2. 1 Rio de Janeiro, May 2001 Banco Central do Brasil Payment Systems and Systemic Risk Reduction: The Brazilian Experience XXXVIII Meeting of Governors of Central Banks of the American Continent

3. 2 Overview: Monetary Policy in Brazil Towards a New Payments System Improving Prudential Standards I.II.III. Banco Central do Brasil

4. 3 I - Overview: Monetary Policy in Brazil Banco Central do Brasil

5. 4 FMonetary Policy in an Inflation Targeting Framework –July/1999: Implementation of new Monetary Regime –Floating exchange rate –Focus on the headline inflation rate (IPCA) –Declining inflation targets: 8% for 1999, 6% for 2000, 4% for 2001, 3.5% for 2002, with a  2% tolerance interval –Central Bank: operational independence –Central Bank: accountability and transparency Monetary Policy in Brazil

6. 5 Domestic Debt Management Policy Average Maturity - New Public Bonds Issues Average Maturity - Public Debt In Number of Months 26.5 26.6 27.0 27.3 29.028.9 29.0 29.3 29.0 29.3 29.8 29.9 31.6 32.2 JanMarMayJulSepNovJan 0001 9.2 16.6 19.1 24.0 30.8 29.0 24.2 23.3 24.0 26.7 28.7 28.9 41.7 45.5 JanMarMayJulSepNovJan 0001

7. 6 FStructural Reform Initiatives –New Payments System –Restructuring the Discount Window –New Prudential Standards –Lower intermediation spreads –Pension Funds reform –New Corporate and Bankruptcy Laws –Bovespa: “Neuer” Market Financial System and Capital Markets

8. 7 II - Towards a new Payments System Payments System

9. 8 FMain Concern: Reduce Systemic Risk –Currently: Central Bank carries all systemic riskCentral Bank carries all systemic risk No-existence of Clearings for critical paymentsNo-existence of Clearings for critical payments Payments System

10. 9 FFocus –Lower Central Bank credit risk –Higher Liquidity in the secondary market for government bonds –Foster competition in the financial sector –Enhance efficiency in payment instruments Payments System

11. 10 FCentral Bank’s role: To ensure an adequate design for the new Payments System –Main outcomes: Private risk transferred to private sector (clearings)Private risk transferred to private sector (clearings) A more efficient, modern and globally integrated financial systemA more efficient, modern and globally integrated financial system Central Bank operates RTGS (Real Time Gross Settlement)Central Bank operates RTGS (Real Time Gross Settlement) Central Bank refuses negative reserve accountsCentral Bank refuses negative reserve accounts Payments System

12. 11 FSchedule –Test Period: June to October/2001 –Transition Period: November to December/2001 –Full Implementation: January 2002 Payments System

13. 12 III - Improving Prudential Standards Prudential Standards

14. 13 FImprovement of Risk Control Policies to reduce systemic risks and short-term volatility –Central Bank initiatives aimed at granting transparent regulatory standards to the financial sector –New standards to ensure a minimum Adjusted Net Worth to limit the risk in credit, exchange rate, swap and interest rate operations Prudential Standards

15. 14 –Classification of credit operations (Credit Bureau) –Provision for non-performing loans –Interest rate and exchange rate risks accounted –Liquidity risk –Domestic and external consolidation of the balance sheet Prudential Standards