The following information relating to us is included for analytical purposes and should be read in conjunction with our Financial Statements appearing elsewhere in this Offering Memorandum as well as with the sections "Presentation of Financial Information," "Selected Financial Information," and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Average Balance Sheets and Interest Rate Data
The tables below present the average balances for interest-earning assets and interest-bearing liabilities, together with the related interest income and expense amounts for the years ended December 31, 2011, 2010 and 2009, resulting in the presentation of the average rates for each period. The average balances have been calculated from the month-end balances of the principal together with the related accrued interest balances.
For the Year Ended December 31,
2011 2010 2009
Average
Balance Interest
Average Rate
Average
Balance Interest
Average Rate
Average
Balance Interest
Average Rate (R$ thousands, except percentages)
Interest-earning assets(1) Securities, interbank investments
and derivatives ... 12,431,274 1,391,188 11.2% 9,267,359 852,630 9.2% 7,816,113 701,097 9.0%
Loan operations - Real
denominated ... 9,450,716 1,385,323 14.7% 8,406,863 1,037,632 12.3% 6,565,732 795,203 12.1%
Loan operations -
Foreign currency (2) ... 1,460,037 233,855 16.0% 1,254,282 17,631 1.4% 1,171,794 (249,657) (21.3%) Interest-earning compulsory
deposits ... 271,578 20,162 7.4% 239,694 15,668 6.5% 204,584 2,796 1.4%
Total interest-earning assets ... 23,613,605 3,030,528 12.8% 19,168,198 1,923,561 10.0% 15,758,223 1,249,439 7.9%
Non-interest-earning assets
Tax credits ... 283,697 247,839 193,476
Debtors for guarantee deposits ... 550,868 365,291 263,005
Permanent assets ... 192,674 192,165 194,835 Other assets ... 428,567 374,130 375,129
Total non-interest-earning assets .... 1,455,806 1,179,425 1,026,445
Total average assets ... 25,069,411 20,347,623 16,784,668
(1) Calculated based on average of the month-end balances during the relevant period.
(2) Reflects expenses from exchange rate variation of R$82.4 million and R$107.7 million and R$379.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, as recorded on our income statement under other operating expenses.
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Time deposits ... 5,368,053 (585,825) 10.9% 4,252,037 (399,343) 9.4% 2,324,223 (212,886) 9.2%
Special deposits ... 1,299,336 (111,194) 8.6% 937,342 (68,306) 7.3% 945,984 (68,019) 7.2%
Open market funding ... 673,299 (75,652) 11.2% 505,323 (48,095) 9.5% 456,952 (44,216) 9.7%
Domestic borrowings ... 57,175 (4,604) 8.1% 67,326 (5,421) 8.1% 75,546 (6,109) 8.1%
Domestic onlendings ... 1,463,058 (93,618) 6.4% 1,518,379 (74,973) 4.9% 1,317,242 (43,165) 3.3%
Foreign borrowings and onlendings Total interest-bearing liabilities ... 19,201,509 (2,025,900) 10.6% 14,866,719 (1,041,726) 7.0% 11,859,537 (497,058) 4.2%
Other liabilities
Demand deposits ... 125,650 132,999 101,770 Allowance for contingencies ... 1,546,595 1,351,590 1,159,410
Employment benefits ... 933,423 1,041,124 960,090 Other ... 941,930 846,543 773,578 Shareholders' equity ... 2,320,304 2,108,648 1,930,283 Total other liabilities ... 5,867,902 5,480,904 4,925,131 Total average liabilities ... 25,069,411 20,347,623 16,784,668
(1) Calculated based on average of the month-end balances during the relevant period.
(2) Reflects income from exchange rate variation of R$105.6 million, R$99.6 million and R$363.4 million for the years ended December 31, 2011, 2010 and 2009, respectively, as recorded on our income statement under other operating income.
(3) Loan agreement granted by the Brazilian government, with no maturity date, classified as a hybrid instrument of equity and debt (instrumento híbrido de capital e dívida) in accordance with CMN Resolution No. 3,444. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources and Uses of Funds—Sources of Funds."
Changes in Interest Income and Expenses - Volume and Rate Analysis
The following tables show the allocation of the changes in our interest income and interest expense due to changes in the average volume and in the average rates for the year ended December 31, 2011 compared to the year ended December 31, 2010 and for the year ended December 31, 2010 compared to the year ended December 31, 2009.
Volume and rate variations have been calculated based on the variation of average balances over the period and changes in average interest rates on average interest-earning assets and average interest-bearing liabilities. The net change attributable to changes in both volume and rate has been allocated to the change due to volume and the change due to rate on a proportional basis.
Increase (Decrease) in Interest Rate Income (Expenses) Due to Changes in Volume and Rate
For the Year Ended December 31,
derivatives ... 329,643 208,915 538,558 133,113 18,420 151,533 Loan operations - Real denominated ... 138,466 209,225 347,691 226,973 15,456 242,429 Loan operations -
Foreign currency ... 3,359 212,865 216,224 (16,414) 283,702 267,288 Interest-earning compulsory deposits ... 2,224 2,270 4,494 559 12,313 12,872 Total interest-earning assets ... 502,590 604,377 1,106,967 302,613 371,509 674,122
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Savings deposits ... (7,578) (6,373) (13,951) (11,475) 404 (11,071) Interbank deposits ... (2,869) (1,082) (3,951) (8,798) 3,567 (5,230) Time deposits ... (115,313) (71,169) (186,482) (180,924) (5,533) (186,457) Special deposits ... (29,548) (13,340) (42,888) 625 (912) (286) Open market funding ... (17,858) (9,699) (27,557) (4,614) 735 (3,879)
Domestic borrowings ... 817 0 817 662 26 688
Domestic onlendings ... 2,820 (21,465) (18,645) (7,365) (24,443) (31,808) Foreign borrowings and onlendings and
securities ... 7,676 (402,410) (394,734) 27,178 (322,513) (295,336) Financial and development funds and
subordinated debt ... (89,044) (76,356) (165,400) (11,443) 4,323 (7,120) Total interest-bearing liabilities ... (359,919) (624,255) (984,174) (149,239) (395,429) (544,667)
Net Interest Spread and Net Interest Margin (NIM) Analysis
The following table shows the net interest spreads between real-denominated and foreign currency-indexed interest-earning assets and interest-bearing liabilities and the comparative net interest margin (the "NIM") for the years ended December 31, 2011, 2010 and 2009. The net interest spread with respect to a category of assets and a category of liabilities is defined as the difference between the average rate on the assets and the average rate paid on the liabilities.
NIM is defined as:
NIM = Interest Revenues — Interest Expenses Average Interest-Earning Assets Spread is defined as:
Net interest spread = Interest Revenues
Average Interest-Earning Assets – Interest Expenses
Average Interest-Bearing Liabilities
For the Year Ended December 31,
2011 2010 2009
(R$ thousands)
Total average interest-earning assets(1) ... 23,613,606 19,168,198 15,758,223 Total average interest-bearing liabilities(1) ... 19,201,509 14,866,719 11,859,537 Interest income ... 3,030,528 1,923,561 1,249,439 Interest expense ... (2,025,900) (1,041,726) (497,058)
Net financial operations income(2) ... 1,004,628 881,835 752,381
Interest-bearing liabilities/interest-earning assets ... 81.3% 77.6% 75.3%
Average rate on average interest-earning assets(3) ... 12.8% 10.0% 7.9%
Average rate on average interest-bearing liabilities(4) ... 10.6% 7.0% 4.2%
Net interest spread(5)... 2.2% 3.0% 3.7%
Net interest margin(6)... 4.3% 4.6% 4.8%
(1) Calculated using the final position at the end of each month.
(2) Interest income less interest expense.
(3) Interest income divided by average interest-earning assets.
(4) Interest expense divided by average interest-bearing liabilities.
(5) Difference between average rate on interest-earning assets and average rate of interest-bearing liabilities.
(6) Net interest income divided by average interest-earning assets.
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Securities and Investments Portfolio General
The following table shows our portfolio of securities and investments as of December 31, 2011, 2010 and 2009:
Brazilian Government securities: Financial Treasury Bills .. 8,885,516 88% 6,718,106 87 3,597,850 69 Total Brazilian Government Securities ... 8,885,516 88% 6,718,106 87 3,597,850 69
Private securities:
The following table presents the maturity distribution as of December 31, 2011 for our securities and investments:
Brazilian Government securities: Financial Treasury Bills ... ― 6,012 4,823,699 2,908,309 1,147,496 8,885,516 Total Brazilian Government Securities ... ― 6,012 4,823,699 2,908,309 1,147,496 8,885,516
Private securities:
Debentures ... ― ― 834,451 45,567 ― 880,018 Equity Securities ... 226,718 ― ― ― ― 226,718 Other ... 428 ― 58,442 11,415 356 70,641 Total private securities ... 227,146 ― 892,894 56,982 356 1,177,377 Total securities ... 227,146 6,012 5,716,593 2,965,292 1,147,852 10,062,893
(1) For securities, "no stated maturity" relates to securities that are highly liquid. As a result, in our financial statements, they are presented as part of current assets.
Lending Operations Loan Portfolio
As of December 31, 2011, our total outstanding gross loans (including accrued interest) were R$11,799 million, which accounted for 44.6% of our total assets. From December 31, 2009 to December 31, 2011, our total loan portfolio, net of allowances, grew 19.1%, from R$8,889 million to R$10,590 million.
Pursuant to CMN regulations, no Brazilian financial institution is authorized to lend more than 25% of its regulatory capital (subject to certain adjustments) to one client or group of clients under the same control. In our case, this limit excludes loans made by us at the risk of the Brazilian Government, as its agent. Our internal policy complies with the regulatory requirements of the CMN.
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The following table reflects the balances for our loan operations by sector, as of December 31, 2011, 2010 and 2009:
As of December 31,
2011 2010 2009
(R$ thousands, except percentages)
Industrial ... 3,189,114 27.0% 2,605,734 23.1% 1,892,524 19.0%
Rural and agribusiness(1) ... 1,474,609 12.5% 1,974,504 17.5% 2,335,451 23.5%
Commercial ... 2,368,416 20.0% 1,898,228 16.8% 1,280,825 12.9%
Governments ... 1,331,046 11.3% 1,257,660 11.1% 1,156,521 11.6%
Acquired loan portfolios(2) ... 265,963 2.3% 695,360 6.2% 600,014 6.0%
Individual and consumer ... 53,334 0.5% 56,461 0.5% 54,329 0.6%
Housing system(3) ... 243 0.0% 243 0.0% 241 0.0%
Other loans ... 3,116,335 26.4% 2,799,578 24.8% 2,617,747 26.4%
Total ... 11,799,060 100% 11,287,768 100% 9,937,652 100%
(1) Does not include microcredit operations under the Agroamigo program, which are part of the FNE's loan portfolio.
(2) Recorded as financial Intermediaries on our income statement.
(3) Includes home mortgage loans.
The table below sets out our loan portfolio divided by type of client, as of the dates indicated:
As of December 31,
2011 2010 2009
(R$ thousands)
Companies(1) ... 10,414,680 9,973,647 8,726,802 Individual and consumer ... 53,334 56,461 54,329
Governments ... 1,331,046 1,257,660 1,156,521 Total ... 11,799,060 11,287,768 9,937,652
(1) Companies includes all clients aside from Individual and consumer and Governments as shown in the table above.
The following table reflects the balances for our loan operations for our 50 largest customers, by industry, as of December 31, 2011:
As of December 31, 2011
(R$ thousands, except percentages)
Services ... 1,990,158 35.0%
Industrial ... 1,708,580 30.0%
Governments ... 1,193,984 21.0%
Financial Institutions ... 197,242 3.5%
Commercial ... 516,027 9.1%
Rural ... 87,806 1.5%
Total ... 5,693,797 100%
Average maturities of loans depend upon the sector to which the loan has been made. We believe we currently lend on terms comparable to private sector banks (with respect to our loan portfolio only) depending on the type of loan. Loans are generally made at pre-fixed rates or index-based rates such as the ANBIMA-rate or the TJLP, plus a spread. Spreads fluctuate depending principally upon the source of funding, the sector, the type of borrower and the program under which the loan is made. The following table reflects the maturity distribution of installments due of our loan portfolio as of December 31, 2011:
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As of December 31,
2011 2010
(R$ thousands)
Past due loans ... 203,147 212,151 Due in 360 days or less ... 5,634,709 4,805,951 Due between 2012 and 2017 ... 2,593,067 2,892,513 Due between 2017 and 2027 ... 3,042,421 3,091,803 Due after 2027 ... 325,716 285,350
Total gross loan ... 11,799,060 11,287,768
Indexation
Most of our loan portfolio is denominated in reais, however, loans indexed to foreign currencies represented 14%, 11% and 14% of our total loan portfolio as of December 31, 2011, 2010 and 2009, respectively.
The following table presents a breakdown of total loans by currency as of December 31, 2011 and 2010:
As of December 31,
2011 % 2011 % 2010 % 2009 %
(U.S.$ thousands, except
percentages)(1) (R$ thousands, except percentages)
Reais denominated ... 5,383,909 86% 10,099,136 86% 10,080,036 89% 8,539,319 86%
Foreign currency-indexed ... 906,239 14% 1,699,924 14% 1,207,732 11% 1,398,333 14%
Total ... 6,290,148 100% 11,799,060 100% 11,287,768 100% 9,937,652 100%
(1) December 31, 2011 figures were converted into U.S. dollars using the selling exchange rate of R$1.8758 per U.S.$1.00, as published by the Central Bank on December 31, 2011.
Allowances for Loan Losses
The following table shows the quality and corresponding allowances for loan losses of our loan portfolio as of December 31, 2011, 2010 and 2009 in accordance with our rating system:
As of December 31,
2011(1) 2010(1) 2009(1)
(R$ thousands, except percentages)
(%) (%) (%)
AA ... 3,315,259 28.1% 3,640,505 32.3% 3,346,521 33.7%
A ... 5,094,425 43.2% 3,847,921 34.1% 3,224,154 32.4%
B ... 2,218,403 18.8% 2,635,606 23.3% 2,232,913 22.5%
C ... 261,866 2.2% 262,461 2.3% 329,704 3.3%
D, E and F ... 188,012 1.6% 202,477 1.8% 136,207 1.4%
G and H ... 246,529 2.1% 294,945 2.6% 217,632 2.2%
Past Due ... 474,566 4.0% 403,853 3.6% 450,521 4.5%
Total loan portfolio ... 11,799,060 100.0% 11,287,768 100.0% 9,937,652 100.0%
Total allowance for loan losses ... 630,060 652,918 615,845
(1) Ratings levels have been restated in order to comply with Resolution No. 2,682/99 of the CMN issued on December 21, 1999, as amended.
As of December 31,
2011 2010 2009
(%) (%) (%) Allowance for loan losses/total loan portfolio ... 5.3% 5.8% 6.2%
Allowance for loan losses/past due loans(1) ... 132.8% 161.7% 136.7%
Allowance for loan losses/loans classified between D and H(1)... 75.6% 77.8% 80.3%
Past due loans (loans in arrears)/total loans(1)... 4.0% 3.6% 4.5%
(1) Allowance for loan losses is calculated according to the risk level of the credit following Resolution No. 2,682/99 of the CMN, as amended.
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We also assume the credit risk associated with certain FNE (and other government funds and programs) loans we manage (50% for all loans contracted after December 1, 1998, excluding certain financings under PRONAF, and 100% for debts that were originally granted by another source and later renegotiated with FNE's funds). As of December 31, 2011, we were exposed to 50% and 100% of the credit risk for 83.1% and 0.7%, respectively, of the total FNE portfolio. Accordingly, we make provisions for losses on FNE loans in accordance with Central Bank guidelines, in the same manner as we provision for losses on our own loan portfolio, and these provisions are included in our overall allowances for loan losses and recorded on our balance sheet under the item other payables – provision for contingent liabilities. For a more complete discussion of our relationship with the FNE and other government funds and programs, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Principal Factors Affecting Financial Condition and Results of Operations—Our Relationship with FNE and Other Government Funds and Programs" and "Business—Description of Products and Services—Government Fund and Program Management" and of the corresponding risk we assume see also "Risk Factors—Risks Relating to us and the Brazilian Banking Industry—We could be subject to a greater degree of risk on certain FNE loans than on loans from our own portfolio."
Past Due Loans
Brazilian financial institutions are required to classify their lending transactions at different levels and record allowances according to the risk level attributed to each such transaction. The classification is based on the financial condition of the client, the terms and conditions of the relevant transaction and also the period of time for which the transaction has been in arrears according to the criteria set out in Resolution No. 2,682. Transactions are classified as follows:
• loans are classified according to the level of creditworthiness of the borrower, from "AA" (highest credit quality) to "H" (lowest credit quality). Each classification has a specified reserve requirement that is applicable to every financial institution in Brazil;
• if a loan is over 60 days past due with respect to principal or interest, it is classified as non-performing;
• if a loan is over 15 days past due with respect to principal or interest, it is classified as past due, and is reclassified (from level "B" to level "H") based upon the number of days past;
• if a loan is 15 days past due or less with respect to principal or interest, it is held in the same level of creditworthiness;
• if a loan is over 360 days past due it is written-off and the amount of the write-off is transferred to a compensation account; and
• in respect of their long-term loans, financial institutions are allowed to enlarge the applicable past due time periods by 100%, thereby permitting us to classify a loan as past due after 30 days as opposed to 15 days.
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The following table shows the risk classifications introduced by the Central Bank with the corresponding provision percentages that are required for each risk classification:
Risk Classification
Level of provision required by the
Central Bank Past due period (% of outstanding
balance) (Number of days) AA ... – – A ... 0.5 – B ... 1.0 30 C ... 3.0 31 to 60
D ... 10.0 61 to 90 E ... 30.0 91 to 120 F ... 50.0 121 to 150 G ... 70.0 151 to 180 H ... 100.0 181 to 360
On February 24, 2000, the CMN Resolution No. 2,697 amended Resolution No. 2,682/99 to provide that Brazilian financial institutions may classify credit transactions involving customers whose debts do not exceed R$50,000 in accordance with either the institution's own evaluation standards or according to the payment delay standards applicable to larger credits described above.
In certain situations, we renegotiate to reschedule the payment of principal and interest on overdue loans in order to increase the likelihood of payment. The criteria for approval of rescheduled loans vary from case to case.
Rescheduled loans are classified at the same risk level attributed to them before they are rescheduled, pursuant to Resolution No. 2,682.
Default History
Past due loans increased by 17.5% from R$403.9 million for the year ended December 31, 2010 to R$474.6 million for the year ended December 31, 2011 (compared to R$450.5 million for the year ended December 31, 2009). For a more complete discussion of past due loans, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations—Loan Loss History." We believe our allowance for loan losses is adequate to cover the risk of losses on our loan portfolio.
The following table provides information with respect to our total past due loans as of December 31, 2011, 2010 and 2009:
As of December 31,
2011 2010 2009
(R$ thousands)
Rural and agribusiness(1) ... 57,076 92,454 148,296 Industrial ... 103,029 100,061 145,205 Commercial ... 166,668 119,489 86,365 Purchases of consumer loan portfolios(2) ... 4,784 18 0
Individual and consumer ... 7,793 7,678 7,993 Other loans(3) ... 135,216 84,153 62,662 Total ... 474,566 403,853 450,521
(1) Does not include microcredit operations under the Agroamigo program, which are part of the FNE's loan portfolio.
(2) Recorded as financial Intermediaries on our income statement.
(3) Includes other loan operations.
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The following table reflects the balances of past due loans for our 50 largest customers by industry, as of December 31, 2011:
As of December 31, 2011
(R$ thousands, except percentages) Industrial ... 96,198 38.2%
Services ... 73,706 29.2%
Financial institutions ... 59,093 23.4%
Commercial ... 4,632 1.8%
Rural ... 18,473 7.3%
Total ... 252,102 100%
The table below shows our net losses on loans as a percentage of total loans as of and for the years ended December 31, 2011, 2010 and 2009:
As of and for the Year Ended December 31,
2011 2010 2009
(R$ thousands, except percentages) Balance at the beginning of the period ... 652,918 615,845 345,790
New Provisions ... 215,557 392,528 372,182 Write-offs ... (238,415) (355,455) (102,127)
Balance at the end of the period ... 630,060 652,918 615,845
Net change for the period(a) ... (22,858) 37,073 270,055 Total loan portfolio(b) ... 11,799,060 11,287,768 9,937,652 Net loss on loans(a)/(b) ... (0.19)% 0.33% 2.72%
The following table shows the breakdown of our past due loans as of and for the years ended December 31, 2011, 2010 and 2009:
As of and for the Year Ended December 31,
2011 2010 2009
(R$ thousands)
Balance at the beginning of the period ... 403,853 450,521 261,471
Net changes in provisions ... 309,128 308,787 291,177 Write-offs ... (238,415) (355,455) (102,127)
Balance at the end of the period ... 474,566 403,853 450,521
The following table shows a breakdown of the past due loan portfolio according to each rating category for the years ended December 31, 2011, 2010 and 2009:
As of December 31,
Ratings Categories 2011 2010 2009
(R$ thousands, except percentages)
AA ... ― 0.0% ― 0.0% ― 0.0%
A ... ― 0.0% ― 0.0% ― 0.0%
B ... 34,180 7.2% 38,743 9.6% 20,996 4.7%
C ... 41,691 8.8% 23,563 5.8% 16,746 3.7%
D-H ... 398,695 84.0% 341,547 84.6% 412,779 91.6%
Total ... 474,566 100% 403,853 100% 450,521 100%
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Return on Equity and Assets
As of December 31,
2011 2010 2009
(R$ thousands)
Net Income ... 314,799 313,590 459,012 Total average assets ... 25,069,411 20,347,623 16,784,668 Average shareholder's equity ... 2,320,304 2,108,648 1,930,283 Dividend and interest on shareholder's equity ... 169,226 206,511 240,446
Return on assets(1)... 1.23% 1.54% 2.73%
Return on equity(2)... 13.57% 14.87% 23.78%
Dividend payout ratio(3)... 54.00% 66.00% 52.00%
Equity to assets ratio(4)... 9.26% 10.36% 11.50%
Capital Ratio(5)... 16.58% 13.60% 12.99%
(1) Return on average assets is calculated as net income earned during the accounting period divided by our average assets.
(2) Return on average equity is calculated as net income earned during the accounting period divided by our average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
(5) Capital ratio required by Central Bank corresponding to a minimum capital adequacy ratio of 11% of total risk-adjusted assets. See "—
Return on Equity and Assets—Capital Adequacy and Minimum Capital Requirements."
Capital Adequacy and Minimum Capital Requirements
Since June 2004, the Central Bank has required banks in Brazil to comply with its regulations with respect to capital adequacy, which currently are similar to the Basel Accord. The Central Bank requires a minimum capital adequacy ratio of 11% of total risk-adjusted assets. Capital adequacy requirements are now established by Resolution No. 3,444 issued by CMN on February 28, 2007, as amended, which replaced Resolution No. 2,837 of May 30, 2001, establishing the criteria for determining the items to be included in Regulatory Capital (Tier 1 and Tier 2).
According to CMN and Central Bank regulations, long-term, subordinated debt without a pre-defined amortization schedule may be classified as Tier 2 capital, up to a maximum of 50% of Tier 1 capital upon Central Bank approval. The Central Bank approved our issuance of subordinated debt in the amounts of R$600.0 million in July 2009 and R$400.0 million in June 2010, respectively, to the FNE. We were able to classify that entire amount of subordinated debt as Tier 2 capital, resulting in an increase to our regulatory capital.
On December 9, 2004, the Central Bank published Communication No. 12,746, establishing the schedule for the adoption of the Basel II Accord in Brazil. Following the communication, CMN and the Central Bank issued several resolutions and circulars that became effective as of July 1, 2008, including CMN Resolution No. 3,490/07 which fully replaced Resolution No. 2,099/94 (which establishes the methodology for calculating regulatory capital) and set forth new criteria to the calculation of the minimum capital requirement for financial institutions. This method of calculation includes a capital requirement for operational risks and a more detailed calculation of credit risk and market risk, such as the more ranges of risk weighted assets, changes on the weight for specific credit risks and new rules for complex financial instruments, including securitization and derivatives.
According to Resolution 3,490/07, the Total Regulatory Capital Required is the sum of the following amounts: (i) credit exposure risk averaged by its weighting risk factor (11% as a rule); (ii) exposure risk in gold, foreign currency and exchange rate; (iii) risk of transactions subject to interest rate fluctuation; (iv) risk of transactions subject to commodities price fluctuation; (v) risk of transactions subject to variation of share price; and (vi) operational risk.
On October 29, 2009, the Central Bank set forth a new schedule for the adoption of the Basel II Accord, by means of Communication No. 19,028, which adjusted the previous schedule. Under this new schedule the requirements relating to the use of certain capital calculation models included in the Basel II Accord will be fully implemented by the first half of 2013. See "Regulation of the Brazilian Banking Industry—Regulations Affecting Financial Market Liquidity—Regulatory Capital and Shareholders' Equity Standards."
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On September 12, 2010, the Group of Governors and Heads of Supervision announced a substantial strengthening of existing capital requirements and fully endorsed previous agreements on the overall design of the capital and liquidity reform package, the Basel III Accord, which was presented during the Seoul G20 Leaders summit in November 2010. The reforms increased minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand periods of stress, bringing the total common equity requirements to 7%. Central Bank Communication No. 20,615 issued in February 2011 established the preliminary guidelines for implementation of these reforms in Brazil. The new rules are expected to be implemented gradually by the central banks of various countries between 2013 and 2019.
On February 17, 2012, the Central Bank published for public comments proposed rules changing the definition of regulatory capital currently set forth by CMN Resolution No. 3,444 issued on February 28, 2007.
Among other topics, the Central Bank indicated it intends to consider, in the composition of the reference shareholders' equity of financial institutions, their controlled entities similar to financial institutions (e.g., credit card administrators) and investment funds from which financial institutions take substantial risks and benefits. We
Among other topics, the Central Bank indicated it intends to consider, in the composition of the reference shareholders' equity of financial institutions, their controlled entities similar to financial institutions (e.g., credit card administrators) and investment funds from which financial institutions take substantial risks and benefits. We