component has not progressed beyond the preparation of an initial blueprint, largely due touncertainties associated with the election process and macroeconomic turbulence.

C'utcome of the &Imndn g System Suundness ndm SafetL He2 CaMrp nemt

61. The outcome of the bmnking system soundness and safety neZ component has been instrumental inachieving the goal of reducing the likelihood of future crises irn the financial system, as well as contributingto higher growth and poverty reduction in the medium-term. The reforms supported by this componentshould result in improved performance of the banking system, create the right incentives to lend, andmotivate fiuther consolidation of the industry through the exit of weak banks. The principal oeom¢es inthis component included:

Q!l INew asset quainty n ssTCnatQIn standlardos whJ1lY wiLl A eflp ii irove t2Se o ffnee ef thebanming system through greates transparency i asset qraLaty Eena g nd throuzgh greater eCorts

- 16-

by the banks to extend better quality loans. Applied in 2000, both the banks and the regulators are

moving along the leaming curve in terns of loan classification. Banks may not yet have the full experience

to classify loans under the new system. Nevertheless, the new asset classification standards have made a

tangible contribution to the banks' risk management practices and the prevention of banking crises, and will

in the medium-term help improve economic growth and reduce poverty.

O Reorganization of the Central Bank's regulatory functions which has enhanced the

effectiveness of banking supervision. The creation of the on- and off-site supervisory units, combined

with intensive training and acquisition of new technology should help the Central Bank to adopt preventive

measures early on and hence reduce the risk of future banking system crises.

L Progress achieved in development of new examination manuals and in a new system of bank

ratings which will strengthen the quality of banking supervision. These manuals are now complete and

their application is now scheduled to begin.

o Strengthening of capital adequacy standards and adoption of consolidated supervision of

financial groups, which will boost the ability of banks to face unfavorable economic trends. The Basle

capital ratios for the banking system stood at a very high 20 percent of assets in December 2001, which

already include the impact of the new standards for off-balance sheet risks.

o A review of deposit insurance, and the negotiation of contingent lines of credit, which could

be expected to enhance the use of the safety net to protect the banking system. By reducing systemic

risk arising from the default of all but the largest banks, the FGC has made a contribution to reducing the

risks of future banking system crises. However, as flagged, the acceptance of the revision of FGC statutes

is still pending.

62. The improvement in banking regulation and supervision can be traced to the reforms started by the

Government after 1994, which considerably accelerated after 1997. The focus has been not only on

strengthening the individual components of the system, but at their broader application in practice - to

institutions such as federal banks. The sustainability of these reforns will hinge on the quality of

supervision, especially with respect to the loan classification standards where both the banks and the

supervisors are still in the learning phase. With timne and experience these standards will help reduce the

risk of future banking system crises by increasing the quality and transparency of loan portfolios to both

depositors and investors.

63. In the process of supervision, new issues have been disclosed. Because of the importance of

investments in banks' assets, greater attention to market risk is also warranted. Recent attempts at

introducing new marking-to-market regulations should help to disclose the true extent of banks' exposure to

market risk. Nevertheless, the lack of market liquidity in most instruments other than Government securities

raises some concerns about the reliability of this information since valuation of some securities could be

questionable. At the same time, banks' activities in derivatives - forwards, futures, options, and swaps

need to be reported with greater detail and clarity including adequate policies and procedures. With respect

to information about the banking system in general, it would also be helpful for the Central Bank to make

available greater detailed and historical infornation on the full financial statements of the consolidated

banking system. Enhanced market discipline and the reduction of systemic risk is dependent on the supply

of ample, timely and detailed information that is easily understood by depositors and investors. Greater

efforts in ttus area would be desirable.

- 17 -

l mpllemeentfiom / )un CT I?of aynm en ts §ylenm ComSone n

64. Key outputs of the payment system component in PFSECAL-I included: (i) the reform of the legalfiamework for the payments system. The new legal firmework clearly establishes the role of the CentralBank in terms of oversight of the payments system. It was established by Provisional Law No 2008 inDecember 1999. (ii) The reform also clarified the nature of interactions between the Central Bank andprivate clearinghouses. Settlements of private clearinghouses would henceforth operate under the oversightof the Central Bank, according to rules approved by the Central Bank. After the netting process, at theclearing houses, the final stage of settlement will occur in all circumstances via the Central Bank, in thenew (RTGS) system. In the Second loan, risk management principles for private participants wereenunciated in regulations comprising a part of the new legal fiamework. (iii) A core output is theinstallation and preparation for the launch of the central bank's new gross settlement system which wouldreduce to zero the risk for the central bank since each transfer will occur only in case of a positive balanceon the reserve account to be debited. The new system was designed to be consistent with international bestpractices. (iv) The first loan also prepared for the launch of a new settlement process for governmentsecurities, which would henceforth also be able to settle all transactions in real team on a gross basis,according to best international practice. (v) Finally, the payments component helped to increase the safetyand efficiency of settlement systems for other securities.

65. The Central Bank has consistently involved key stakeholders in the reform process, which hasenabled widespread understanding and support for the new systems. When the reform is completed, Brazilwill have a safer and sounder payments system allowing intemational financial integration as well asprotecting the Central Bank from risk of loss while drastically reducing moral hazard.

C)utccure of ulhe ]?nynnem ta ndi $ecuziftes Cilearnane mS_" n :o 2rfLe Cc'' ¢22parienm

66. The outcome of the payments and securities clearance component is supportive of the overall goalof increasing efficiency, better identifying, managing and pricing risk, hence contributing to preventingfuture systemic crises in the financial system.

O IBy accelerang worE onn nfte dleve2onaenen' ocT E mew paynmennf oystenm tinTs corapnneaft Esennpedel to redltuce systemnnc rAsk ounee tine systemsn Ibeccnes osrtiEmL. The impact of this component ishigh in terms of reduced risk of a financial crisis, although quite small in terms of a direct and immediateimpact upon economic growth or poverty reduction. The successfil outcome of this component will also bedependent on a success achieved by the Central Bank in supervising private clearing systems.

]lrplemnennftniou / 1DCtpnt cT secuntes -jsrrf, n, e. Coponnent

67. The authorities have been pursuing reforms to introduce reforms in the corporate govemanceframework for listed companies in Brazil, to stimulate domestic securities markets, and also to strengthenthe legal and regulatory fiamework for securities markets and the market regulator. Amendments to theCorporate Law and the Securities Markets Regulation Law received partial approval in Congress prior tothe presentation of PFSECAL-I (Draft Law 3115). Changes aimed at strengthening minority shareholderrights through better 'tag along' rights in cases of ownership change (to protect the financial interests ofminority shareholders when listed companies withdraw from the stcck market and go private, and whenlarge acquisitions by controllirg shareholders take place); reducing the incidence of non-voting shares andincreasing the 'free float' of listed companies, fostering the issuance of voting shares; enhancing CVMenforcement capacity; and raising accounting standards (by creating an independent professional body toset accounting standards). These amendments were passed by Congress as part of the policy actions for

- 18 -

the PFSECAL-lI. Corporate govemance objectives were also pursued through regulations issued by CVM.

68. In addition, good governance criteria were issued by the stock exchange (BOVESPA) and new

pension fund investment guidelines were approved by the National Monetary Council to encourage

investment in shares of companies with good govemance. A host of other, recently passed CVM

regulations focus on enhancing investor protection-mainly through improved transparency and disclosure

requirements-and easing foreign investor access to Brazilian securities markets.

Outcome of the Securities Market Component

69. The outcome of the securities market component has been supportive of the overall goals of

underpinning economic growth, reducing poverty, and preventing future crises in the financial system in the

mediun-tern. The principal outcomes in this component included:

o Enhanced quality of corporate governance, which should encourage increased investments,

both domestic and foreign. This should support the objectives of support to econonic growth. However,

changes in the Corporate Law alone are not going to be sufficient to stimulate Brazil's capital markets, as

these are also affected by factors such as the migration of trading overseas, and investor confidence in the

region. Thus the role of the present component in terms of the overall challenge to promote investments and

savings in the economy has to be kept in perspective.

o A strengthened and more effective securities markets regulator, through reform of the CVM

Law should make an important contribution to investor confidence. Once the CVM Law is approved

and implemented, this sub-component is expected to make a positive contribution to the prevention of

future crises in the financial system as well as enhancing economic growth through increased investments.

In the meantime, much greater strengthening of the resources at the disposal of CVM such as staff training,

additional personnel, consultancies to develop new rules and regulations, and acquisition of new

information technologies are essential to the eventual success of these policy reformns.

4.3 Net Present Value/Economic rate of return:Not applicable

4.4 Financial rate of return:Not applicable

4.5 Institutional development impact:

70. The institutional development impact of PFSECAL-I is deemed significant based on the

project objectives of improved supervision of banks and capital markets, more transparency, better

alignment of incentives for economic agents, enhanced financial and legal infrastructure, hence

contributing to preventing crises in the financial system and of enhancing economic growth. However

it must be recognized in this context that the real work of institutional building has been undertaken

by the technical assistance loans which have preceded and paralleled the adjustment loans. Perhaps

the highest rating could be assigned to the reinforcement of the Central Bank. Reflecting the issues flagged

in the first Technical Assistance Loan, perhaps the most important components in termns of institutional

development have been those dealing with banking supervision and, with banking system efficiency. The

reorganization of the banking supervision departments with a clearer mandate to enhance the safety and

soundness of the system was an important contribution of this Loan. At the same time, the upgrading of the

payment system called for reinforcing of the legal framework and Central Bank capacity to implement and

supervise the new payments infrastructure. The improvement in the enabling environment for the banking

-19-

system would not have been possible with an equally supportive strengthening of the organizationalcapabilities of the Central Bank. It should be acknowledged nevertheless that the Central Bank of Brazilhas been an excellent partner to the Bank's efforts due to its existing strong capacity, especially in terms ofhuman resources. The loan also helped to build up a relation with the securities regulator, the CVM, and topave the way for the phased strengthening of this institution over the period of the adjustment loans andnew technical assistance loan.

71. With respect to ienncies fin ameunncigE !imtenseiU , tne ILoamr was Lmtnn=memnnz imtfiggernimg im-depth dfiaignne and anRmy&s a: the zzs%n FcaM2d te Innge opreads fin ca ene=fi lbsnnREemdimg. As saCk, cnabuetiaa towards ins utfian-iaM devefsp n iemn th1nis Anren cnm 1be deeamned to lbemmdoart. While more analysis is needed in this complex area of financial intermediation, the Loan hasincreased the awareness of policymakers as to the need for greater transparency of infonnation, rightincentives to lending, better control mechanisms to nmnage credit risk, and greater opening of the marketsto competition. (Gam nnee tlenrefoire the institntinE y: ' - -n armg fis dleeadi to fbe =ndoat.

50 B'iIDan IFactars AXiTetig llm nleuentatmaa and tn-aCma

5.1 Factors outside the control of government or implementing agency:72. lEntemn-l ac-tors were rela1iveny favorable over ube rn-flad CT the Tlrst lprraamnaat Loam,tnaagln a detereiauteia in amne external elnvn-assmesnt Enn a nmteAnD im-DaCt aIDn the hiM ]2enatO noTthe ssnamd nolan, nimd inemnce te pragrgnm as a wiLnai. This is best discussed in the context of anevaluation of the second Loan, or in the context of the Program as a whole. As mentioned in the President'sReport for PFSECAL-1, macroeconomnic risks posed an important challenge to the successful outcome ofthis Loan.

73. Et sNOnfd 9aso be flngged taEt tlhe pEssnge oT laws, wfiC aDeeleda Cmguress!oamnl approvnl, werealan lbeyouad the centraon of tine governmnent. This was a key factor behind the inclusion of the passage ofthe revised Corporate and CVM laws in the second part of the program. The need to seek appropriatewindows of opportunity for the presentation to Congress znd subsequent sponsorship and passage throughCongress of key legislation has also explained, for example, slow progress on the independent bill dealingwith accounting reform, delays in the approval of bankruptcy legislation - left to a possible third loan - andthe lack of approval to date of the constitutional amendment (Article 192) on key financial systemregulation. Non-submission to Congress of a bill to protect supervisors was largely due to the lack of anopportune climate in Congress.

5.2 Factors generally subject to government control:74. Feireinsps tle key giTntor n=dimg ainr sueeess iroam tCLe goven-mmemtls perspetIve was a streagcommfntmeanta the reaoirm pracess Am thne Tmnm:ac sntar. With respect to the macroeconomicenvironment, the government lYeld firm to its fiscal and monetary policies, despite the external pressures onthe cunrency and the weakening of the economy in 2C0i. Excellent macroeconomic management alsocontributed to a favorable environment for reforms in the financial sector. A strong Govemment ownershipof the Program as well as this Loan, helped to assure smooth ihnplementation of many of the achievementsfor which the Loan was approved.

75. 11 Me Govermueent's n-mease to te etemn-n preassnures as weE as in denglE wItin tle internaluacertnintes on the Palt[iCl pirseas las Eno a generaly - .'- Impat na th e ofnaa CT as LEans,athougl an nmmee areas, the Tmal pnaosMoa ns mot yet lean-. The commitment to fiscal responsibilitydespite the growing pressures os the deficit is the biggest factor which bodes well for continued credibility

-20 -

of Government policies. On the other hand, the tightenmng of fiscal and monetary policies, in the wake of

large scale macroeconomic difficulties, has clouded the evidence on the impact of this Loan on economic

growth and poverty reduction.

5.3 Factors generally subject to implementing agency control:

76. As the key implementing agency, the Central Bank was strongly committed to the objectives

of the PFSECAL-I and viewed the Bank as a close partner in their achievement. There were no areas

of disagreement in terms of the Loan's scope and policy matrix. However at the time of the first

Programmatic Loan, the Central Bank's caution with regard to any perceptions of Bank involvement in the

reforn of the federal banks led to their exclusion from the policy matrix. As dialogue continued and

deepened over the course of the loan, this area too was brought into the arena of the second adjustment

operation. With regard to the second implementing agency, the CVM, the loan and its accompanying

second technical assistance loan permitted the Bank for the first time to build a close and sustained

partnership with a key regulator. The CVM was not in a position to control the passage through

Congress of the revised Corporate and CVM laws, but was clearly very involved in the process

nevertheless. CVM was directly able to control the preparation of supporting regulations, which it has

executed relatively speedily with in-depth and important regulations.

5.4 Costs andfinancing:77. Not applicable. However see Annex 2 for the role of the present operation in the govenmment's

overall financing requirements.

6. Sustainability

6.1 Rationalefor sustainability rating:78. As the ICR for the first of three programmatic loans comprising the Program, this evaluation

considers two aspects of sustainability: first, the sustainability of the individual components of this

Loan (PFSECAL-I); and second, the synergistic impact of this Loan on the sustainability of the

Program.

79. The sustainability of reforms achieved under the present Loan is judged to be likely. A first

key factor in sustainability is political and implementing agency commitment. The strong commitment

by the Government to the financial sector reforms during the period of the first PFSECAL, and sustained

during the second operation, has been one important ingredient for continued success of the measures

implemented, so far. Continued future commitment is however still to be assessed, in view of the

installation of a new government from January 1, 2003.

80. A second consideration is the low degree of reversibility of many reforms achieved. A large

number of the reforms which have been brought about are now deeply embedded in the system and the

likelihood of any reversal is low. This includes for example the improvement in prudential regulations, and

to a large extent, improvements in supervisory practices. Changes in the payments system are essentially

irreversible and changes brought about in core legislation such as in the Corporate Law and CVM law are

at least difficult to change without further legal amendments. However there are other areas of the

operation, for example, reduction in interest rates or spreads, which depend significantly on macroeconomic

and policy variables, and which could therefore be reversed, both through changes in extemal circumstance

and through government decision. On balance, however, there are few areas of the operation where there is

-21 -

any serious possibility of corrosion of current achievements as tabulated in PFSECAL-I.

81. Thirds the iincrenreuntnl inppiroeh adIoptef by qbls iL7nnm, salce a¢ go au¢ OT n R7off,%mMnseries off Donas, aEso aSdds to tDe snusaIbMity of eanEc h½dvdual oann, as this is necessary in order toproceed to firther stages of the Program.

82. 1The imng¢ct off tas LoEa on tfo ae su h1mlty oT tle Iroanm 5s asso DUdgde tO he -flekly. Asthe first in a series of adjustment loans in support of the financial sector program, the successful outcomeof the PFSECAL-I has provided a strong foundation for the achievement of the overall reform agenda andsuccessfWl execution of subsequent loans. In the case of the banking system soundness and safety net, thepayments and securities clearing system, and the securities markets components, follow up actions in thePFSECAL-II were made possible by the good track record with this Loan.

83. Eoweveiw, risks a&dtuelld an te lF'IECOAJI ReA ¢rt off te 2rFes iM2 aire stE re:azlvnt fCtonSfor t¢Se sustsEnahIlilty of tEne everE I?rogram. A favorable macroeconomic environment was certainlyhelpful for the successful outcome of the first loan, and present turbulence in this environrnent due to bothexternal and intemal factors makes it more difficultl to remain on track with financial sector reforns,especially in the area of effciency of intermediation. Sustained comnmitment to sound fiscal policies willhelp to ensure a favorable environrnent for protection against financial crises. lFinally, the commitment ofthe new government which will take office from January 1, 2003, will be a major factor affecting thesustainability of the programmatic framework, especially in areas (more emphasized in the SecondProgrammatic Loan) such as public bank reform.

84. Buldgetary rmqunremnemts off hn plonentieng agemceos couEd j ape uijpon t1e entennt to whIchsupport ean be provided to the ezecutnsDg ageacies, tne (CentraZ Iannk anid he 9VEJB i throughaccompanying techDncal assistance, and hence reforn implementation in some components. Although nota major factor affecting the sustainability of broad policy direction; this too is likely to be affected by theoverall macroeconomic environrnent.

6.2 Transition arrangement to regular operations:Not applicable

7. &Bsnk annd IBlorrower Peyorsnance

7.1 Lending:85. lln the indenflcation off the Loann tne 3Igak -'; - Aound !ofBM2nntm ce½ tllg the targetshaosed on the overall Program matrx, annd n tDhe piro innatic dengs off ¢te ograion. The Bankwas proactive in supporting a series of financial sector strengthening measures to address challenges offinancial stability. While the Loan was complex, the design was compatible with the borrower's capacity.

7.2 Supervision:86. Atnnough tne presennt loan was a single tiranDcne ogrgairMs and am s such tDe iasue off suCT ervisiooff the first loanm s not reDevanm, supervisonM off tEn pirennni a a wDhoLe continUedI closely a1eor the firstLoian wennt to the Boaird. Indeed the follow up Second loan, within a year of the first loan, was enabled bythe continuous close supervision of financial sector developmenWs, by fornal as well as informal means.

-22 -

For rating purposes, quality of supervision may be deemed to be satisfactory.

7.3 Overall Bankperformance:87. Overall Bank performance is deemed to be satisfactory. In general the Loan was well designed

and consistent with the Bank's country strategy. Bank staff worked very closely with their counterparts in

the Brazilian Government. Bank support through the ongoing policy dialogue served to channel in-house

expertise to provide success-based advice on the design and implementation of financial sector reforms.

Borrower7.4 Preparation88. The commitment of the Government to supporting the programmatic framework of lending

for sustained reform, and to promoting the macroeconomic stability required to support financial

sector reform was clear. The Government's team comprised its most senior policymakers who saw this

Loan as an opportunity to solidify their agenda. The Government maintained a very positive policy

dialogue with the Bank during Program design.

7.5 Government implementation performance:89. Given that the present operation was a single tranche programmatic loan the distinction

between preparation and implementation of the present loan is not relevant. In terms of the overall

programmatic context, both the Government's and the Implementing Agencies' performance in keeping

reform momentum on track was highly satisfactory, as evidenced by the successful presentation to the

Bank's Board of the Second programmatic loan a year after PFSECAL-I.

7.6 Implementing Agency:90. The performance of the implementing agencies, especially the Central Bank, by now a close

partner of the Bank in the financial sector reform program is deemed to have been highly

satisfactory. The commitment of the Central Bank, at the highest levels, to the strengthening of banking

supervision, improving financial sector efficiencies, reducing payment system risks and supporting capital

market deepening was clearly instrumental in the satisfactory outcome of this Loan. The Central Bank teamn

comprised its most senior staff who saw this Loan as an opportunity to solidify their agenda. The CVM

was also supportive, viewing the Bank as a partner in the implementation of its agenda to improvegovernance and strengthen the capacity of the regulator. Both agencies maintained a very positive policy

dialogue with the Bank during Program design.

7.7 Overall Borrower performance:91. After consideration of the above-mentioned factors and of the outcome of the Loan, the

overall performance of the Borrower is rated as highly satisfactory.

8. Lessons Learned

92. The principal lessons derived form the outcome of this project include the following:

o Programmatic lending provides the Bank with more flexibility in supporting the Government's

reform agenda, and also permits the building of a genuine partnership and dialogue. Government

officials felt that the programmatic approach gave them greater flexibility to introduce new items to the

- 23 -

agenda, and reassess reforn priorities within the programmatic agenda .

O Strong government comrmtment and ownership of the Program is a key ingredient for success.In the case of PFSECAL-I, the Government had sought the Bank's support in framing a strategy forfinancial sector reforms. The Government ownership of the Program was a determining factor in the highlysatisfactory implementation of reforms in the financial sector.

o Early in-depth analysis by the Bank of financnal sectonr smues and vulnerabilites helped to speedup loan design of the Program and preparation of the PFSECAL-I. Bank staff included numerousfinancial sector experts who maintained a very productive dialogue with the Government. This work hadbeen initiated by the banking problems of 1995- 1996 and deepened by the multi-focused AAA undertakenin the year preceding the loan, which helped to identify key issues that proved to be highly relevant for theBrazilian experience.

o Accompanying technical assistance was a kiey element in building dialogue and also inn theimplementation of several areas of refoirm. Thus the first CBTAL contributed considerably to the banksupervision component; the second TA loan helped to build rapport with the CVM and include securitiesmarkets issues within the scope of the loan.

o The objective of poverty reduction, which was a goal of this Program, could have beenaddressed more directly thiroughn specific policy reforms with more immediate impact. While therationale for linking the improvement in the financial system to poverty reduction in the medium-term wasclear and valid, perhaps more attention may have been given to immediate outcomes in reducing poverty.

o The Bank needs to be sensitive to the politcal pendulum wDhen designing proects wfith significantlegislative components. Delays in passage of the Amendment to Article 192 of the Constitution and of theBankruptcy reform law points to the need for greater analysis of political factors. Perhaps greaterassessment of the political landscape during Loan preparation and analysis of the likelihood of passage foreach piece of legislation would be helpful.

9. Parlner Comnmesnts

(a) Borrower/implementing agency:9.1? Partner Comments - Centaral Bank of iBrazff

(See Annex 9 for the original in Portuguese)

EvaDuadon of the First Pirogrammatic Loan from llBlllD to Brazil fofr the Structural Adjustment of theFinancial Sector (SAL).

Introduction: Role of the Central Bank in Brazil's Financial Sector Reform

93. The Central Bank is responsible for the oversight of the structural consolidation of reformns of theNational Financial System, accompanying and analyzing the process of transfer of social control, themerger or separation of social objectives, and authorizing new companies to function. In its task ofaccompanying and analyzing these processes, there has been an increasing degree of transparency in itsactions, opening the way for society to participate more actively in discussions and influence decisions.

94. Recent evaluations demonstrate that, in general terms, Brazil has achieved positive results in theformulation and implementation of public policy aimed at strengthening the security and efficiency of the

- 24 -

Brazilian financial sector, which includes consistent progress in increasing the efficiency of financialintermediation and access to financial services, improving banking system soundness and the bank safetynet, and reinforcing Brazil's capital markets. These actions make up part of the Brazilian government'sstrategy to overcome the banking problems which occurred between 1995-1997.

Contributions of the World Bank Loan in Support of Financial Sector Reform Objectives

95. Brazil's financial sector reform program has received broad support from internationalorganizations, principally the World Bank, whose partnership resulted in the granting of a first structuraladjustment loan for the financial sector, in the amount of US$400 million, as part of a potentially longerseries of programmatic financial sector support loans. The objective of the program with the World Bankconsists of actions supporting modemization in the following areas:

o financial intermediation and access to banking services;

o solvency and security of the financial system;

o payment system reform; and

o restructuring of public banks.

96. Regarding recent developments, it is worth mentioning efforts directed at the implementation of thenew payments system, the creation of a new information system to improve off-site supervision, theimprovement in the operations of the Credit Risk Center, the formulation of a bank classification system forsupervisory purposes and the introduction of new manuals for supervisors regarding procedures andpractices.

Sustainability of the Loan and Program and Bank / Borrower Performance

97. The loan, resulting from a process of extensive discussions with the World Bank, can be viewed asa success, and has efficiently achieved its objectives. The policy reform exchange with World Bank hasproven to be very advantageous. Results obtained recommend the continuation of this relationship and also,sustained financial resource inflows for the process of modemization of the National Financial System.

Lessons Learned

98. Among the factors responsible for the success of the operation with the IBRD, the technicalcapability of the staff involved, and the work undertaken in partnership developed by under the efficientcoordination of the World Bank, deserve to be mentioned. This integration allowed the channeling ofdiscussions and actions to specific objectives, directly linked to the achievement of expected loan results /outputs.

99. To summarize, the loan for the structural adjustment of the financial sector was fully justified andextremely useful in helping to prepare the Central Bank to confront the challenges presented by theadvances in information and communications technology, as well as the globalization of financial markets.

9.2 Partner Comments - CVM (Comissdo de Valores Mobilitrios do Brasil)

(See Annex 10 for the original in Portuguese)

- 25 -

Evaluation of the First Programunmtic Lozn from IEE1lD to MrazlE for the Snuctural A nusmennt of teIeFinancial Sector (SAL)

Role of the CVM in Brazil's Financial Sector Reform

100. To better execute its responsibilities, the Brazilian Govemrnent is implementing a financial sectorreform program that benefits from the support of international financial organizations, notably the WorldBank, whose partnership resulted in the granting of a first structural adjustment loan for this sector, in theamount of US$400 million.

101. In this context, the Comissao de Valores Mobiliarios - CVM (securities commission) had arelevant role, as the governmental agency responsible for regulating and inspecting the securities market.CVM seeks through its actions, inter alia, to ensure the transparency and fidelity of information disclosedto the market, as well as in the listing and distribution of securities, and to undertake rigorous investigationsof possible illicit acts, such as market manipulation, abuse of power by controllers, or the improper use ofinsider information.

102. However, in Brazil, the securities market has not reached the level of maturity of its equivalents inmore developed economies. As a consequence, there is a need to adopt measures that not only stimulate thedemand for financial assets negotiated in the market, but that also develop an efficient regulatory structure,whose focus is based on, principally, the disclosure of better quality infortnation, as well as markettransparency.

Recent Advances in Brazil's Capital Markets

103. It is worth mentioning that, recently, some advances have taken place in Brazil's capital markets,through the new Laws 10303/01 and 10411/02, and Decree 3295/01, which amended Laws 6385/76 and6404/76, which govern, respectively, the securities markets and joint stock corporations. Such norms,which make up part of the policy of stimulating Brazil's securities markets, seek to institutionallystrengthen CVM, induce public companies to adopt good corporate governance practices and strengthenand adjust defmitions of crimes against capital markets and establish tougher penalties for illicit behavior.

104. For this to occur, the principal laws which govern the securities market, Laws 6385/76 and6404/76, were amended and replaced by Laws 10303/01 and 10411/02, and Decree 3295/01. With thepolicy objective of promoting securities markets, these legislations introduced various modifications aimedat the adoption of good corporate governance practices and the strengthening of the regulatory agency.Most significant among these modifications are:

a Protection for minority shareholders;

o Enlargement of the definition of crimes against capital markets and establishment of rigorouspenalties for misconduct such as insider trading, manipulation of the market and irregular professionalpractices.

o Strengthening of the regulatory body, including transformation of CVM into a regulatory agencywith administrative independence and enlargement of its regulatory responsibilities.

105. With society showing interest in the implementation of measures regarding corporate governance,in December 2000, the Sao Paulo Stock Exchange (BOVESPA) created the Novo Mercado, a section with

- 26 -

listing requirements that incorporate the best practices of social governance and full disclosure rules.Companies that wish to register in this section should voluntarily commit themselves to fulfilling certainrequirements, stricter than the current Brazilian legislation. This segment of the market was modeled using,as a base, the concept that the value and liquidity of shares are positively related to the rights given toshareholders.

106. With the objective of strengthening the initiative promoted by BOVESPA, CMN, throughResolution 2829/01, increased the investment limits of Pension Fund assets in securities issued bycompanies observing the rules of the Novo Mercado.

Role of World Bank Programmatic Support

107. In this adjustment process, the World Bank's participation should be noted, as it has madeavailable access to knowledge of better practices adopted by capital markets of other countries,contributing decisively to the achievement of proposed objectives.

108. The results already obtained recommend not only the continuance of this relationship, but theimprovement of it as well, and the creation of other mechanisms which can secure the placement of a highervolume of financial resources for the strengthening of Brazil's securities markets.

(b) Cofinanciers

(c) Other partners (NGOs/private sector).

10. Additional Information

109. Relevant supplementary information is incorporated in the Annexes to this document. Seeparticularly additional Annex 8 which has the matrix of policy actions for this operation together with anupdate on the status of progranimatic components.

ENDNOTES

Project Appraisal Document, Central Bank Modernization Technical Assistance Project, October 23, 1997,Report No. 16867-BR; and Mid-Term Review (Loan 4245-BR), March 7, 2001.

The decision to not proceed was also due to substantive concerns on public versus private sector roles and amismatch of maturities of the envisaged World Bank loan. See Report of the President, Proposed Banking ReformSpecial Sector Adjustment Loan, November 30, 1998, Report No. P-7278-BR. DraftT.

The second programmatic loan, PFSECAL-II, was approved in May 2002. See Report of the President, SecondProgrammatic Financial Sector Adjustment Loan, May 20, 2002, Report No. 24067-BR.

See Report of the President: First Programmatic Financial Sector Adjustment Loan, April 26, 2001, Report No.P7778-BR.

Programmatic and Emergency Adjustment Lending World Bank Guidelnes, Operations Policy and Strategy

- 27 -

Group, September 29, 1998; and OD 8.60, Operational Memorandum: Guidelines for Programmatic AdjustmentLoans / Credits, Operations Policy and Strategy Group, February 11, 2000.

6Project Appraisal Document: 'Brazil - Financial Sector Technical Assistance Loan Project', Report No. 22603,August 2001. World Bank.

In order to emphasize the importance of a financial system law, the Bank had an oblique inclusion of this item inthe Policy Matrix for PFSECAL-I under the section dealing with the Securities Markets. Thus, the presentation ofa Central Bank capital markets law was included in the actions required for the Second loan. The achievement ofthis outcome would have required the passage of the constitutional arnendment of Article 192. However, thistangential inclusion may not have been appropriate, especially embedded in the section on capital markets. In viewof the legal obstacles presented by the Constitution, it should have been excluded from the frs Loan, but revisitedin subsequent loans as a free-standing component.

See Thorsten Beck (2000), 'Impediments to the Development and Efficiency of Financial Intermediation inBrazil', World Bank, Policy Research Working Paper No. 2382; also Central Bankr of Brazil, 'Juros e SpreadBancairio no Brasil', November 2000 and 2001.

These figures are based on a six-month moving average of the spreads.

-28 -

Annex 1. Key Performance Indicators/Log Frame Matrix

As the project was an adjustment operation, it did not have a log matrix or dedicated resourcesfor specific procured contracts. Nevertheless below are discussions of the status of indicators of outcome/ impact included in the Report of the President. Values for these indicators have been tracked, before,during and after the project.

One lesson to emerge from the review of the status of indicators below is that we have to be verycareful to recognize that the trends in major macroeconomic or financial sector variables such asinterest rates, bank credit, or financial access, are influenced by a number offactors, many exogenous.Among the factors, the Bank adjustment operation, especially in a large country, can only be a verypartial explanatory variable for the observed outcome. As such it is difficult to give the loan credit forgood outcomes or to hold the program responsible for poor outcomes.

Outcome/Impact Indicators

Indicator Projected in SAR/PAD ActualULatest EstimateEnd of Projectl

Not applicable

Output Indicators:

Indicator Projected in SARIPAD Actual/LatestEstimate

Not applicable

-29 -

¢Rmcased IE ½C necy M R½llmebSi gh gmcE pi sS:05m o Aces

Annaes Flgure AL I: ren& in 1angerese 2Angev

40 74 - - Selic/Overnight

35 1 TR/Reference rate

30 - (administered)

25 - . . . TJLP/Long terrn interestrate (adminmstered)

15 20_ _ _ _ _ Source: Central Bank of Brazil1010 ------ a-° -_0000fu

0)hn Apr Jul Oct Jnn Apr Jul Oct Jan Apr Jul Oct1999 200D 2CDI

Interest rates, which had declined steadily from 1999 to early 2001, then exhibited someincrease from the first to third quarters of 2001. But this is due primarily to the softening ofinternational demand as the result of a global slowdown, coupled with events in Argentina and ininternational capital markets which led to exchange rate depreciation and required a tightening ofmonetary policy to contain the inflationary pressure resultingfrom the depreciation. A domestic energycrisis with electricity rationing constrained economic activity and also contributed to the fiscaltightening.

Anaers IFige A2.2: Trends i$n a n iere8 leage rSpea&

70% TMM& e 'resds m Seg (299@2fDlI)70 ANote: Spread calculated as

the difference betweenlending and finding rates.

60-Source: Central Bank ofBrazil

40

30 -Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul OctW999 20012 2001

Behavior in spreads has tended to parallel behavior of base interest rates and periods ofincreasing interest rates have not beenfavorablefor the reduction of spreads, as a comparison of the twoabove Figures Al.1 and Al.2 suggests.

-30 -

Annex Figure A .3: Trends in Credit as a % of GDP

Brazil: Total crediVGDP - % (Jun 2000 - Dec 2001)30

Note: Total Credit consists ofearmarked and non-earmarked

29 - funds, leasing operations and

public sector funds.

28 - // \ Source: Central Bank of Brazil

27 1/

26 i

25Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec

2000 2001

There has been relatively little major trend movement in the ratio of credit to GDP in the lasttwo years, as shown in the figure above. The overall ratio has fluctuated between 26 and 30 percent. Adrop of around 3 percentage points in the first quarter of 2001 recovered somewhat in the followingyearbut has been unable to achieve the upward trend observed from 2000 to 2001. A key reason again hasbeen credit tightening due to macroeconomic conditions.

Annex Table A 1. Exten ofAccess to Bankin Services in - Op FaN; of -, Total'No. of Total No-.Of Municip. wlt Municip., Total No. of Muicidp.,wi'

Mqnicipalities Brancbes PABs. - Branch wJPAB and'no PAAs - no Services (*)

End 1999 5,626 -16,189 6,614 . 1,403 189 na 19-Bran .End 1999 5,626 16 189 6,614 1,403 189 n/a 1 679

End 2000 5,636 16,396 6,562 1,390 155 582 1,659End 2001 5,654 16,841 7,318 1,394 135 619 1,681

Source: Central Bank of Brazil.PAB - Posto de Atendcnento Bancirio; PAA - Posto de Atendimento Avanoado.

As the table above indicates, the number of bank branches in Brazil has increased over 1999 to2001 by almost 800 orfive percent. The number of municipalities with I branch has declined - and thisdespite some increase in the total number of municipalities. There is a small increase of municipalitieswith no service (2 municipalities) but this could reflect the increase in total numbers of municipalites (by28). Meanwhile, the number of service outposts has clearly increased.

- 31 -

lBDn g Systeim ounnnimdmess amd te §SfeVy Net:

A bsen ce of Ban hing C¢ises:

In 2002, a year after the project, private banks were very profitable and no banking crises have

occurred despite macroeconomic fragility. Measures of capital adequacy improved for the system as a

whole, reflecting however large scale recapitalization offederal banks in June 2001.

Aanosr Table A1.2. 1'zuigs ll&m Nag Syseei - i ecen ]ncnsoz?s (lo) i ec 20N0 -})ec 200!1. All Banks 2. Top Five Federal Banks 3. Top Five Pnvate Banks

ll3ac-O1 Jt2r-nO Der-, D=ec-On ;OX111ec *4C De=-O1 Jt-ol 1I2CA4

Capital AdequacyEquity/Assets 92 90 8. 67 70 6 116 107 11

Equity /Loans 31 0 29 7 27 25 5 23 8 18 34 3 32 4 34

arnaings P rofitabilityReturs on Assets 2.9 -1 8 1.( I 1 -42 0 53 -49 4

RetumnstoEquity 318 -205 15. 17.2 -601 11.1 457 -461 35

Loan Loss Provisions /Assets 2 0 1 9 2 1.9 2 1 21 2 5 2 4 2

GrowtDi (year on year)Assets 13 4 9 8 11 4 6 -2 3 9 1 25-3 42 1 31 1

Loans 54 137 10 -216 -159 -2. 307 620 34

Net Income 134.2 -184 8 -25 ' 68.2 -839 7 -46 65 8 -390.3 33.2

Note Poor profitability figures for June 2001 have been substantially affected by losses at two institutions in that quarter; Caixa

Econ6mica Federal and Santander Brasil.Source Central Bank of Brazil

Effecfive BanA Failue Resoguggon:

There have been no major bank failures during this period and hence no opportunity to test the

effectiveness of bank failure resolution. However, proposed changes in the legislation for bank failure

resolution, although at an advanced stage of drafting and discussion, have yet to be introduced. A key

reason for this is that hopedfor legislation on Central Bank independence is delayed, and in its absence,

the scope of changes which can be proposedfor bankfailure resolution is limited. Given that the passage

of a law to increase Central Bank independence is still considered likely, the present approach of trying

to wait for its passage before presenting final proposals for the adoption of changes in the present bank

failure resolution rules is considered an appropriate one and consistent with the agreed policy direction.

Paynerags $ysten - Centrag BanI Losses Siopped:

There have been no losses to the Central Bank due to payments failures since the new real time

gross settlement system was put in place in April 2002.

$ec&MZiges Markets: [ncreased aorfolio Ives9meng in BaeiZOg Secorldies

During the period under review, both market capitalization and the number of listed companies

declined. However, this is not a reflection on project performance, but again a reflection on broader

macroeconomic and financial sector forces, including for example market turmoil in the US and Latin

America following the events of September 11, 2001, and later, the political uncertainty faced by Brazil's

markets in the run-up to national elections. Once again the lesson to learn is that indicators may be

affected by severalfactors outside the Bank project.

- 32 -

It is encouraging however that with regard to an improvement in governance, which was the coreproject condition, the number of companies listed as Level One good Governance companies grew to 19by end 2001. Also, the BOVESPA exchange began to maintain an index of the good governancecompanies, which has performned somewhat better than the market index as a whole.

Annex Table Al.3: Market capitalization /No of listed companies End 2000 - October 2002Date No. of companies Market Capitalization Market Capitalization

(R$ billion) (US$ billion)End 2000 459 R$440.9 US$225.5End 2001 428 R$430.3 US$185.4

Annex Table A 1.4: No of conpanies listed on Levels I and 2 of the Novo MercadoNo. of companies

End 2001Novo Mercado 0kevel I Corporate Govemance 19Level 2 Corporate Govemance 1

Annex Figure A1.4: Stock Market Indices - allfirms and Good Governancefirms

Brazil: Market indeces (2001)-IBOVESPA & IGC -

1,200

1,100 IGC

1,000 m __1,000 - - - IBOVESPA

900 s /

800 v o IGC - Special Corporate Governance700 - ^ Stock Index

700-IBOVESPA - Bovespa Index

600-

500 . Comparative IGC x IBOVESPAJun Jun Jul Aug Sep Oct Nov Doc Base 1,000 = 06/25/200125

2001 Source Bovespa

- 33 -

Anne, 2. Plroject Costs and FEnnnc!ng

The program was an adjustment operation for budgetary and balance ofpaeyments support. Assuch, project costs andfinancing sources were not defined as under investment loans, either by

component or by procurement arrangements.

It can be mentioned nevertheless that the project formed a part of the externalfinancing needs of

Brazil in 2001, which included a current account deficit of US$23.2 billion and medium- and long-term

debt amortizations of US$36.5 billion. This was financed with foreign direct investment of US$22.5

billion and around US$5 billion from multilateral institutions, including US$1.2 billion from the Wlorld

Bank. The present project provided around a third of IBRD disbursements in 2001. In addition to

contributing to external financing requirements, the loan helped to meet the federal government's

financing requirements of about US$11.6 billion in 2001, and helped, modestly, to lengthen the term

structure ofpublic sector debt and thus reduce vulnerability.

Annez Table A 2.1: Brazig - Finanxcing RegAiremenres nsin 1L3A ]Roe (1S$ bidEion)

A999 2clua 2cua

Curvent Account Balance -25.3 -24.2 -23.2

1 & L Term DebtAmortization Needs 57.6 43.6 36.5

Financing:

1lw FDI 28.6 32.8 22.5

BRD Disbursements 0.8 1.7 1.2

Memo items:nt'l Reserves (end of }I'zevious Year) 34.4 23.9 31.5

Public Sector Borrowing ReqaiLrements 31.5 20.4 18.4

Public Sector Borrowing ReqEirements (o (DP 5.8 3.6 3.5Source: Central Bank of Brazil, IMF and World Bank

Annes 2a: Projece Costs by Capo/ents (on n $ ni9ilon egiov'aen)

Not applicable because this is an adjustment operation.

Project Component Aoraisal Estimate ActualLatest Estimate Percentage ofN f .raisal

I _ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

,No Ap3p4l-ae

-34 -

Annex 2b: Project Costs by Procurement Arrangements (In US$ million equivalent)

Not applicable because this is an adjustment operation.

Expenditure Procurement Method Procurement MethodCategories Appratisal Estimate _ Actual/Latest Estimate

ICB NCB Other NBF Total ICB NCB Other NBF Total

1 Works _2 G oods _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

3 Services _ = = = = = = =

4 Misc. _Total _

Annex 2c: Project Financing by Component (in US$ million equivalent)

Not applicable because this is an adjustment operation.

Component Appraisal Estimate Actual/Latest Estimate Per entage of A DraisalBank Govern- Co Bank Govem- Co Bank Govem- Co

=3an I ment financier ment financier ment financier

-35 -

Anmnem 3. Ecouonnmc Costs Rnid I

gfIDcnte clrneey, uidt nind buse yeex)

Standard calculations of economic or financial rates of return are not applicable because thiswas an adjustment operation and most of the outcomes were related to the adoption of policy reforms,the achievement of growth and maintenance of macroeconomic and financial stability. However, it isworth pointing out that notable benefits were achieved in terms of building a soundframeworkfor thefinancial sector and hence reducing systemic risks, and in building a sustained policy direction for thesector, to which the government remained committed. This was demonstrated by the follow up SecondProgrammatic Financial Sector Adjustment Loan. A summary of the current statls of achievement ofprogrammatic actions is described in the Matrix in Annex 8, which includes comments on the currentstatus of achievement ofprogrammatic actions.

Present Value of FlowsEconomic Analysis Financi Analysis

Appraisal Latest Estimates Appraisal Latest EstimatesBenefits _ . _Costs_ __ _j _ _ __

Net BenefitsIRR/NPV

-36 -

Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation10/07 - 10/19/00 4 1 Team Leader (Lead Operations S S

Officer), 2 Lead FinancialEconomists, I Lead Economist

11/25 - 12/15/00 3 1 Team Leader, I Lead S SEconomist, I Bank Supervisor

Appraisal/Negotiation1/20 - 2/2/01 5 1 Team Leader, I Sr. S S

Regional Financial SectorAdvisor, I Lead FinancialEconomist, I FinancialEconomist and I BankSupervisor

3/26 - 3/31/01 1 1 Team Leader S S

Supervision11/5/2001 - 5 See note (*). I Team Leader S S11/14/2001 / Sector Manager, 2 Banking

Supervisors, 2 FinancialEconomists.

3/4/2002 - 3 See note (*). ITeam Leader / S S3/13/2002 Lead Financial Economist, I

Sector Manager, 1 BankingSupervisor.

ICR8/3 - 8/10/02 1 1 Consultant S S

*Preparation for PFSECAL-2. Given that PFSECAL-I was a single tranche programmatic loan, there was nomission travel for supervision. However, program supervision was included under the preparation of the follow upProgrammatic Loan. Resource use for this purpose is not accounted for under this project.

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 35 220.3Appraisal/Negotiation 50 310.2Supervision 8 40.01CR 8.5 39.5Total 101.5 610.0

- 37 -

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

?Macro policies O H O SU O M O N O NA?Sector Policies O H O SU O M ON O NA

O Physical O H OSUOM O N O NA

? Financial OH OSUOM O N O NAs Institutional Development 0 H O SU O M 0 N 0 NA

O Environmental O H OSUOM 0 N 0 NA

SocialS ia Poverty Reductioni 0 H OSUOM O N ( NA

O Gender OH OSUOM O N (D NAF Other (Please specify) O H OSUQM O N O NAExpansion ofAccess to Financial Services

? Private sector development 0 H O SU 0 M 0 N 0 NAX Publhc sector management 0 H O SU O M 0 N 0 NALiOther (Please specify) O H OSUOM O N O NA

-38 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

0 Lending OHS OS OU OHUM Supervision OHS OS OU O HUER Overall OHS OS O U O HU

6.2 Borrowerperformance Rating

2 Preparation OHS OS OU O HUF Government implementation performance OHS O S 0 U 0 HUX Implementation agency performance OHS OS O U O HUZ Overall *HS OS O U O HU

Borrower dialogue and cooperation were excellent throughout. Borrower performance and commitmentto the overallfinancial sector program is clearly revealed in the swiftfollow up operation; the SecondProgrammatic Financial Sector Adjustment loan to Brazil.

-39 -

Aiumeu 7. IList ofS nppoutiEg lDorncemots

Central Bank of Brazil, 'Juros e Spread Bancirio no Brasil', November 2000 and 2001.

Concept Paper: 'Brazil - Access to Financial Services', January 24, 2002. World Bank.

Mid-Tenn Review: 'Central Bank Modernization Technical Assistance Project' (Loan 4245-BR),March 7,2001. World Bank.

Operational Directive 8.60, Operational Memorandum: Guidelines for Programmatic AdjustnentLoans / Credits, Operations Policy and Strategy Group, February 11, 2000. World Bank.

Report of the President on a Proposed Banking Reforin Special Sector Adjustnent Loan', Report No.P-7278-BR, November 30, 1998. World Bank.

Report of the President: 'Proposed First Programmatic Financial Sector Adjustment Loan', Report No.P-7448-BR, April 26, 2001. World Bank.

Report of the President: 'Proposed Second Programmatic Financial Sector Adjustnent Loan', ReportNo. P-24067-BR, May 20, 2002. World Bank.

Programmatic and Emergency Adjustnent Lending: World Bank Guidelines, Operations Policy andStrategy Group, September 29, 1998. World Bank.

Project Appraisal Document: 'Central Bank Modernization Technical Assistance Project', Report No.16867-BR, October 23, 1997. World Bank.

Project Appraisal Docurnent: 'Brazil - Financial Sector Technical Assistance Loan Project', ReportNo. 22603, August 2001. World Bank

-40 -

Additional Annex 8.Ma trix of Policy Actions

The last column here on the Status at the time of ICR has been inserted into the Matrix of

Programmatic Actions for PFSECAL-I in order to illustrate the status of the program as a whole at the timeofpreparation of the ICR As the column indicates, and as borne out by the Second Programmatic FinancialSector Adjustment Loan, progress with the program as a whole was highly satisfactory, leading to a rapid

follow up Programmatic Loan in June 2002. Since then, uncertainties have been introduced in terns of apotential third operation due to the change of government in 2002, and the need to reaffirm sectoral policydirection with the new team.

Actions Completed 1 Indicative Actions I Indicative Actions Monitoring Indicators of Program Program Goals Statusattime ofICRExpected by 2' Loan Expected by 3rd Loan Ountuts and Outcomes

2 Loan i 3' Loan1. Intermediation Efficiency and Access to Financial Services

A. Efficiency in Intermediation

* Major progress * Risk Center system * AuditofRiskCenter * Use of Risk * Approval of * Increase * Risk Center nowachieved in Central readiness to provide finctioning and action Center fine-tumng action efficiency and producing information onBank actions to resolve enhanced set of debto plan to remedy any information plan depth of smaller denomnation loansstructural causes of information shortcomings financial (R$5,000, below previousBrazil's record high * Cedula * New intermediation level of R$20,000), andintermediation spreads. * Publication of law * Publication of Legislation bankruptcy law provided by the includmng coops andPnncipal actions are for the Cedula de amendments to effectve effective pnvate sector microcredit entites

CrMditoBancdno Bankruptcy Law * Contract signed and> Risk Center * Issue of Study * Policy debate * Poverty work advanced for Riskstrengthened and Debto * Completion of completed reduction Center positive informationinformation improved study of fimncal through growth and access by financial

sectr txatin 0Policy institutions> Corntrat sector taxaton recommendations issued * Rtsk Center web page onenforcement on new financial sector Central Bank websitestrengthened taxation framework * Provisional law on

Cedula de CrJdito> Bankruptcy reform Bancorno deemed to havebeing considered by full legal statusCongress Competitions / consumer

protection and disclosurestrengthened through (i)Bank Consumer ProtectonCode and (ii) enhancedinterest rate, account andoverdraft disclosure* Two working papers onthe CPMF tax issued.* Submission to Congressof proposed elimination ofCPMF on stock market

tranisactions..Preparation ofmodiflcatuonof Law 4591 on theSistemna Financeira deHabitaqdo including, interalha, the tax treatment Ofsavings accounts.* Achievement of strongerdraft law with creditorsrights increased, flexiblesolutions for bankruptcy,lirmits to labor and taxclaims and reduced standstill

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _I_ p erio d

-41-

Actions Completed Insdicandve Actions |inticative Actions | oitring R ts | PrograGonisa Snt-sadvcECLR1 Epected by 2]d Expected by 3rd Wiogiog R Outputs outcor esLoan Loan 2nd l oan I 3rdLoan

B. Broadening ofAccess

o Innovative steps o Completion of o Agreed action plan o Strategy o Approval of D Broaden access to o Completion of reportstaken to reach strategy to further to further develop completed acton plans financial services for by four investigativeunder-served develop availability availability of o Strategy o Approval of under-served population committees on Access topopulabon. Pnncipal of financial services financial services to completed acton plans o Monitonng system microfinance by theactions are, to under-served under-served sectors maintained to measure Comunidade Soliddriao Accessibility of sectors o Agreed action plan progress beyond and formulation offinancial services o Completion of to widen the use of programmatic penod strategy to expandwidened strategy to widen the movable collateral to c Poverty reduction financial services to- Cooperative services use of movable mobilize credit through increased access inderserved.deepened collateral to mobilize o Launching of new

credit inibatives for micrcreditby SEBRAEo Passage ofresolution

broadening access tofinancing by microcredrtsocieties (SCMs)o Auctionungofpostal

franchise for extension ofnetwork of provision offinancial services

o Introduction ofretail

sales of Treasury bondso Measures to expandhousing finance> Extension of Cedulainstrument to housingsector (Cedula doCr6ditoImobilirno)

> Separation ofconstruction companyand project assets, (patrim6nio de afeuta,ao)and creation of specialpurpose mutual funds forhousing loansecuntizaion (FGC)

Eased use of ahaenagdofiducidria for housing

-42 -

Acdtons Completed Indicative Actions Indicative Actions Monitoring Indicatorsof o Program Goaf Statusattime oflCRExpected by 2nd Expected by 3rd Loan Prga OP and Outcomes

Loan 2nd Loan 3rd Loan

I. Banking System Soundness and Safety NetA. Banking Regulatio and Supervision

* Quantum reforms * New off-site * Effectiveness of * Central Bank * Central Bank * Central Bank * Ensure soundness in the

achieved in urveillance system new off-site Reports Reports Reports operaton of both public and

modemizing and operational surveillance system. * Central * Central Bank * Central Bank nvate banks

strengthening * Enhanced Risk Effectiveness of the Bank Reports Reports Reports * Poverty impact through

supervisory methods, Center operational enhanced Risk cnsis prevention. System

capital adequacy * Introduction of Center completed end 2001

standards, asset Examination Manuals * Universal applcation representing huge advance

classification, * Introduction of ban of Examination in offsite surveillance

examination manuals, anng system Manuals capacity,

bank rating, Credit * Universal * RLsk Center extension

Risk Center and application of bank underway (see I I above)

streamlining of on- rating system * Manual Project near

and off-site completion (Aug 2002)

supervision, * Rating system

Pnncipal actions are- work advanced (July 2002)

> Consolidated * Law submitted to * Not submitted due to

supervision introduced ongress to better * Law effective * Record of Record of Law * Record ofLaw politcal opposition> Capital adequacy prtc suevsr submiussion effectiveness effectiveness However, enhancedstandards strengthenedprtcinorsir> Sound asset protectionforsemor

classification supervisors embedded mn

introduced proposed Central Bank law

> Majorsupervisory * Additonal regulatory

reorganzation completed refomis in areas ofaccounting with.

> Advanced > Marking-to-market of

contract secunties and separation of

implementation to booking of secunties for

develop examination trading holding, and

manuals available for trade

> Advanced > Mark-to market and

contracting to develop netting of denvatives,

bank rabng system clanfied hedge accounting,credit denvates and swapoperabons> Strengthened disclosureand intemal controls

-43 -

Actions Completed Indicative Acdons [ Indicative Acdons M '7toring oI torso ogram ProgrnmGoalsand StatusattimeofICR. Expected by 2nd Expected by 3rd Loan O Outcomesl_______ _ Loan 2r.d Loa3 r| 3rd Loan

B. Bank Resolutien and Deposit Insurancee Complex and far * Preparation of * New Law and new o Record of * Record of * Improve e Draft legislationreaclung review draft legislation and deposit msurance submission of effectiveness of efficlency of bank on bank failureprogram of bank exit new draft statutes for statutes effective Law and new Law and new exit process resolution underframework and role the deposit insurer, draft statutes statutes a Improve asset preparation byof deposit insurance and their submission recovery Central bankagreed and intiated for approval consultant

a FGC proposals forcbanges to its statutesrepared and submitted

_to the Central BankC ContingencyPlanng__

o Central Bank * Completion of a Blueprint updated and o Approval of a Bluepnnt * Strengthen a Bluepnnt developed,decision adopted to bluepnnt and tted bluepnnt updated capacity to prevent a submitted to the Centraldevelop contingency approval by the cnsis and to respond Bank, and approved byplanmng and authonties promptjly and the Central Bankintensive work effectively if it Director on May 2001program agreed and occursinitiatediLl. Payments and Securities Clearance and Settlement Systms

a Landmark reform * New Payments System * Satsfactory o Centrl Bank e Central Bank e Reduce systemic a New Payment Systemlaunched and parocularly RTGS, fully fimctioning of new reports reports nsk and Central expected to be launcheddemanding operational Payments System a Guidelines e Guidelmes Bank exposure, on Apnl 22, 2002.implementation * Guidelines for pnvate * Review of gurdelines issued updated increase overall Revised date supportedtimetable maintauned payment and securities and any shortcomings efficiency in cleanng by Bankers' AssociationEnabling legislation clearance finalized and corrected and settlement, and a Guidelines issued,passed issued ensure prudent including circulars on

management of nonutonng of reserveremaining nsks ounts, statues of

cleanng houses andsetlement of secunties onlCETIP (pnvate cleanng)

-44 -

Actions Indicative Indicative Actions Monitoring Indicators of Program Program Goals Status at time of ICR

Completed Actions Expected by 3rd Outputs and OutcomesExpected by 2nd Loan 2nd Loan 3rd Loan

LoanI

IV. Securities MarketsA. Corporate Governance* Submission to * Publication of revised * Review of * Record of * Corporate * Corporate * CVM Instruction NoCongress and partial Corporate Law effectiveness of new Corporate Law govemance govemance 358 issued on January 3,sanction of revised * Additional govemance ftrmework effectiveness * Review complete * Stimulate the 2002 which regulates andCorporate Law regulations to perfect * Additional regulations * Regulatbons * Regulations demand by local strengthens the disclosure

* Good govemance and consolidate to strengthen disclosure issued issued and foreign of secunties relatedguidelines issued by mmonty shareholder and transparency investors for matenal informationstock exchange and protection secunties issued by * CVM Instruction NoBNDESpar and Brazilian firms 361, issued on March 5,pnnciples incorporat * Broaden the 2002 on obligatory tenderin pension fund access to long term offers to minontyinvestment regulations finance, especially shareholders

for medium-size * SPC Resolution No Ienterpnses issued on disclosure of* Poverty reducton vottng of pension fundsthrough growth

B. Regulatory Framework and Enforcement

* Submission to * Publcation of revised * Review/ * Record of * Review completel * Develop an * Revisions to CVM lawCongress and partial CVM Law recommendations on CVM Law * Acceptance of effective regulatory passed and embodied insanction of legal * Bluepnnt for effectiveness of new effectiveness guiding pnnciples structure, with Law 1041 1 and Decreeamendments to consolidation of mutual CVM Law and * Blue pnnt and bluepnnt appropnate 3995enhance CVM's fund regulation and appropnate completed * Regulation issued disclosure and * Merger of mutual fundenforcement capacity pension fund regulation amendments proposed * Record of * Record of Law tansparency, for responsibilities underand establish * Submission to * Guiding pnnciples Law effectiveness secunties markets CVM achieved throughindependence of Congress of Cental agreed for establishmen submission modifications to CVMaccounting standards Bank/financial system of new pmfessional lawsetting law body for the settng of * Regulation issued* CVM regulations accounting standards requinng pension funds toissued to enhance * Mutual fund and mark to market theirinformation pension fund regulation secunties portfolios anddisclosure and consolidated classif-y secunties as heldinvestor protection * Publication of Central for tading or for matunty

* Agreement on Bank/financial system (Central Bank circularpnnciples of draft law 3086).Central * Central Bank/financialBank/financial system law split intosystem law separate regulatory

prOjects; issues relevant tocapital markets (mutualfund and pension fundconsolidation) to beachieved as detailed above

-45 -

Aionnll AEnnez 9.Co mmenmt IRele@vnd frninm flte CeOitrlR IBnnmE ( orriuee oniDnnE)

AvnlllEqo do IPrnlieno ZEmprir nno do IlIED no BirzEn zngrn A<us¢mmneim Estmorenf do SoelorMnannceLiro (SAIL)

Introducao: 0 Papel do Banco Central nas Reformas do Setor Financeiro do Brasil

1. Banco Central tem a responsabilidade de zelar pela viabilizasAo do processo de consolidaqao daestrutura do Sisterna Financeiro Nacional, por meio do acompanhamento e de analise do processo detransferencia de controle societArio, cisao, incoporapao e mudanca de objeto social, alem das autorizaq6espara funcionamento de novas empresas. Nessa tarefa de acompanhar e analisar esses processos, vemconferindo crescente grau de transparencia is suas aq6es, abrindo espaqo para que a sociedade possaparticipar mais ativamente das discuss6es e influenciar decis6es.

2. Avaliaq6es ja realizadas demonstram que, de fonna geral, o Brasil tem alcanqado resultadospositivos na formulacao e imnplementacao de politicas pubEicas objetivando a seguranca e a eficiencia dosetor financeiro brasileiro, no qual se incluem os principais progressos voltados para aumentar a eficienciana intermediac,o financeira e o acesso a servi,os financeiros, aperfeiroar a saude do sistema bancario e arede de prote,ao bancaria, assim como o refor9o do mercado de capitais brasileiro. Essas aq6es fazemparte da estrategia do governo brasileiro para ultrapassar os problernas bancarios ocomidos no periodo1995/1997.

Con tribuicoes do Emprestimo do Banco Mundial em Apoio aos Objetivos de Reform a do SetorFinanceiro

3. Programa de refonnas do setor financeiro que vem sendo implementado pelo Governo brasileirotem recebido ainplo apoio dos organismnos financeiros internacionais, principalmente do Banco Mundial,cuja parceria resultou na concessao do primeiro emprestimo pam ajuste do setor financeiro, no valor deUS$ 400 milhoes, sendo uma parte integrante de uma serie, potencialmente longa, de emprestimosprogramaticos de apoio ao setor financeiro. 0 objetivo do programa corn o Banco Mundial consiste emapoiar o processo de mudan9as voltado para modemizargo do setor financeiro, incluindo-se, dente outras,aq6es nas seguintes areas:

a) internediacao financeira e acesso a servicos bancarios;b) solvencia e seguranca do sistema financeiro;c) reforrna do sistemna de pagamentos; ed) reestruturacao de bancos publicos.

4. Relativarnente is ac,es desenvolvidas, vale destacar os esforsos direcionados para airnplementacao do novo sistema de pagamentos, a criagao de novo sisterna de infornnago para aperfei9oara supervisao a distancia, o aperfei9oarnento das operagdes da Central de Risco de Credito, a formul1ano desistema de classificacao de bancos para fins de supervisao e a introduqao de novos manuais deprocedimentos e rotinas para os supervisores.

Sustentabilidade do Emprestimo e do Programa e o Desempenho do Banco e do Devedor

5. 0 ernprestimo, resultado de largo processo de discussoes com o Banco Mundial, revestiu-se depleno exito, tendo, a nosso ver, alcancado os objetivos a que se destinava. 0 intercambio com o Banco

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Mundial tem se mostrado bastante proficuo, sendo que os resultados ja obtidos recomendam a continuidadedesse relacionamento e, consequentemente, novos' recursos financeiros destinados ao processo demodernizaqao do Sistema Financeiro Nacional.

Liqoes Aprendidas

6. Dentre os fatores responsaveis pelo axito da operacao com o BIRD merecem ser destacados, semduivida, a capacidade tecnica das pessoas envolvidas e o trabalho de parceria desenvolvido pelas partes soba eficiente coordenacao realizada pelo Banco Mundial. Essa integracao permitiu canalizar asdiscussoes/acoes para objetivos especificos e diretamente vinculados com os resultados esperados doemprestimo.

7. Em sintese, o emprestirno para ajuste estrutural do sistema financeiro foi plenamente justificado ede grande utilidade no sentido de ajudar a preparar o Banco Central para enfrentar os desafiosapresentados pelos avancos na tecnologia de informacao e de comunicacoes, bem como pela globalizaqcodos mercados financeiros.

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O Papel da CVM nas Reformas do Setor Financeiro do Brasil

1. 0 Govemo brasileizo, para melhor exercer suas atr-buiqdes, vem inmplementando um programa dereformas do setor financeiro que conta com o apoio de organismos financeiros intemacionais, notadarnentedo Banco Mundial, cuja parceria resultou na concessao do primeiro empr6stimo pam ajuste deste setor, novalor de US$ 400 milhoes.

2. Dentro desse contexto, a Comissao de Valores Mobiliarios - CVM desempenha umn relevantepapel, por ser a agencia governarental que tem a responsabilidade de regular e fiscalizar o mercado devalores mobiliirios. Para tanto, suas ac,es procuram, dentre outros objetivos, assegurar a transparencia e afidedignidade das infornagdes divulgadas ao mercado, bem como dos registros efetuados no ambito dosistema de distribuic,ao de valores mobiliarios, alem de pautar sua atuacao na rigorosa averigua9ao daocorrencia de possiveis ilicitos, dentre os quais podemos citar a manipulagcao de mercado, casos de abusode poder de controle e o uso indevido de informagao privilegiada.

3. Nota-se, todavia, cue o mercado de valores mobiliarios ainda nao atingiu, no Brasil, arepresentatividade alcancada pelos seus congeneres nas economias mais desenvolvidas. Em conseqiiencia,verifica-se a necessidade da adoceo de medidas que estimulem nao apenas a demanda pelos ativosfinanceiros nele negociados, mas tamb6m desenvolvam urna eficiente estrutura regulat6ria, cujo foco estejavoltado, principalmente, para a divulgaqio de informanoes de maior qualidade, bem como para atransparencia desse mercado.

Os Avancos Recentes nos Mercados de Capitais Brasileiros

4. A prop6sito, cabe destacar que, recenternente, foram observados alguns avancos no arnbito domercado de capitais brasileiro, em virtude da edigco das Leis n° 10.303/01 e n° 10.411/02 e do Decreto no3.295/01, que alterararn as Leis n° 6.385/76 e n° 6.404/76, que regem, respectivamente, o mercado devalores mobiliarios e as sociedades por a9aes. Tais normativos, que fazem parte da politica de estirnulo aomercado de valores mobilirios brasileiro, buscam fortalecer institucionalmente a CVM, induzindo ascompanhias abertas a adotarein boas priticas de governanga corporativa e ampliando e adequando atipificagao dos crimes contra os mercados de capitais, mediante o estabelecimento de penalidades maisrigorosas para as condutas ilicitas detectadas.

5. Para tanto, as principais leis que regem o mercado de valores mobiliarios, Leis 6385/76 e 6.404/76forarn alteradas pelas Leis n° 10.303/01 e 10.411/02, bem como pelo Decreto n° 3.295/01, que dentro dapolitica de estimulo do Mercado de Valores Mobiliarios, introduziram diversas modific aes, visando ofortalecimento do 6rgao regulador e a adogao de boas priticas de govemanga corporativa. Entre asprincipais modificacoes, aprovadas pelo Congresso Nacional ou editadas diretamente pela Presidencia daRepibhlica, podemos citar, como as mais significativas, as seguintes:

I protecao ao acionista minoritario;

E! ampliaq&o dos crinmes contra os mercados de capitais, antes nao adequadamnente tipificados,estabelecendo penalidades rigorosas para condutas como o uso de informacao privilegiada, manipulacao de

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mercado e exercicio irregular da profissao; e

O fortalecimento do orgao regulador, transformacao da CVM em um 6rgao regulador comindependencia administrativa e agencia, arnpliacao do seu leque de responsabilidades regulat6rias.

6. Ja demonstrando que a sociedade tinha interesse na implementacao de medidas relacionadas aGovernanca Corporativa, em dezembro de 2000, a Bolsa de Valores do Estado de Sao Paulo (BOVESPA)implantou o NOVO MERCADO, uma se,co com requisitos de inscricao que incorporam os melhoresprincipios de governanca societiria e regras de plena divulgacao. As empresas que desejam se registrarnessa se,co devem voluntariamente se comprometer a cumprir certos requisitos mais rigidos do que osvigentes nos termos da legislacao brasileira. Essa seco foi modelada com base no conceito de que o valor ea liquidez das acoes sao positivamente relacionadas aos direitos conferidos aos acionistas, a eficiencia nagarantia dos direitos dos investidores e a qualidade da infornacao fomecida. Os principais requisitos deinscricao da secao NOVO MERCADO sao: (1) uma acao/ um voto; (2) plenos direitos de inclusao dosacionistas minoritarios em negociag6es ou transacoes de venda da empresa; (3) oferta de cancelamento deinscricao a ser feita somente ao valor econ6mico; (4) uma camara de arbitragem para solucao decontroversias entre acionistas minoritarios e controladores; (5) float livre minimo de 25% do capital; e (6)conselho fiscal formado por uma maioria de membros externos (acionistas minoritarios).

7. Neste ensejo, objetivando estimular a iniciativa promovida pela BOVESPA, o Conselho MonetarioNacional, atraves da Resolucao 2.829/01, aumentou os limites de alocacao de ativos Fundos de Pensao emvalores mobiliarios emitidos por companhias que observam as regras do Novo Mercado.

O Papel do Apoio Programatico do Banco Mundial

8. Nesse processo de ajuste, merece destaque a participacao do Banco Mundial, na medida em que talorganismo tem viabilizado o acesso as melhores praticas adotadas pelo mercado de capitais de outrospaises, contribuindo, de forrna decisiva, para que os objetivos propostos sejam gradativamente alcancados.

9. Dessa forma, os resultados jA obtidos recomendam nao apenas a continuidade desserelacionamento, mas tambem o seu aprimoramento, e a criacao de outros mecanismos que possamassegurar a destinacao de um maior volume de recursos financeiros para o fortalecimento do mercado devalores mobiliarios brasileiro.

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IMAGING

Report No.: 25116Type: ICR