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Henrique de Campos Meirelles

Addressing New Basel Regulations, their Effects on Global Banking, and the Impact on the Brazilian Financial System. Henrique de Campos Meirelles. Brazilian-American Chamber of Commerce September 2010. Basel III Capital and Liquidity Reform. 2010 – Basel 3: Quantity and quality of capital

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Henrique de Campos Meirelles

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  1. Addressing New Basel Regulations, their Effects on Global Banking, and the Impact on the Brazilian Financial System Henrique de Campos Meirelles Brazilian-American Chamber of Commerce September 2010

  2. Basel III Capital and Liquidity Reform • 2010 – Basel 3: • Quantity and quality of capital • Leverage • Countercyclical buffer • Liquidity

  3. Basel III Capital and Liquidity Reform Countercyclical Buffer - Common Equity (0-2.5%) Conservation Buffer - Common Equity (2.5%) Minimum Requirement - Capital (8%) - Tier 1 Capital (6%) - Common Equity (4.5%)

  4. Basel III Capital and Liquidity Reform 18 15 current level In Brazil countercyclical 12 buffer % of GDP conservation 9 buffer 6 current minimum requirement 11% minimum requirement 8% 3 0 Basel Brazil Sources: BIS and Central Bank of Brazil

  5. Basel III Economic Impact • Transition period reduces adjustment costs • In the long run, benefits outweight costs • Reform reduces the probability of financial crisis • Possible increase in the cost of financial intermediation are more than offset by the economic benefits of ensuring more financial stability

  6. Brazil in 2003 • 60% of total sovereign debt denominated in dollars • IMF debtor country • High public debt to GDP ratio: 60.6% • Policy rate at 25% • Rising inflation • High country risk premiums and sovereign debt rated as speculative grade • Unemployment rate at 12% • Minimum wage at US$ 60

  7. Changes in Economic Policy 2003: Monetary and fiscal policy stance Austere monetary policy Strong fiscal adjustment • Quick disinflation • Jan 03: 30% (annual rate) • Jul 03: 0% • Inflation on target since 2004 • Decrease in the public debt • Decrease in sovereign debt exposure on FX • As a result: decrease in country risk premium

  8. Public Sector Net Debt market consensus 60.6 60 54.9 55 50.6 50 48.2 47.0 % of GDP 45.1 45 42.8 42.7 40.6 38.4 40 35 30 Dec Dec Dec Dec Dec Dec Aug Dec Dec Dec 02 03 04 05 06 07 08 08 09 10 Sources: Central Bank of Brazil

  9. Floating Exchange Rate Regime and Build Up of International Reserves international reserves allow for a safe fluctuation of the exchange rate Sep 21st 271.4 250 Aug 08 205.1 200 USD billion 150 100 50 0 Jan Jan Jan Jan Jan Jan Jan Jan Jan 02 03 04 05 06 07 08 09 10 Source: Central Bank of Brazil

  10. Net External Debt and Risk B+ 1Q03 165.2 BB- BB- 4Q04 135.7 USD billion BB BB+ -49.5 BBB- Sources: Central Bank of Brazil and S&P

  11. Macroeconomic Responsibility Virtuous Circle: responsible policies lower risk premiums more credibility stronger growth macroeconomic stability greater efficiency increased credibility expectations anchored lower interest rates lower interest on public debt higher growth rate decline in public debt to GDP ratio

  12. Macroeconomic Policy Framework • Macroeconomic fundamentals of inflation targeting, fiscal responsibility, exchange rate flexibility, combined with • Adequate prudential policy and solid bank supervision, resulted in • capacity to absorb internal and external shocks • macroeconomic and financial stability • sustainable growth • investment growth • credit and capital market development

  13. Investments x Country Risk 170 2000 country risk - Brasil t-2 (right) 2Q 10 1810 160 1620 150 1430 investments GFCF (left) 140 1240 basis points 130 1050 1995 = 100 860 120 670 110 480 100 290 90 100 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 3Q 00 01 02 03 04 05 06 07 08 09 10 Sources: IBGE and JPMorgan

  14. Credit – Outstanding Balances consistent growth throughout the period 1,600 50 46.2 45 1,400 40 1,200 35 1,000 % of GDP 30 R$ billion 800 25.7 25 600 20 400 15 200 10 0 5 Jan Jan Jan Jan Jan Jan Jan Jan Aug 02 03 04 05 06 07 08 09 10 Source: Central Bank of Brazil

  15. 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Stocks Commercial papers Others Capital market – primary issues R$ billion Source: CVM (Brazilian Securities Comission) *12 months to August

  16. 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 12 13 14 Net Foreign Direct Investment market consensus* 2010-14 37.8 2007-09 35.2 USD billion 2002-06 15.7 Source: Central Bank of Brazil (market consensus) *17/9/2010

  17. China India Brazil United States Russia Mexico United Kingdom German Indonesia Vietnan Tailand Poland France Australia Malaysia Canada Japan Chile South Africa Peru Spain 0 20 40 60 80 100 3rd preferred host economy for FDI for the 2010-12 period Source: UNCTAD

  18. Brazilian External Liabilities as a percentage of the gross external liabilities 2001 2010* FDI 37% Others 26.4% Others 13.2% FDI 32.8% Fixed income 18.6% Stocks (domestic and foreign) 9.9% Fixed income 30.9% Stocks (domestic and foreign) 31.3% Source: Central Bank of Brazil *August

  19. 250 200 150 100 50 80 85 90 95 00 05 10 Exports 2010-14 229.6* USD billion 2000-09 111.1 1990-99 42.7 1980-89 25.5 14 Source: Central Bank of Brazil (market consensus) *17.9.2010

  20. 30 27.8 27 USA 24 23.7 Europe 21.4 21 Latin America 18 15 Asia 12 9.9 9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Exports’ Diversification % Fonte: Banco Central * até Julho

  21. 18 135 16 130 14 125 12 120 10 115 8 110 6 105 4 100 2 - 95 Jan Jan Jan Jan Jan Jan Jan Jul 03 04 05 06 07 08 09 10 Price Stability and Real Payroll Growth stability generates increasing well-being real payroll Jan 03 = 100 % change in 12 months IPCA Source: Central Bank of Brazil

  22. Formal Job Creation from January to August 1954 14 million jobs created since 2003 2000 1804 average 04-07 1312 1500 thousands 1000 average 00-03 741 680 500 average 96-99 128 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: MTE/CAGED

  23. 13 12 11 % 10 9 8 7 6.73 Jan Jan Jan Jan Jan Jan Jan Ago 03 04 05 06 07 08 09 10 Unemployment in Brazil seasonally adjusted Source: IBGE

  24. South Africa 25.3 Spain 20.3 Lithuania 18.3 Croacia 16.4 Ireland 13.6 Colombia 13.3 Greece 11.8 Poland 11.4 Hungary 11 Portugal 10.8 India 10.7 Turkey 10.5 Euro zone 10 United States 9.6 France 9.3 Belgium 8.9 Venezuela 8.7 Finland 8.5 Italy 8.42 Chile 8.3 Canada 8.1 Argentina 7.9 United Kingdom 7.8 Germany 7.6 Sweden 7.4 Brazil 6.73 Unemployment Rate relatively dynamic labor market Source: Bloomberg

  25. 0.566 0.57 0.56 0.558 0.56 0.553 0.55 0.545 0.54 0.535 0.532 0.528 0.53 0.52 0.52 0.514 0.509 0.51 0.50 98 99 01 02 03 04 05 06 07 08 09 Income Inequality Reduction Gini Index Source: IBGE/PNAD

  26. Middle Class Growth and Poverty Reduction • From 2003 to 2009 • 35.7 million people have entered the middle class • 20.5 million have crossed the poverty line upwards • 2010-2014 forecast for the current trend • 36.0 million more will enter the middle class • 14.5 million more will come out of poverty • Family Grant Program (Bolsa Família): reduction of people in extreme poverty from 12% to the 4% level Source: FGV-CPS

  27. Lower Level Income 30 28.1 25.4 25 22.8 % of population 19.3 20 18.3 16.0 15.3 15 10 2003 2004 2005 2006 2007 2008 2009 Source: CPS/FGV

  28. Social Mobility A/B C D E 200 31 20 13 150 millions of people 66 +44.1% +19.0% 95 113 100 47 44 50 40 49 29 16 0 2003 2009 2014* Source: Finance Ministry; * estimated

  29. Performance Before and After the Crisis compared to other emerging markets 6.1 7.3 (**) Brazil 5.2 5.7 GDP real growth % 4.3 (*) EME ex. Brazil, India and China 3.6 -0.2 -2.2 (*) 2007 2008 2009 2010 Sources: FMI (WEO April 2010) and Central Bank of Brazil

  30. GDP Growth annual real growth rate 7 7.3% 6 5 5.1% (2006-2008) 4 3 3.3% (2003-2005) 2 2.1% (1999-2002) 1 0 -0.2% - 1 99 00 01 02 03 04 05 06 07 08 09 10 Sources: IBGE and Central Bank of Brazil

  31. Agenda for the Future Level of Domestic Saving Quality of Public Expenditures Investment Rate and Infra-Structure Education Review and Simplification of the Tax System Legal Environment more favorable to Business Incentive to Long Term Investment

  32. BRL billion Growth 2005 - 2008 2010 - 2013 % Oil and Gas 160 340 112.9 Mining 53 52 - 2.7 Steel 26 51 99.5 Petrochemical 20 34 70.9 Automobile 23 32 37.8 Electric/Electronics 15 21 39.0 Pulp and Paper 17 19 10.6 Total 314 549 74.8 Investment prospects - industry Source: BNDES

  33. BRL billion Growth 2005 - 2008 2010 - 2013 % Electricity 67 98 45.2 Telecommunication 66 67 2.1 Sanitation 22 39 76.5 Railways 19 56 195.3 Highways 21 36 73.0 Ports 5 15 217.9 Total 199 310 55.6 Investment prospects - infrastructure Source: BNDES

  34. Henrique de Campos Meirelles September 2010

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