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

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

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

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

5. Inflation Targeting Regime Before After (1994:4 - 1999:2) (1996:1 - 1999:2 - shorter period) (1999:3 - 2002:2) Volatility - Coefficient of Variation* Inflation0.90.80.4 GDP Growth (seasonally adj.) 3.22.51.5 Interest Rate 0.40.20.1 Average (Annualized) Inflation10.35.87.1 GDP Growth (seasonally adj.) 2.02.02.4 Interest Rate 35.428.218.0 Inflationary Inertia (monthly data)* Inflation (t-1) - significant 0.60.2 * standard deviation/average, quarterly data **Data: 1995:08 - 2002:06 (equation also includes the exchange rate change in the previous 12 months and the unemployment rate)

6. Exchange Rate Pass-Through Estimation Model Administered Prices Free Prices IPCA Structural Model and Information regarding Administered Prices 25%12%16% VAR Model 20%8%14% Exchange Rate Pass-Through to Administered Prices, to Free Prices and to the IPCA (in 12 months) Real Plan

7. 0 1 2 3 4 5 6 7 8 9 Jan-00 Mar-00 May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 % p.a. Central Target Upper Limit Lower Limit Inflation Expectation 12-Month Ahead Expected Inflation and Inflation Target Inflation Expectations: Under Control