Banco Central do Brasil The Role of International Financial Conglomerates in Emerging Markets June/2005

Composition of the Brazilian Financial System – BFS (as % of total assets)

Composition of the Brazilian Financial System - BFS Overall reduction in the number of banks point to more concentration in the BFS Private banks (domestic and foreign) occupy the space left by the reduction in the number of government-owned institutions, as a result of privatization Foreign banks grab a greater share of the market in 2001, only to lose it to domestic banks in 2004

Capital adequacy

Capital adequacy Private banks maintain their Basel capital ratio at good levels (above 15%), well above the required capital of 11% No difference: Domestic X Foreign Government banks show considerable improvement in theirs (doubling from 8 to 16% in the period)

Evolution of Intermediation

Evolution of Intermediation Considerable reduction in the loan portfolio of government banks (portfolio restructured ) and good increase in the loan portfolio of private domestic banks Foreign banks also increased their credit portfolios, albeit less than domestic banks

Efficiency * ratio between administrative outlays (including staff-related costs) and the sum of the net income of financial intermediation and fees

Efficiency While government banks find difficulty in improving their efficiency, domestic private banks gradually improve theirs and foreign banks, inversely, see their efficiency deteriorating The administrative expenses of both private domestic and foreign banks increased in the period but, in the case of the former, this was more than compensated by a comparatively higher increase in revenues

Earnings

Earnings After a bad year in 2000, foreign banks recovered; the slight reduction in profitability from 2001 to 2004 being basically due to the appreciation of the Brazilian currency (Real) Remaining government institutions were restructured and significantly improved their earnings performance Domestic private banks confirm their good phase with a leap in profits from 2001 to 2004 (originating from higher earnings in both financial intermediation and services)

Some thoughts No performance differences among domestic private and international financial conglomerates; No financial innovation; Support from home-supervisor Lower concerns with capital adequacy; International conglomerates interest tend to be unstable: Market share depends on economic and political stability; Strategic presence for market survey; Strategy of speculative positions to arbitrage domestic gaps and fragilities; Domestic private and government long term committed (no options).

Contact BANCO CENTRAL DO BRASIL Directorate of Supervision E-mail: secre.difis@bcb.gov.br Phone: 55-61-414-2442 Fax: 55-61-321-4280