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                                                                          The World Bank

                                                                      FOR OFFICIAL USE ONLY
Public Disclosure Authorized

                                                                                                                     Report No: 25116-BR

                                                            IMPLEMENTATION COMPLETION REPORT


                                                                     LOAN (Loan No. 7053 - BR)

                                                             IN THE AMOUNT OF US$404.04 MILLION
Public Disclosure Authorized


                                                             THE FEDERATIVE REPUBLIC OF BRAZIL

                                                                                 FOR A

                                             FIRST PROGRAMMATIC FINANCIAL SECTOR ADJUSTMENT LOAN

                                                                           December 17, 2002
Public Disclosure Authorized

                               Brazil Country Management Unit
                               Finance, Private Sector and Infrastructure Department
                               Latin American and the Caribbean Region

                                 This document has a restricted distribution and may be used by recipients only in the performance of their
                               I official duties. Its contents may not otherwise be disclosed without World Bank authorization.
                                     CURRENCY EQUWVAL2NrTS
                               (Exchange Rate Effective Dec 15, 2002)
                                       Currency Unie = Rezl (R$"
                                              R$3.6 = US$ 1
                                                US$ I = R.Z3.5

                                             FISCAL YEAR
                                       january 1       Decenber    31
                               ABEREVIATIONS AND AC..CY1V'S

AAA        Atividades Analiticas e Consultivas              _        Analytic xid Advisory Acfivities
BNDES      Banco Nacional dc Desenvolvunento Econ6rico e Social      Nattor- -3znkfor Economic and Social
BNDESpar   BNDES Partcipa$oes                                          National Bank for Economic and Social
                                                                       Devclopnmnt - 3quity Branch
BOVESPA    Bolsa de Valores de Sao Paulo                               Stockc Exchange of BraLil - Sao Paulo
CAIXA      Caixa Econ6mica Federal                                    tNational infrastructurc/H{ousing Bank
CAMELS     Sistema de Ratins Bancanos                                 lBank Rating System
CAS        Estrat6gia de Assistencia para o Pais                       CouTntIy Assistance Strategy
CBTAL      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 Secunties
CMN        Conselho Monotano Nacional                        _         National Monetary Council
CPM!F      Contibui,ao Provis6ria sobre Movimenta,ao Finarceira iTemporary Tax on Financial Transactions
CVM        Comissao de Valores, Mobilianos do Brasil                   Brazi! Securities &Exchange Com=mission
FDI        Investimento Direto Estrangeiro                            |Foreign Direct Investment
FGC        Fundo Garantidor de Cr6dhtos                                Credit Insurance Fund
FSTAL      Segundo Emprestimo de Assistencia Tcnica         __|_       csnd Assistancc Loan
GCI        Inspec,o Global Consolidada                                |l1bal Consolidated Inspection
GDP        Produto Interno Bruto                                       Gross :'omestic Phduct
IBRD       0 Banco Internacional para Reconst-ug,co e                 lLnteoationel Bank for Reconstruction and
           Desenvolvimento                                         _I,zvclopmcnt
ICR        Relat6rio da Concluslo da Execu,cao                       JLzplementation Coin0letion Rep3rt
IMIF       Fundo Monetrio Internacional                              jinternatioial Monctary Fund
PFSECAL    Emprestimo PrograirAtco para Ajuste ao Setor Financiero jorTvnrac Fianrcial Seetor Adjustment Loan
PROES      Programa de incentiN o ARcduqAo do Setor Publico Estiual Reduction of State Level Partcipation in
           n a Atividade Bancana                                      zrBanin Activities
RTGS       Sistema de Transferencia de Reservas                      Rce-time Gross Settlement
SAL        Empr6stimo pam Ajtstamento Estrutural                     Structural Adjustrment Loan
SPC        Secretana de Previdencia Complementar                     Secretariai of Comyplementary Social Security
TA         Assistencia T6cnica                                       Tcchnical Assistance

                                    Vice President:          aic.w2 de Ferranti
                     Countr,' Manager/Director:             V.ned T-horuas
                       Secto - Manager/Director:            Semnaco Morntes-RNegreifDanny M. Leipziger
                     Task Team Leader of Loan:              stefazn Al'er
                     Task Team Leader of XCL1:              Aja!i 'Kunar
                    First Programatic Financial Sector Adjustment Loan


                                                                             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
ProjectID: P070640                                                    ProjectName: First Programatic Financial Sector
                                                                      Adjustment 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 and
                                                                                          Caribbean Region
        Sector/subsector: Banking (43%); Payment systems, securities
                          clearance & settlement (13%); General finance
                          sector (38%); General industry and trade sector (6%)

                                                                              Original               Revised/Actual
         PCD: 01/08/2001                                         Effective.                          06/22/2001
     Appraisal: 04/24/2002                                           MTR:
     Approval: 05/24/2001                                         Closing:                           03/31/2002

     Borrower/lmplementingAgency:        Federative Republic of Brazil/Banco Central do Brasil (Central Bank of Brazil)
                                         and Comissao de Valores Mobiliarios do Brasil (Brazilian Securities and
                                         Exchange Commission)

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 PrimaryAuthor:        Anjali Kumar; Manuel Lasaga

2. Principal Performance Ratings
(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly
Unlikely, HU=Highly Unsatisfactory, H=High, SU-=Substantial, M=Modest, N=-Negligible)
                          Outcome: S
InstitutionalDevelopment Impact: M
               Bank Performance:S
           Borrower Performance:HS

                                                  QAG (if available)               ICR
                                Quality at Entry: S                                S
                     Projectat 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 a
sernes of such sinnge tmrnobe opeimaones. leuce 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 aind
lessonns learnmed to dlate. Given that broad components of the overall program have been designed and
described in the context of the First operation, this present ICR will therefore represent not only the ICR of
the First Programmatic Financial Sector Adjustment Loan (PFSECAL-I) but also the foundational ICR for
the subsequent programmatic financial sector operations for Brazil within this program. At the time of
preparation 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 a
more comprehensive evaluation of programmatic progress to date.

3. Assesmnent of llDevelojpnmennt Objective anrd Deo2Sig, zind of QuDty at ZEl2ury
3.1 OriginalObjective:
2.     Economic Con text: Tle olbjecitve of the            lrst   irogram   nntic IFhnacmcal Sector Adsimemnt
Lo,an was to suppeut a prognmass of broad-based nFD oomnnprekenslve fDuDnmenta gnmgDDe sector0
refornsn embarked ulpon by tEne nutlhorites in DirnaL, to consolidte growoth wvith stabity and tDhe
reduction of poverty. The series of loans presented under the programmatic umbrella for the financial
sector are best viewed in the context of the overall economic context and the Bank's financial sector
dialogue with the Brazil govemment and its agencies in the year 2000. World Bank support was proposed
at a strategic juncture which was favorable to meaningful progress in fundamental medium term reform.

3.     Macroeconomsnc stabity, nDitEted with the RS3 illeal RlEIM, dram                 ilyrediced
                                                                                              D       filnDiton
and tius permntted a cDea;r focus oDn structural reorems. With the initiation of the Real plan, thel 2-month
consumer price inflation fell dramatically from over 2,477 percent per annum at end-1993 to less than 2
percent at end-1998. The disinflation process benefited initially from a favorable extemal environment.
This favorable external financing environment contrnbuted significantly to the success of the
exchange-rate-based anti-inflation program through 1998. Portfolio flows dominated total capital inflows
in the early stages and thus displayed high volatility, with a massive reversal in 1998 causing intemational
reserves 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 not
reversed by the currency devaluation in early-1999.

4.        ¶1Dne bold steps takein towards devaunation in early 21BP esunred thant mnacroecoinomi
sta2bilintion endulred and was codnsolidted despite te seve;re inimnanDclel !Tzir emRe tqhe enchlange
rate crisis. This resulted in considerable credibility gains for economic policy and policy makers, both at
home and abroad. After the 1999 devaluation, a new inflation targeting fiamework was adopted for
monetary policy and macroeconomic management. Inflation targets of 4.0 percent and 3.5 percent were
established for 2001 and 2002, respectively, which at the time of loan preparation were realistic. Lower
interest 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) program
was in place and Brazil had demonstrated an ability to consistently achieve and exceed fiscal targets. The
associated reduction in the level and volatility of interest rates created conditions and favorable
expectations for the deepening and broadening of financial intermediation, and the resumption of a focus on
growth and poverty reduction. GDP grew by about 4.5 percent in 2000, following an average of only 0.8
percent per year during 1998-99. The year 2000 was viewed by Bank staff as the beginning of a new
phase 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

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 process
since 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-owned
 private banks, and the growing presence of highly-rated international banks. ln addition, the unsound major
 private banks were already removed in the context of the 1995-96 wave of bank failures. The relative
 stability of the banking system permitted the loan to focus on such medium term banking system issues as
 the strengthening of supervision, the improvement in the system of failure resolution, deposit insurance and
 contingency planning.

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

 10.      sDnalow kternmeEnton nM       tne albm System waEno: connemagted by BianZVSa anp!tal2
 mnirkets. Despite relatively high ratios of domestic market capitalization of equity securities (US$ 230
billion 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 not
yet represent a significant atemative to banks as a source of finance for private enterprises. There was no
meaningful private market f.or long-term finance in Brazil. Aside from the long-term (subsidized) credit
granted by the main govemment's development bank (BNDES), saving and borrowing contracts were, and
are still of very short duration. A key reason identified for shallow capital marktets in Brazil was the poor
standard of corporate govenance, discouraging minority shareholders. Improving standards of corporate
govemance was hence a recognized priority area for financial system reform.

 11.     Status of FinancialSector Dialogue: 71le D3ZaMn wel P0osn0med to parSrezr Banfi
                                                      wan                                      se!ze
thne window of opportunty foir te accelertionm and c esaHddIM oT ammdn etor reffb=2 dne Xo LZ
acdve daogue onm Mmacia recoir mmetterm with the Brazilian authorities over the years preceding this
operation. 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 provided
resources for a major upgrading of bank regulation and bankcing supervision standards, and for the
undertaking 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 Special
Sector Adjustment Loan fo:r Banking Reform, but as pressures against the currency marklet quickly
subsided following the devaluation in January 1999, the Bank did not need to proceed with the loan (see
endnote). Nevertheless, the proposed Special Sector Loan's thematic core endured the need to take steps to
prevent banking crises. Analytic work on bank stress testing and crisis prevention, and the investigation of
appropriate designs for ensuring the adequacy of the banking system safety net, were incorporated into this
Program. Additionally, follovwing a high level mission in early 2000, extensive analytical financial sector
work was carried out on jointly identified priority reform areas leading to a series of FY00 targeted policy
notes, on the overall efficiency of financial intermediation, regulatory issues, bank safety net issues, rural
and housing finance, debt management and debt markets, as well as capital markets. Additionally, as part
of a multi-country Western Hemisphere Initiative on payments systems and securities clearance and
settlement. Issues concerning poverty and the financial secto;r were broached through parallel workc focused
on 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 progranmuatic
adjustment 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-.         ELbetweenn the Goverru      ent's overll reTrnm
pirogroun, nad the onlbset of Eses am sea tEtee wYnchb cmpirne=1 tlne D3Egn'ss progrrs The
Government's program was defined to include areas where the Bank was not a direct participant in policy
discussions, notably, fundamental financial system legislation including constitutional amendments to
regulate the financial sector, and reform of the federal banks. Et was considered that refonns in these areas
could take an unknown and possibly long time to accomplish, so that their incorporation in a time bound
prograxn would be difficult. Moreover, there could also be political sensitivity to suggestions of Bank
intervention in these areas which could in some circumstances be counterproductive. However, the Bank
undertook to broadly monitor the progress in the implementation of the Government's overall financial
sector 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 an
adverse bearing on domestic interest rates, growth, and fiscal perfonance; (ii) weakening consensus
underlying financial sector reforns; and (iii) institutional weaknesses. in view of turbulent financial market
trends since the end of 2001, the Bank's foresight in terms of risk factors was influential in terms of
averting 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 overall
intermediation were largely within the domain of the Central Bank, which had practical support from the
Bank in these areas through the CBTAL technical assistance loan, program issues dealing with securities
markets necessarily entailed other regulators, such as the CVM, Brazil's Securities Commission. A new
Technical Assistance (TA) Loan was therefore prepared to support the CVM, in parallel to programmatic
lending. The second Technical Assistance loan (FSTAL) was presented to the Bank's Board on September
4, 2001, around three months after the first programmatic loan, due to the need for govemment approval
procedures for investment loans. However this was well before the presentation of the Second
Programmatic Loan on Jure 2002. Meanwhile, program objectives were substantially covered by the
existing TA Loan (see endnote).'

3.2 Revised Objective:
19.     The loan objectives remained unchanged
3.3 OriginalComponents:
Gverall I1esign of the PFSIECATHL1

20.       The fnamciaD sector pro      mmatic loans to BrE3 attemnptd Xo spam al areas of te fimnancIl
system identfled by the govemmanent for its reform agendiaO. The areas covered had already been revealed
by jointly undertaken analytical and advisory work to be areas where major reforms were desirable. These
included 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 bank
safety net, the strengthening of capital markets primarily through improved governance, and protection to
the Central bank against payments systems risks, including failures, through the modernization and
strengthening of the payments system. As presented in the documentation for the First loan, significant
actions already taken over the past one to three years were acknowledged in the first loan, including the
initiation of major reform programs, such as the payments system reform. Items on the agenda which had a
possibility of being accomplished within a relatively short time frame, including some items of major
legislation such as the passage through Congress of the amendments to the Corporate and CVM laws, and

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

21.     One key area which PFSECAL-I did not address in its programmatic matrix was the area of
public sector banks, although the importance of reform in this area was acknowledged in the matrix of
overall sector strategy. It was argued that given the unpredictable pace of federal bank reform and the
political sensitivity of this area, its inclusion was not appropriate in the programmatic matrix. One
comment on this position is that sustained and substantial reform had already taken place in public banks
under the PROES program of the government, in the preceding three to five years, which included the
privatization 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 not
included 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, and
the Bank had strengthened its dialogue with the Central Bank to include detailed discussions on these
institutions. Public bank reform, both federal and private, was thus drawn into an expanded reform
program discussed during the time of the second loan.

22.     A second set of issues acknowledged in the overall reform matrix, but not included in the
programmatic matrix of PFSECAL-I concerned reforms in financial system legislation linked to the
possibility of passing an amendment to Article 192 of the 1988 Constitution that would permit several
laws to regulate the financial system, as opposed to the current version of the Constitution which states that
only one law would regulate all aspects of the financial system. The article also includes a number of
miscellaneous items among others a ceiling on domestic interest rates. The proposed amendment under
discussion would thus leave the agenda open as to the relevant pieces of legislation to regulate the financial
system, permitting considerable strengthening and deepening of the legal and regulatory framework for a
number of areas in the financial system. Both the Government and the Bank agreed that it was premature at
the time of the PFSECAL-I to predict the timing of the constitutional amendmnent. In view of the
significance 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 of
the proposed constitutional reform, through the Senate and through major house subcommittees, and as
such 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 as
such the distinction between an overall matrix of sectoral policy, and the programmatic matrix, was then

23.     With respect to the overall Program objectives, more emphasis could have been given to the
design of components that directly addressed the goal of poverty reduction. While the rationale for
linking the improvement in the financial system to poverty reduction in the medium-term was clear and
valid, perhaps more attention could have been given to immediate outcomes for reducing poverty. This
issue 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) intermediation
efficiency and access to financial services; (ii) banking system safety and soundness; (iii) payments system

reform and risk reduction; and (iv) deepening of securities markets. The strategic initiative in the area of
enhancing efficiency and access to financial services reflected the govemment's ovm concerns with high
bank spreads, and shallow and high cost financial intermediation, and also reflected jointly undertaken
economic work which identified priority reform areas (see endnote).' The banking system safety and the
payments and clearing systems components were in line wfita the Government's Iceen interest in inproving
supervision, strengthening regulations, and reducing fimancia' system risks. These were priority areas of the
loan, which were also directly supported by the first (Central Bamk) technical assistance loan in terms of
regulatory staff training, conlsultancy to develop prudential regulations, the credit rating system, a bank
rating system, and strengthering banking supervision. The acquisition of technology for the development of
new payments systems was also supported by the technic&F assistance loan and through its advice to Brazil
on the Western Hemisphere payments initiative the Bank vwas closely following the major payments systems
reforms which were underway. Governance issues in the development of capital markets had also been
identified as a priority area, in advisory work, and importnt legal reforms in this area were under way in
Brazil, through proposed modifications to the Companies law and Securities law; these formed the core of
the Securities Markets component. Comments on the design of ezch policy area and the components within
it 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-served
population to financial services. The issue of efficiency of financial intermediaticn is much broader than the
concept dealt with in the loan, which mainly addresses the problem of high intermediation costs in the
banking system, and particularly, high loan spreads which affected p-imarily consumer lending and a broad
segment of the business lending market.

26.       The goal of the efficiency in intermediation component was to reduce the cost of capital, encourage
bank lending, and as a consequence, improve economic activity. A series of studies by the Central Bank
had identified multiple factors affecting loan spreads, ranging from macroeconomic management and
volatility, the legal fiamework and within it the functioning of the judiciary, reserve requirements and
financial 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 credit
markets. These could not all be addressed in the proposed loan. In this regard the Loan therefore sought to
support significant incremental steps dealing mainly with initiatives to improve the legal system (through
better 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, financial
sector taxation). Because of limited flexibility in terms of fiscal measures and recognizing that another
Bank progranmnatic lending cperation dealing with fiscal policy was under preparation at the time, the
emphasis of PFSECAL-I was on reducing the incidence of default risk on bank lending spreads, which
represented the main factor explaining about 35 percent of the spread; followed by administrative expenses
with 22 percent; bank margins with 18 percent; indirect taxes with 14 percent; and direct taxes with 11

27.     The specific actions taken by the government in this area and acknowledged by the Bank among
actions already undertaken in support of the first programnnatic loan included: enhancing the quality and
coverage 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 under
the 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 reducing
restrictive 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 greater
participation of private bank and non-bank financial institutions) and action plans to further expand
financial services, including the use of movable collateral to mobilize credit. This was paralleled by the
launching 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 these
indicators is included in Annex I to the present document. The Central Bank had already been gathering
these 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 adequacy
standards, creation of a sound system of asset classification which supported more rigorous provisioning
rules, major organizational streamlining within the supervision department of the Central Bank, progress in
completing 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 the
role 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 to
cover 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

implementation in subsequent loans under the Program.

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

34.      The loan also gave recognition to reform momentum in the area of bank failure resolution
reflecting the Government's concerns about banking system soundness, particularly after the major bank
failures 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 of
extra-judicial liquidation of failed banks, which has proven to be cumbersome and time consuming. Under
Bank-financed technical assistance, a work program was initiated to amend the relevant legislation for bank
failure resolution, as well as enhance the role of the deposit insurznce fund (FCC). But more substantive
work in this area has been prevented by the deadlock posed by Article 192 of the Constitution. ln view of
this Constitutional restriction, this sub-component sought to identify the key issues that should be included
in any new legislation that would eventually be submitted to Congress once Article 192 of the Constitution
was 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 is
funded from premiums assessed on its members, and the fund is supposedly managed by the banks
themselves (although its by-laws are required to be approved by the National Monetary Council). The
Board of Directors is comprised of representatives from the larger banks. Article 192 of the Constitution
explicitly 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 to
increase its efficiency and reduce the cost of protection in the event of financial crises, through expanded
access to contingent lines of credit. Although the deposit insurance system in Brazil, through the FGC was
considered by the Bank to reflect better international practices at the time the PFSECAL-1 was prepared, a
number of issues needed to be addressed dealing with an enhanced role of FGC in a reformed bank
liquidation 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 introduction
of risk-based premiums and complementary monitoring powers.

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

IDeaigM of the Paymeants system Componmemt

38.     In the area of payments systems, Brazil had launched a landmark reform program, which was
aimed at reducing systemic risk associated with Central Bank exposure to loss in the settlement of
payments. Partly to cope with past high inflation, Brazil's payment system had achieved a high level of
technological 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

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

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.
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 large
 and influential term lending wholesale bank; as well as by pension funds and by the stock exchange. The
 outcome of this component of the Loan was envisioned to be higher investor demand for Brazilian
 securities, 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=s
 mmenniAmed uHnchanged as they were hased an aCtiOasS cEMELy MccOMpESed Piair ta 1OEaa I tlan
 of 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 introduce
 in an explicit manner some areas of reforn which had lirrited prominence in PFSECAL4. As flagged
 above, these included public bank reformn, certain areas of fundamental financial legislation involving
 constitutional amendments, as well as more direct poverty and access targeted interventions. The flexibility
 afforded by the programrnatic framework permitted the expansion and adaptafion of Icey components to
 follow 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 of
 the Loan objectives was highly relevant in terms of the Bankc's Country Assistance Strategy. As the first of
 three programmatic adjustment loans, the PFSECAL-" could only constitute the first phase in terms of
 inmmediate outcomes. A numbzr of the reforms supported by the Loan as well as the Program were already
 part of the Government's agenda prior to the design of tis Loan. The structuring of the Loan, within the
 overall goals of the Program to enhance economic growth, reduce poverty, and prevent fature financial
 system crises, was well balanced. Preparation of the Loan was done efficiently by competent and
 well-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 I7§ECAI-ll ay,
                                      ae                       w aclm n tum is n2 lnr com memn in am
series oT proamganisatic dusnkTemnt Eaoms tmat coerAse Cle I?ragrEmL Evaluation of the outcome for the
PFSECAL-I is judged in the context of the contribution of this loan to the yaasf fulfillment of the
Program objectives. The outcome is thus measured in increments, and in this case the evaluation refers to
whether the incremental contribution of this loan is judged to be satisfactory in the context of a Program
that expects to make further progress in the achievement of these objectives through the sequels to this
Loan. A successful rating of this Loan is thus based on the judgment that partial achievement of the
Program objectives, based on a critical mass of outcomes associated with this Loan, is consistent with a
satisfactory achievement of Program objectives in the medium-term, which in tun is conditional on the
successful 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 a
number of factors, including: (i) highly satisfactory marginal achieverment of loan objectives and on balance
until the present, satisfactory achievement of overall financial sector program objectives, as embodied in
both the program and policy matrices, and the government's Letter of Development Policy. At the time of
this ICR, the second Loan (PFSECAl-l[) has already been approved, substantially based on the successful
completion of actions envisaged at the time of formulation of the series of programmatic loans, which
fiuther supports the satisfactory evaluation of the PFSECAL-I. (ii) Successful outcomes on specific
program components. (iii) Expansion of ambit of the program and depth of dialogue with the government
on 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

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.

                                                     - 13 -
 50.      The government has begun taking a number of important steps to extend the frontier of financial
 services towards the under-served population. For instance, it has recently authorized banks to use
 locations other than bank oranches-such as post offices, supermarlcets, and lottery points-to make
 financial services available to population in remote and poorer areas. It has also eased restrictions to widen
 the 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 has
 been expanded under the recently approved PFSECAL-f.

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

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

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

O        TNe introduciojmn of several unew legd hnstrnnhens tCEnInC rove c¢ullratc eanTor¢emelnt amd
thusohelp to reduce defl&ut risk The development of the Cedula de Cr&iito Bancdrio and the
Alienaq o Fiduciaria should contribute to increased lending by commercial banks at lower spreads, which
will in turn induce higher economic growth, reduce poverty, and through better credit quality help prevent
financial crises in the future.
O        Submitt¢ing of nDew lmnnEkrptcy Law to Conngreos hDss enhanmcef Iae p3OSi1bly tat ha2
 Eandmark reform wi     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 eial
arrangementls betweenm bganks nnd postal offleas zs weall as fLcaL retears. By increasing access to basic
financial services these initiatives should support economic growth through greater efficiency in payments
for services by the under-served population and reduce poverty by offering an opportunity to increase
savings and thus wealth of the lower income strata.

 52.      One of the indicators of increased financial system efficiency was the reduction in inMteras raae
 spreads in the banking system. Until early 2001, the favorable macroeconomic environment of lower
interest rates and non-inflationary growth had contributed to the lowering of both rates and spreads. The
average spread on loans to businesses had bottomed in July 2001 at 20.6 percentage points down from 33.3
percentage points in December 2000, the corresponding spreads for consumer loans were 46.6 percentage
points down from 80.2 percentage points (see endnote). Towards the end of 2001, with increasing external
financial pressures, spreads began to widen, and the trend continued. However, these increases were in
response to measures the govemment was obliged to take, in an effort to tighten monetary policy in
response to the potentially inflationary impact of the currency depreciation. Although efforts to decrease
interest rates and spreads have clearly been less successful over the last months this can be ascribed largely
to 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, FeUnrelResolmsntffoa, Dsg        ffvce, a
                                        s            d fOP,0osff9            gd

58.       Strongly motivated by the disappointing experience with extra-judicial liquidation, the Central
Bank 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 such
as: (i) the reduction of the Central Bank role in the extra-judicial liquidation process and the increase of the
role of the private sector; (ii) the balance of rules and discretion in the corrective phases of dealing with
troubled 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) possible
changes to the design of the deposit insurance (e.g., the introduction of risk-based premia and
complementary monitoring powers).

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

60.      The Central Bank iritiated work to develop a blue print contingency plan-to ensure adequate
preparedness to deal with early stages of a financial crisis, should one unexpectedly arise. In developing a
contingency blueprint, the work program would find solutions to ensure: (i) minimization and adequate
management of risks of contagion and systemic illiquidity; (ii) inter-institutional coordination and effective
decision 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 runs
would be practiced from time to time to test the system and correct any shortfalls. However, to date work
on this component has not progressed beyond the preparation of an initial blueprint, largely due to
uncertainties 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 in
achieving the goal of reducing the likelihood of future crises irn the financial system, as well as contributing
to higher growth and poverty reduction in the medium-term. The reforms supported by this component
should result in improved performance of the banking system, create the right incentives to lend, and
motivate fiuther consolidation of the industry through the exit of weak banks. The principal oeom¢es in
this component included:

Q!l    INew asset quainty n ssTCnatQIn standlardos whJ1lY wiLl eflp ii irove t2Se
                                                           A                        ffnee o the
banming system through greates transparency i asset qraLaty            g Eenathrouzgh 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   -
 lmpllemeentfiom / )un      CT I?of ents §ylenm ComSone n

64.       Key outputs of the payment system component in PFSECAL-I included: (i) the reform of the legal
fiamework for the payments system. The new legal firmework clearly establishes the role of the Central
Bank in terms of oversight of the payments system. It was established by Provisional Law No 2008 in
December 1999. (ii) The reform also clarified the nature of interactions between the Central Bank and
private clearinghouses. Settlements of private clearinghouses would henceforth operate under the oversight
of the Central Bank, according to rules approved by the Central Bank. After the netting process, at the
clearing houses, the final stage of settlement will occur in all circumstances via the Central Bank, in the
new (RTGS) system. In the Second loan, risk management principles for private participants were
enunciated in regulations comprising a part of the new legal fiamework. (iii) A core output is the
installation and preparation for the launch of the central bank's new gross settlement system which would
reduce to zero the risk for the central bank since each transfer will occur only in case of a positive balance
on the reserve account to be debited. The new system was designed to be consistent with international best
practices. (iv) The first loan also prepared for the launch of a new settlement process for government
securities, 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 safety
and efficiency of settlement systems for other securities.

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

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

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

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

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

67.      The authorities have been pursuing reforms to introduce reforms in the corporate govemance
framework for listed companies in Brazil, to stimulate domestic securities markets, and also to strengthen
the legal and regulatory fiamework for securities markets and the market regulator. Amendments to the
Corporate Law and the Securities Markets Regulation Law received partial approval in Congress prior to
the presentation of PFSECAL-I (Draft Law 3115). Changes aimed at strengthening minority shareholder
rights through better 'tag along' rights in cases of ownership change (to protect the financial interests of
minority shareholders when listed companies withdraw from the stcck market and go private, and when
large acquisitions by controllirg shareholders take place); reducing the incidence of non-voting shares and
increasing the 'free float' of listed companies, fostering the issuance of voting shares; enhancing CVM
enforcement capacity; and raising accounting standards (by creating an independent professional body to
set 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 ofreturn:
        Not applicable

4.4 Financialrate of return:
        Not applicable
4.5 Institutionaldevelopment 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

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

71.      With respect to         ienncies fin ameunncigE !imtenseiU    , tne ILoamr was Lmtnn=memnnz im
tfiggernimg im-depth dfiaignne and anRmy&s a: the zzs%n FcaM2d te Innge opreads fin ca ene=fi lbsnnR
Eemdimg. As saCk, cnabuetiaa towards ins utfian-iaM devefsp n iemn Anren cnm 1be deeamned to lbe
mmdoart. While more analysis is needed in this complex area of financial intermediation, the Loan has
increased the awareness of policymakers as to the need for greater transparency of infonnation, right
incentives to lending, better control mechanisms to nmnage credit risk, and greater opening of the markets
to competition. (Gam nnee tlenrefoire the institntinE y: ' -         -n armgdleeadito fbe =ndoat.
50 B'iIDan IFactars AXiTetig          llmnleuentatmaa and       tn-aCma
5.1 Factorsoutside the control ofgovernment or implementing agency:
72.     lEntemn-l ac-tors were rela1iveny favorable over ube rn-flad CT the Tlrst lprraamnaat Loam,
tnaagln a detereiauteia inamne external elnvn-assmesnt Enn a nmteAnD im-DaCt aIDn the hiM ]2enatO    noT
the ssnamd nolan,   nimd inemnce te pragrgnm as a wiLnai.   This is best discussed in the context of an
evaluation of the second Loan, or in the context of the Program as a whole. As mentioned in the President's
Report for PFSECAL-1, macroeconomnic risks posed an important challenge to the successful outcome of
this Loan.

73.      Et sNOnfd 9aso be flngged taEt tlhe pEssnge oT laws, wfiC aDeeleda Cmguress!oamnl approvnl, were
alan lbeyouad the centraon tine governmnent. This was a key factor behind the inclusion of the passage of
the revised Corporate and CVM laws in the second part of the program. The need to seek appropriate
windows of opportunity for the presentation to Congress znd subsequent sponsorship and passage through
Congress of key legislation has also explained, for example, slow progress on the independent bill dealing
with accounting reform, delays in the approval of bankruptcy legislation - left to a possible third loan - and
the lack of approval to date of the constitutional amendment (Article 192) on key financial system
regulation. Non-submission to Congress of a bill to protect supervisors was largely due to the lack of an
opportune 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 streag
commfntmeanta the reaoirm pracess Am thne Tmnm:ac               sntar. With respect to the macroeconomic
environment, the government lYeld firm to its fiscal and monetary policies, despite the external pressures on
the cunrency and the weakening of the economy in 2C0i. Excellent macroeconomic management also
contributed to a favorable environment for reforms in the financial sector. A strong Govemment ownership
of the Program as well as this Loan, helped to assure smooth ihnplementation of many of the achievements
for which the Loan was approved.

75.     11 Me Govermueent's n-mease to te etemn-n          preassnures as weE as in denglE wItin tle internal
uacertnintes   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 responsibility
despite 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 Factorsgenerally 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 sustainabilityrating:
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

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   OT au¢
                                                                                        n R7off,%mMn
 series off Donas, aEso aSdds to tDe snusaIbMity of eanEc h½dvdual oann, as this is necessary in order to
 proceed to firther stages of the Program.

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

83.      Eoweveiw, risks a&dtuelld an te     lF'IECOAJI   ReA ¢rt te 2rFes iM2 aire stE re:azlvnt fCtonS
for t¢Se sustsEnahIlilty of tEne everE I?rogram. A favorable macroeconomic environment was certainly
helpful for the successful outcome of the first loan, and present turbulence in this environrnent due to both
external 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 will
help to ensure a favorable environrnent for protection against financial crises. lFinally, the commitment of
the new government which will take office from January 1, 2003, will be a major factor affecting the
sustainability of the programmatic framework, especially in areas (more emphasized in the Second
Programmatic Loan) such as public bank reform.

84.    Buldgetary rmqunremnemts off hn plonentieng agemceos couEd j
                                                                  ape uijpon t1e entennt to whIch
support ean be provided to the ezecutnsDg ageacies, tne (CentraZ Iannk anid he            through
                                                                                    9VEJB i
accompanying techDncal assistance, and hence reforn implementation in some components. Although not
a major factor affecting the sustainability of broad policy direction; this too is likely to be affected by the
overall macroeconomic environrnent.

6.2 Transition arrangement to regularoperations:
Not applicable

7. &Bsnk
       annd IBlorrower Peyorsnance

7.1 Lending:
85.     lln the indenflcation off the Loann tne    3Igak -'; - Aound     !ofBM2nntm    ce½ tllg the targets
haosed on the overall Program matrx, annd n        tDhe piro    innatic dengs off ¢te ograion. The Bank
was proactive in supporting a series of financial sector strengthening measures to address challenges of
financial 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 s such tDe iasue off suCT
                                                                         am                          ervisio
off the first loanm s not reDevanm, supervisonM off tEn pirennni a a wDhoLe continUedI closely a1eor the first
Loian wennt to the Boaird. Indeed the follow up Second loan, within a year of the first loan, was enabled by
the 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.

7.4 Preparation
88.     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 improve
governance and strengthen the capacity of the regulator. Both agencies maintained a very positive policy
dialogue with the Bank during Program design.

7.7 Overall Borrowerperformance:
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 for
financial sector reforms. The Government ownership of the Program was a determining factor in the highly
satisfactory implementation of reforms in the financial sector.
o     Early in-depth analysis by the Bank of financnal sectonr smues and vulnerabilites helped to speed
up loan design of the Program and preparation of the PFSECAL-I. Bank staff included numerous
financial sector experts who maintained a very productive dialogue with the Government. This work had
been initiated by the banking problems of 1995- 1996 and deepened by the multi-focused AAA undertaken
in the year preceding the loan, which helped to identify key issues that proved to be highly relevant for the
Brazilian experience.
o Accompanying technical assistance was a kiey element in building dialogue and also inn the
implementation of several areas of refoirm. Thus the first CBTAL contributed considerably to the bank
supervision component; the second TA loan helped to build rapport with the CVM and include securities
markets issues within the scope of the loan.
o The objective of poverty reduction, which was a goal of this Program, could have been
addressed more directly thiroughn specific policy reforms with more immediate impact. While the
rationale for linking the improvement in the financial system to poverty reduction in the medium-term was
clear 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 significant
legislative components. Delays in passage of the Amendment to Article 192 of the Constitution and of the
Bankruptcy reform law points to the need for greater analysis of political factors. Perhaps greater
assessment of the political landscape during Loan preparation and analysis of the likelihood of passage for
each 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 the
Financial 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 the
National Financial System, accompanying and analyzing the process of transfer of social control, the
merger or separation of social objectives, and authorizing new companies to function. In its task of
accompanying and analyzing these processes, there has been an increasing degree of transparency in its
actions, 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 the
formulation 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 financial
intermediation and access to financial services, improving banking   system soundness and the bank safety
net, and reinforcing Brazil's capital markets. These actions make    up part of the Brazilian government's
strategy to overcome the banking problems which occurred between     1995-1997.

Contributions of the World Bank Loan in Support ofFinancialSector Reform Objectives

95.      Brazil's financial sector reform program has received broad support from international
organizations, principally the World Bank, whose partnership resulted in the granting of a first structural
adjustment loan for the financial sector, in the amount of US$400 million, as part of a potentially longer
series of programmatic financial sector support loans. The objective of the program with the World Bank
consists 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 the
new payments system, the creation of a new information system to improve off-site supervision, the
improvement in the operations of the Credit Risk Center, the formulation of a bank classification system for
supervisory purposes and the introduction of new manuals for supervisors regarding procedures and

Sustainabilityof the Loan and Program and Bank / BorrowerPerformance

97.     The loan, resulting from a process of extensive discussions with the World Bank, can be viewed as
a success, and has efficiently achieved its objectives. The policy reform exchange with World Bank has
proven 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 technical
capability of the staff involved, and the work undertaken in partnership developed by under the efficient
coordination of the World Bank, deserve to be mentioned. This integration allowed the channeling of
discussions and actions to specific objectives, directly linked to the achievement of expected loan results /

99.     To summarize, the loan for the structural adjustment of the financial sector was fully justified and
extremely useful in helping to prepare the Central Bank to confront the challenges presented by the
advances 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 teIe
Financial Sector (SAL)

Role of the CVM in Brazil's FinancialSector Reform

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

101.     In this context, the Comissao de Valores Mobiliarios - CVM (securities commission) had a
relevant 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 disclosed
to the market, as well as in the listing and distribution of securities, and to undertake rigorous investigations
of possible illicit acts, such as market manipulation, abuse of power by controllers, or the improper use of
insider information.

102.     However, in Brazil, the securities market has not reached the level of maturity of its equivalents in
more developed economies. As a consequence, there is a need to adopt measures that not only stimulate the
demand 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 market

Recent Advances in Brazil's CapitalMarkets

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 and
6404/76, 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 institutionally
strengthen CVM, induce public companies to adopt good corporate governance practices and strengthen
and 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 and
6404/76, were amended and replaced by Laws 10303/01 and 10411/02, and Decree 3295/01. With the
policy objective of promoting securities markets, these legislations introduced various modifications aimed
at 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 rigorous
penalties for misconduct such as insider trading, manipulation of the market and irregular professional
o       Strengthening of the regulatory body, including transformation of CVM into a regulatory agency
with 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 certain
requirements, 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 to

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

Role of World Bank ProgrammaticSupport

107.     In this adjustment process, the World Bank's participation should be noted, as it has made
available 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 the
improvement of it as well, and the creation of other mechanisms which can secure the placement of a higher
volume 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. See
particularly additional Annex 8 which has the matrix of policy actions for this operation together with an
update on the status of progranimatic components.


 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 a
mismatch of maturities of the envisaged World Bank loan. See Report of the President, Proposed Banking Reform
Special 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, Second
Programmatic 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.

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

                                                   - 27 -
Group, September 29, 1998; and OD 8.60, Operational Memorandum: Guidelinesfor ProgrammaticAdjustment
Loans / Credits, Operations Policy and Strategy Group, February 11, 2000.

6ProjectAppraisal 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 in
the Policy Matrix for PFSECAL-I under the section dealing with the Securities Markets. Thus, the presentation of
a Central Bank capital markets law was included in the actions required for the Second loan. The achievement of
this outcome would have required the passage of the constitutional arnendment of Article 192. However, this
tangential inclusion may not have been appropriate, especially embedded in the section on capital markets. In view
of the legal obstacles presented by the Constitution, it should have been excluded from the frs Loan, but revisited
in subsequent loans as a free-standing component.

 See Thorsten Beck (2000), 'Impediments to the Development and Efficiency of Financial Intermediation in
Brazil', World Bank, Policy Research Working Paper No. 2382; also Central Bankr of Brazil, 'Juros e Spread
Bancairiono 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 resources
for specific procuredcontracts. Nevertheless below are discussionsof the status of indicatorsof 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 very
careful to recognize that the trends in major macroeconomic or financial sector variables such as
interest rates, bank credit, orfinancial 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 very
partial explanatory variablefor the observed outcome. As such it is difficult to give the loan credit for
good outcomes or to hold the program responsiblefor poor outcomes.

Outcome/Impact Indicators

                     Indicator          Projected in SAR/PAD      ActualULatest Estimate
                                        End of Projectl

                       Not applicable

Output Indicators:

                     Indicator          Projected in SARIPAD      Actual/LatestEstimate

                     Not applicable

                                                     -29 -
      ¢Rmcased IE                 gh gmcE pi sS:05m o Aces
                     ½C M R½llmebSi

Annaes FlgureAL             I: ren&in 1angerese2Angev

 40 74                                                              - - Selic/Overnight

 35 1                                                                    TR/Reference rate
 30 -                                                                    (administered)
 25 -                                                       .     . . TJLP/Long terrn interest
                                                                      rate (adminmstered)

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

      )hn Apr Jul Oct Jnn Apr Jul Oct Jan Apr Jul Oct
      1999            200D            2CDI

        Interest rates, which had declined steadily from 1999 to early 2001, then exhibited some
increase from the first to third quarters of 2001. But this is due primarily to the softening of
international demand as the result of a global slowdown, coupled with events in Argentina and in
international capital markets which led to exchange rate depreciation and required a tightening of
monetarypolicy to contain the inflationarypressure resultingfrom the depreciation. A domestic energy
crisis with electricity rationing constrained economic activity and also contributed to the fiscal
                       i$n n
Anaers IFigeA2.2: Trends a iere8leage                           rSpea&
      70%                               'resds
                                        TMM&     m     Seg e (299@2fDlI)
       70 ANote:                                                   Spread calculated as
                                                            the difference between
                                                            lending and finding rates.
                                                            Source: Central Bank of


 30 -
       Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
       W999           20012            2001

       Behavior in spreads has tended to parallel behavior of base interest rates and periods of
increasinginterestrates have not beenfavorablefor the reduction of spreads, as a comparison ofthe two
above FiguresAl.1 and Al.2 suggests.

                                                                  -30 -
Annex Figure A .3: Trends in Credit as a % of GDP
                Brazil: Total crediVGDP - % (Jun 2000 - Dec 2001)
                                                                     Note: Total Credit consists of
                                                                     earmarked and non-earmarked
 29 -                                                                funds, leasing operations and
                                                                     public sector funds.

 28 -                  //                    \                       Source: Central Bank of Brazil

 27 1/

 26                                              i

      Jun 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 last
two years, as shown in the figure above. The overall ratio hasfluctuated between 26 and 30 percent. A
drop ofaround 3 percentagepoints in the first quarterof 2001 recovered somewhat in the followingyear
but has been unable to achieve the upward trend observedfrom 2000 to 2001. A key reason again has
been credit tightening due to macroeconomic conditions.

Annex Table A 1.            Exten            ofAccess to Bankin Services in                      - Op    Fa
                    N; 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    1,659
End 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 increasedover 1999 to
2001 by almost 800 orfive percent. The number of municipalities with I branch has declined - and this
despite some increase in the total number of municipalities. There is a small increase of municipalities
with no service (2 municipalities) but this could reflect the increase in total numbers of municipalites(by
28). Meanwhile, the number ofservice outposts has clearly increased.

                                                                     - 31 -
lBDn g Systeim ounnnimdmess amd te §SfeVy Net:

A bsence 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 improvedfor the system as a
whole, reflecting however large scale recapitalizationoffederal 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 Adequacy
          Equity/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 Profitability
          Returs on Assets                            2.9        -1 8          1.(         I1      -42         0          53         -49        4
          RetumnstoEquity                            318        -205          15.         17.2    -601        11.1       457        -461       35
          Loan Loss Provisions /Assets                20          19           2           1.9      21         21         25          24        2
        GrowtDi (year on year)
          Assets                                     13 4          98         11           46      -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 FailueResoguggon:

          There have been no major bank failures during thisperiod 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
 reasonfor this is that hopedfor legislationon CentralBank independence is delayed, and in its absence,
 the scope ofchanges which can be proposedfor bankfailureresolution 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 presentingfinal proposalsfor the adoption of changes in the present bank
failure resolution rules is considered an appropriateone and consistent with the agreedpolicy direction.

                        BanI Losses Siopped:
Paynerags$ysten - Centrag

        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 capitalizationand the number of listed companies
declined. However, this is not a reflection on project performance, but again a reflection on broader
macroeconomic andfinancial sector forces, includingfor example market turmoil in the US and Latin
Americafollowing the events of September 11, 2001, and later, the political uncertaintyfaced 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 encouraginghowever that with regard to an improvement in governance, which was the core
project condition, the number of companies listed as Level One good Governance companies grew to 19
by end 2001. Also, the BOVESPA exchange began to maintain an index of the good governance
companies, which hasperformned somewhat better than the market index as a whole.

     Annex Table Al.3: Market capitalization /No of listed companies End 2000 - October 2002
         Date              No. of companies        Market Capitalization    Market Capitalization
                                                         (R$ billion)           (US$ billion)
       End 2000                   459                      R$440.9               US$225.5
       End 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 Mercado
                                          No. of companies
                                              End 2001
Novo Mercado                                       0
kevel I Corporate Govemance                       19
Level 2 Corporate Govemance                       1

          Annex Figure A1.4: Stock Market Indices - allfirms and Good Governancefirms
                                                Brazil: Market indeces (2001)
                                                   -IBOVESPA & IGC -
               1,100                                                                                   IGC

               1,000        m     __
                                      1,000                                                   -   - - IBOVESPA
                900                     s                               /
                800                                 v                   o               IGC - Special Corporate Governance
                                                              -               ^                     Stock Index
                                                                                           IBOVESPA - Bovespa Index
                500     .                                                                 Comparative IGC x IBOVESPA
                       Jun      Jun    Jul    Aug       Sep       Oct       Nov   Doc        Base 1,000 = 06/25/2001
                       2001                                                                       Source Bovespa

                                                                            - 33 -
Anne, 2. Plroject Costs and FEnnnc!ng

        The program was an adjustment operation budgetary and balance ofpaeyments support. As
such, project costs andfinancingsources were not defined as under investment loans, either by
component or by procurement arrangements.

          It can be mentioned nevertheless that the projectformed a part of the externalfinancingneeds 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 billionfrom 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 - FinanxcingRegAiremenres 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
 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
PublicSector BorrowingReqaiLrements                                     31.5         20.4              18.4
Public Sector Borrowing ReqEirements (o (DP                             5.8           3.6               3.5
        Source: Central Bank of Brazil, IMF and World Bank

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

Not applicable because this is an adjustment operation.
   Project Component           Aoraisal Estimate             ActualLatest Estimate    Percentage of
                                                                                       Nf .raisal

                                                ,No Ap3p4l-ae
                                                 I                                           _        _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

                                                             -34 -
Annex 2b: Project Costs by ProcurementArrangements (In US$ million equivalent)

Not applicable because this is an adjustment operation.
  Expenditure                          Procurement Method                                             Procurement Method
   Categories                           Appratisal Estimate                             _            Actual/Latest Estimate
                      ICB             NCB      Other    NBF                 Total           ICB      NCB      Other NBF                          Total
 1 Works                                                                                                    _
 2 Goods          _       _   _   _    _   _   _    _   _   _   _   _   _   _   _   _       _   _     _     _   _    _     _   _       _    _

 3 Services       _                    =                =       =               =           =             =              =
 4 Misc.              _
 Total                                                                                                 _

Annex 2c: ProjectFinancingby Component (in US$ million equivalent)

Not applicable because this is an adjustment operation.
 Component                Appraisal Estimate                       Actual/Latest Estimate                            Per entage of A Draisal
                Bank    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)

         Standardcalculations of economic or financial rates of return are not applicable because this
 was 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 is
 worth pointing out that notable benefits were achieved in terms of building a soundframeworkfor the
financialsector and hence reducing systemic risks, and in building a sustainedpolicy directionfor the
sector, to which the government remained committed. This was demonstrated by the follow up Second
Programmatic FinancialSector Adjustment Loan. A summary of the current statls of achievement of
programmatic actions is described in the Matrix in Annex 8, which includes comments on the current
status of achievement ofprogrammaticactions.

                                       Present Value of Flows
                                Economic Analysis                            Financi Analysis
                           Appraisal      Latest Estimates           Appraisal        Latest Estimates
  Benefits                                        _.    _
  Costs_                       __                  _j            _       _              __

  Net Benefits

                                                -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 Development
                     Month/Year     Count              Specialty                            Progress      Objective
               10/07 - 10/19/00                4     1 Team Leader (Lead Operations            S              S
                                                     Officer), 2 Lead Financial
                                                     Economists, I Lead Economist
                11/25 - 12/15/00               3     1 Team Leader, I Lead                     S              S
                                                     Economist, I Bank Supervisor

              1/20 - 2/2/01                    5     1 Team Leader, I Sr.                      S              S
                                                     Regional Financial Sector
                                                     Advisor, I Lead Financial
                                                     Economist, I Financial
                                                     Economist and I Bank
               3/26 - 3/31/01                   1    1 Team Leader                             S              S
                11/5/2001 -                     5    See note (*). I Team Leader               S              S
                11/14/2001                           / Sector Manager, 2 Banking
                                                     Supervisors, 2 Financial
               3/4/2002 -                       3    See note (*). ITeam Leader /              S              S
               3/13/2002                             Lead Financial Economist, I
                                                     Sector Manager, 1 Banking
               8/3 - 8/10/02                    1     1 Consultant                             S               S
*Preparation for PFSECAL-2. Given that PFSECAL-I was a single tranche programmatic loan, there was no
mission travel for supervision. However, program supervision was included under the preparation of the follow up
Programmatic Loan. Resource use for this purpose is not accounted for under this project.

(b) Staff:

       Stage of Project Cycle                         Actual/Latest Estimate
                                         No. Staff weeks                   US$ ('000)
  Identification/Preparation                       35                           220.3
  Appraisal/Negotiation                            50                           310.2
  Supervision                                       8                            40.0
  1CR                                             8.5                             39.5
  Total                                         101.5                           610.0

                                                     - 37   -
(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)
 ?Macropolicies                                      O H O SU O M O N O NA
 ?SectorPolicies                                     O H O SU O M ON O NA
O Physical                                           O H OSUOM O N O NA
 ? Financial                                         OH OSUOM O N O NA
s   InstitutionalDevelopment                         0 H O SU O M 0 N 0 NA
O Environmental                                      O H OSUOM 0 N 0 NA

         S ia
            Poverty Reductioni                       0 H OSUOM O N ( NA
         O Gender                                    OH OSUOM O N (D NA
         FOther (Pleasespecify)                      O H OSUQM O N O NA
      Expansion ofAccess to Financial
? Privatesector development                  0 H O SU 0 M 0 N 0 NA
X Publhc sector management                   0 H O SU O M 0 N 0 NA
LiOther (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 Bankperformance                                         Rating

0 Lending                                                   OHS OS        OU OHU
M Supervision                                               OHS OS        OU O HU
ER Overall                                                  OHS OS        O U O HU
6.2 Borrowerperformance                                     Rating

2 Preparation                                               OHS OS        OU      O HU
F Government implementationperformance                      OHS O S       0 U     0 HU
X Implementation agency performance                         OHS OS        O U     O HU
Z Overall                                                   *HS OS        O U     O HU

Borrower dialogue and cooperationwere excellent throughout. Borrowerperformance and commitment
to the overallfinancialsectorprogram is clearly revealed in the swiftfollow up operation; the Second
ProgrammaticFinancialSector Adjustment loan to Brazil.

                                                    -39 -
Aiumeu 7. IList ofS    nppoutiEg lDorncemots
   Central Bank of Brazil, 'Jurose Spread Banciriono 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 Adjustnent
       Loans / 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', Report
       No. P-24067-BR, May 20, 2002. World Bank.

    Programmatic and Emergency Adjustnent Lending: World Bank Guidelines, Operations Policy and
        Strategy 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', Report
        No. 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
 ProgrammaticActions for PFSECAL-Iin order to illustrate the status of the program as a whole at the time
 ofpreparationof the ICR As the column indicates, andas borne out by the Second ProgrammaticFinancial
 Sector Adjustment Loan, progresswith the program as a whole was highly satisfactory, leading to a rapid
follow up ProgrammaticLoan in June 2002. Since then, uncertainties have been introduced in terns of a
potential third operation due to the change of government in 2002, and the need to reaffirm sectoralpolicy
 direction with the new team.

     Actions Completed     1 Indicative ActionsI Indicative Actions Monitoring Indicators of Program                                              Program Goals Statusattime ofICR
                         Expected by 2' Loan Expected by 3rd Loan               Ountuts                                                           and Outcomes
                                                                      2 Loan        i     3' Loan
 1.     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 now
 achieved in Central         readiness to provide         finctioning and action               Center                   fine-tumng action efficiency and           producing information on
 Bank actions to resolve     enhanced set of debto        plan to remedy any                   information              plan              depth of                 smaller denomnation loans
 structural causes of        information                  shortcomings                                                                    financial                (R$5,000, below previous
 Brazil's record high                                                                          * Cedula                 * New             intermediation           level ofR$20,000), and
 intermediation spreads.     * Publication of law         * Publication of                     Legislation              bankruptcy law    provided by the          includmng coops and
 Pnncipal 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 Risk
 strengthened and Debto * Completion of                                                                                  completed                reduction        Center positive information
 information improved   study of fimncal                                                                                                          through growth   and access by financial
                               txatin                     0Policy                                                                                                  institutions
 > Corntrat             sector taxaton                    recommendations issued                                                                                   * Rtsk Center web page on
 enforcement                                              on new financial sector                                                                                  Central Bank website
 strengthened                                             taxation framework                                                                                       * Provisional law on
                                                                                                                                                                   Cedula de CrJdito
 > Bankruptcy reform                                                                                                                                               Bancorno deemed to have
 being considered by                                                                                                                                               full legal status
 Congress                                                                                                                                                                            /
                                                                                                                                                                   protection and disclosure
                                                                                                                                                                   strengthened through (i)
                                                                                                                                                                   Bank Consumer Protecton
                                                                                                                                                                   Code and (ii) enhanced
                                                                                                                                                                   interest rate, account and
                                                                                                                                                                   overdraft disclosure
                                                                                                                                                                   * Two working papers on
                                                                                                                                                                   the CPMF tax issued.
                                                                                                                                                                   * Submission to Congress
                                                                                                                                                                   of proposed elimination of
                                                                                                                                                                   CPMF on stock market
                                                                                                                                                                   Preparation ofmodiflcatuon
                                                                                                                                                                   of Law 4591 on the
                                                                                                                                                                   Sistemna Financeira de
                                                                                                                                                                   Habitaqdo including, inter
                                                                                                                                                                   alha, the tax treatment Of
                                                                                                                                                                   savings accounts.
                                                                                                                                                                   * Achievement of stronger
                                                                                                                                                                   draft law with creditors
                                                                                                                                                                   rights increased, flexible
                                                                                                                                                                   solutions for bankruptcy,
                                                                                                                                                                   lirmits to labor and tax
                                                                                                                                                                   claims and reduced standstill
                                   _____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
                                         _____               ___ _                              __ _ _ _ __ _   _ __ _ _ __ _   _ _ _ _ _ _ _I_                     perio d

     Actions Completed
                            Insdicandve Actions |inticative Actions |
                              Epected by 2]d
                                                    Expected by 3rd
                                                                             oitring R
                                                                           2nd l oan
                                                                                           ts      |
                                                                                      Outputs outcor
                                                                                     I 3rdLoan

B.     BroadeningofAccess
o Innovative steps        o Completion of          o Agreed action plan o Strategy     o Approval of D Broaden access to           o Completion of reports
taken to reach            strategy to further      to further develop    completed     acton plans    financial services for       by four investigative
under-served              develop availability     availability of        o Strategy    o Approval of under-served population      committees on Access to
 populabon. Pnncipal      of financial services    financial services to  completed     acton plans     o Monitonng system         microfinance by the
 actions are,             to under-served          under-served sectors                                 maintained to measure      ComunidadeSoliddria
 o Accessibility of       sectors                  o Agreed action plan                                 progress beyond            and formulation of
 financial services       o Completion of          to widen the use of                                  programmatic penod         strategy to expand
 widened                  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 ofnew
                          credit                                                                                                   inibatives for micrcredit
                                                                                                                                   by SEBRAE
                                                                                                                                   o Passage ofresolution
                                                                                                                                   broadening access to
                                                                                                                                   financing by microcredrt
                                                                                                                                   societies (SCMs)
                                                                                                                                   o Auctionungofpostal
                                                                                                                                   franchise for extension of
                                                                                                                                   network of provision of
                                                                                                                                   financial services
                                                                                                                                   o Introduction ofretail
                                                                                                                                   sales of Treasury bonds
                                                                                                                                   o Measures to expand
                                                                                                                                   housing finance
                                                                                                                                    > Extension of Cedula
                                                                                                                                   instrument to housing
                                                                                                                                    sector (Cedula do
                                                                                                                                    > Separation of
                                                                                                                                    construction company
                                                                                                                                    and project assets, (
                                                                                                                                   patrim6niode afeuta,ao)
                                                                                                                                   and creation of special
                                                                                                                                    purpose mutual funds for
                                                                                                                                    housing loan
                                                                                                                                    secuntizaion (FGC)

                                                                                                                                    Eased use of ahaenagdo
                                                                                                                                   fiducidria for housing

                                                                     -42 -
     Acdtons Completed     Indicative Actions    Indicative Actions                             o
                                                                           Monitoring Indicatorsof       Program Goaf          Statusattime oflCR
                            Expected by 2nd     Expected by 3rd Loan         Prga OP                     and Outcomes
                                 Loan                                      2nd Loan       3rd Loan
I.         Banking System Soundness and Safety Net
A. 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, enhanced
standards strengthenedprtcinorsir
> Sound asset                                                                                                              protectionforsemor
classification                                                                                                             supervisors embedded mn
introduced                                                                                                                 proposed Central Bank law
 > Majorsupervisory                                                                                                         * Additonal regulatory
 reorganzation completed                                                                                                    refomis in areas of
                                                                                                                            accounting 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 swap
                                                                                                                             > Strengthened disclosure
                                                                                                                             and intemal controls

                                                                 -43 -
 Actions Completed        Indicative Acdons
                        . Expected by 2nd
                                                 [Expected by Acdons
                                                              3rd Loan
                                                                         M   '7toring oI torso
                                                                                                   ogram     ProgrnmGoalsand StatusattimeofICR
                   l_______ Loan
                             _                                               2r.d Loa3    r|   3rd Loan
B. Bank Resolutien and Deposit Insurance
e  Complex and far      * Preparation of          *New Law and new       o Record of      *Record of         * Improve                   Draft legislation
reaclung review         draft legislation and     deposit msurance       submission of    effectiveness of   efficlency of bank       on bank failure
program of bank exit    new draft statutes for    statutes effective     Law and new      Law and new        exit process              resolution under
framework and role      the deposit insurer,                             draft statutes   statutes           a Improve asset          preparation by
of deposit insurance    and their submission                                                                 recovery                 Central bank
agreed and intiated     for approval                                                                                                  consultant
                                                                                                                                     a FGC proposals for
                                                                                                                                     cbanges to its statutes
                                                                                                                                      repared and submitted
                                                                                                                                     _tothe Central Bank
C ContingencyPlanng__
o Central Bank           * Completion of         a Blueprint updated and o Approval of     aBluepnnt         * Strengthen          a Bluepnnt developed,
decision adopted to      bluepnnt and            tted                    bluepnnt          updated           capacity to prevent a submitted to the Central
develop contingency      approval by the                                                                     cnsis and to respond Bank, and approved by
planmng and              authonties                                                                          promptjly and           the Central Bank
intensive work                                                                                               effectively if it       Director on May 2001
program agreed and                                                                                           occurs
 iLl.     Payments and Securities Clearance and Settlement Systms
a Landmark reform    * New Payments System *Satsfactory           o Centrl Bank            e CentralBank     e  Reduce systemic      a  New Payment System
launched and         parocularly RTGS, fully     fimctioning of new      reports           reports           nsk and Central         expected to be launched
demanding            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 supported
timetable maintauned payment and securities      and any shortcomings                                        efficiency in cleanng   by Bankers' Association
Enabling legislation clearance finalized and     corrected                                                   and settlement, and     a Guidelines issued,
passed               issued                                                                                  ensure prudent          including circulars on
                                                                                                             management of            nonutonng of reserve
                                                                                                             remaining nsks              ounts, statues of
                                                                                                                                     cleanng houses and
                                                                                                                                     setlement of secunties onl
                                                                                                                                     CETIP (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 Outcomes
                         Expected by 2nd                 Loan                 2nd Loan            3rd Loan
IV.        Securities Markets
 A. Corporate Governance
* Submission to        * Publication of revised   *Review of                 * Record of      * Corporate         *Corporate             * CVM Instruction No
Congress 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 and
Corporate 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 related
 guidelines issued by mmonty shareholder          and transparency                                                investors for           matenal information
stock exchange and protection                                                                                     secunties issued by   * CVM Instruction No
BNDESpar and                                                                                                      Brazilian firms       361, issued on March 5,
pnnciples incorporat                                                                                              *Broaden the          2002 on obligatory tender
in pension fund                                                                                                   access to long term   offers to minonty
investment regulations                                                                                            finance, especially   shareholders
                                                                                                                  for medium-size       * SPC Resolution No I
                                                                                                                  enterpnses            issued on disclosure of
                                                                                                                  *Poverty reducton     vottng of pension funds
                                                                                                                  through growth
B. Regulatory Framework and Enforcement
* Submission to    * Publcation of revised *Review/                          * Record of      *Review completel   * Develop an          * Revisions to CVM law
Congress and partial   CVM Law                 recommendations on            CVM Law          *Acceptance of     effective regulatory   passed and embodied in
sanction of legal      * Bluepnnt for          effectiveness of new          effectiveness    guiding pnnciples  structure, with        Law 1041 1 and Decree
amendments to          consolidation of mutual CVM Law and                   * Blue pnnt      and bluepnnt       appropnate             3995
enhance CVM's          fund regulation and     appropnate                    completed        *Regulation issued disclosure and         * Merger of mutual fund
enforcement capacity   pension fund regulation amendments proposed           * Record of      *Record of Law     tansparency, for       responsibilities under
and establish          * Submission to         *Guiding pnnciples            Law              effectiveness      secunties markets      CVM achieved through
independence of        Congress of Cental      agreed for establishmen       submission                                                 modifications to CVM
accounting standards   Bank/financial system of new pmfessional                                                                         law
setting                law                     body for the settng of                                                                   * Regulation issued
* CVM regulations                              accounting standards                                                                     requinng pension funds to
issued to enhance                              *Mutual fund and                                                                         mark to market their
information                                    pension fund regulation                                                                  secunties portfolios and
disclosure and                                 consolidated                                                                             classif-y secunties as held
investor protection                            *Publication of Central                                                                   for tading or for matunty
* Agreement on                                 Bank/financial system                                                                     (Central Bank circular
pnnciples of draft                             law                                                                                      3086).
Central                                                                                                                                  * Central Bank/financial
Bank/financial                                                                                                                           system law split into
system law                                                                                                                               separate regulatory
                                                                                                                                         prOjects; issues relevant to
                                                                                                                                         capital markets (mutual
                                                                                                                                         fund and pension fund
                                                                                                                                         consolidation) to be
                                                                                                                                         achieved as detailed above

                                                                      -45    -
Aionnll AEnnez 9.Co mmenmt IRele@vnd frninm flte CeOitrlR IBnnmE (              orriueeoniDnnE)

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

Introducao: 0 Papeldo Banco Central nas Reformas do Setor Financeirodo Brasil

1.       Banco Central tem a responsabilidade de zelar pela viabilizasAo do processo de consolidaqao da
estrutura do Sisterna Financeiro Nacional, por meio do acompanhamento e de analise do processo de
transferencia de controle societArio, cisao, incoporapao e mudanca de objeto social, alem das autorizaq6es
para funcionamento de novas empresas. Nessa tarefa de acompanhar e analisar esses processos, vem
conferindo crescente grau de transparencia is suas aq6es, abrindo espaqo para que a sociedade possa
participar mais ativamente das discuss6es e influenciar decis6es.

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

Contribuicoes do Emprestimo do Banco Mundial em Apoio aos Objetivos de Reforma do Setor

3.      Programa de refonnas do setor financeiro que vem sendo implementado pelo Governo brasileiro
tem 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 de
US$ 400 milhoes, sendo uma parte integrante de uma serie, potencialmente longa, de emprestimos
programaticos de apoio ao setor financeiro. 0 objetivo do programa corn o Banco Mundial consiste em
apoiar 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; e
        d)   reestruturacao de bancos publicos.

4.      Relativarnente is ac,es desenvolvidas, vale destacar os esforsos direcionados para a
irnplementacao do novo sistema de pagamentos, a criagao de novo sisterna de infornnago para aperfei9oar
a supervisao a distancia, o aperfei9oarnento das operagdes da Central de Risco de Credito, a formul1ano de
sistema de classificacao de bancos para fins de supervisao e a introduqao de novos manuais de
procedimentos e rotinas para os supervisores.

Sustentabilidadedo Emprestimo e do Programae o Desempenho do Banco e do Devedor

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

                                                    -46 -
Mundial tem se mostrado bastante proficuo, sendo que os resultados ja obtidos recomendam a continuidade
desse relacionamento e, consequentemente, novos' recursos financeiros destinados ao processo de
modernizaqao do Sistema Financeiro Nacional.

Liqoes Aprendidas

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

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

                                                  -47 -
A1iflional Amnnez no-.Co nmmennftz lReceived fnnmm Sae CV1             oRtungpneve onilgftnall)

AVzHFaVEo do Ipriie Irn
                      Emprimo do IE&1 20 Drans jjraUn
                                         I     REil                       Stuaemn IEs0r           X
MFimgmce!ro (SAJL)

O Papelda CVM nasReformas do Setor Financeirodo Brasil
1.      0 Govemo brasileizo, para melhor exercer suas atr-buiqdes, vem inmplementando um programa de
reformas do setor financeiro que conta com o apoio de organismos financeiros intemacionais, notadarnente
do Banco Mundial, cuja parceria resultou na concessao do primeiro empr6stimo pam ajuste deste setor, no
valor de US$ 400 milhoes.

2.      Dentro desse contexto, a Comissao de Valores Mobiliarios - CVM desempenha umn relevante
papel, por ser a agencia governarental que tem a responsabilidade de regular e fiscalizar o mercado de
valores mobiliirios. Para tanto, suas ac,es procuram, dentre outros objetivos, assegurar a transparencia e a
fidedignidade das infornagdes divulgadas ao mercado, bem como dos registros efetuados no ambito do
sistema de distribuic,ao de valores mobiliarios, alem de pautar sua atuacao na rigorosa averigua9ao da
ocorrencia de possiveis ilicitos, dentre os quais podemos citar a manipulagcao de mercado, casos de abuso
de 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, a
representatividade 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 ativos
financeiros nele negociados, mas tamb6m desenvolvam urna eficiente estrutura regulat6ria, cujo foco esteja
voltado, principalmente, para a divulgaqio de informanoes de maior qualidade, bem como para a
transparencia desse mercado.

Os Avancos Recentes nos Mercados de CapitaisBrasileiros

4.        A prop6sito, cabe destacar que, recenternente, foram observados alguns avancos no arnbito do
mercado de capitais brasileiro, em virtude da edigco das Leis n° 10.303/01 e n° 10.411/02 e do Decreto no
3.295/01, que alterararn as Leis n° 6.385/76 e n° 6.404/76, que regem, respectivamente, o mercado de
valores mobiliarios e as sociedades por a9aes. Tais normativos, que fazem parte da politica de estirnulo ao
mercado de valores mobilirios brasileiro, buscam fortalecer institucionalmente a CVM, induzindo as
companhias abertas a adotarein boas priticas de governanga corporativa e ampliando e adequando a
tipificagao dos crimes contra os mercados de capitais, mediante o estabelecimento de penalidades mais
rigorosas para as condutas ilicitas detectadas.

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

                                                   -48 -
mercado e exercicio irregular da profissao; e

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

6.       Ja demonstrando que a sociedade tinha interesse na implementacao de medidas relacionadas a
Governanca 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 melhores
principios de governanca societiria e regras de plena divulgacao. As empresas que desejam se registrar
nessa se,co devem voluntariamente se comprometer a cumprir certos requisitos mais rigidos do que os
vigentes nos termos da legislacao brasileira. Essa seco foi modelada com base no conceito de que o valor e
a liquidez das acoes sao positivamente relacionadas aos direitos conferidos aos acionistas, a eficiencia na
garantia dos direitos dos investidores e a qualidade da infornacao fomecida. Os principais requisitos de
inscricao da secao NOVO MERCADO sao: (1) uma acao/ um voto; (2) plenos direitos de inclusao dos
acionistas minoritarios em negociag6es ou transacoes de venda da empresa; (3) oferta de cancelamento de
inscricao a ser feita somente ao valor econ6mico; (4) uma camara de arbitragem para solucao de
controversias 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 Monetario
Nacional, atraves da Resolucao 2.829/01, aumentou os limites de alocacao de ativos Fundos de Pensao em
valores mobiliarios emitidos por companhias que observam as regras do Novo Mercado.

O Papeldo Apoio Programaticodo Banco Mundial
8.       Nesse processo de ajuste, merece destaque a participacao do Banco Mundial, na medida em que tal
organismo tem viabilizado o acesso as melhores praticas adotadas pelo mercado de capitais de outros
paises, contribuindo, de forrna decisiva, para que os objetivos propostos sejam gradativamente alcancados.

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

                                                   -49 -
-   50   -

Report No.:       25116
Type:       ICR

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