Risk Management Report
Pillar 3 - 2Q14
Rule 12g3-2(b) Exemption # 82-35186
Risk Management Report - Pillar 3 – 2T14
RISK MANAGEMENT REPORT
PILLAR 3
BANCO DO BRASIL S.A.
2nd Quarter of 2014
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Risk Management Report - Pillar 3 – 2T14
Summary
1.
INTRODUCTION............................................................................................................................. 6
2.
GOVERNANCE .............................................................................................................................. 7
2.1
Types of Risks ...................................................................................................................... 7
2.2
Corporate Risk Governance ................................................................................................ 9
2.3
Risk Management Process ................................................................................................ 11
2.4
Reports ................................................................................................................................ 11
3.
REGULATION .............................................................................................................................. 12
3.1
Basel II ................................................................................................................................. 12
3.1.1
3.1.1.1
3.1.2
3.1.2.1
3.1.3
3.1.3.1
Pillar I ......................................................................................................................................... 13
Minimum Capital Requirements ................................................................................................ 13
Pillar II ........................................................................................................................................ 14
Risk and Capital Supervisory Process ...................................................................................... 14
Pillar III ....................................................................................................................................... 14
Transparency ............................................................................................................................. 14
3.2
Basel III ................................................................................................................................ 16
3.3
Basel II in Banco do Brasil ................................................................................................ 16
3.3.1
3.3.2
3.3.3
Market Risk................................................................................................................................ 17
Credit Risk ................................................................................................................................. 17
Operational Risk ........................................................................................................................ 17
4.
FINANCIAL CONGLOMERATE ................................................................................................... 19
4.1
Balance Sheet ..................................................................................................................... 19
4.2
Composition of the Financial Conglomerate ................................................................... 22
5.
RISK MANAGEMENT .................................................................................................................. 24
5.1
Credit Risk........................................................................................................................... 24
5.1.1
5.1.2
5.1.3
5.1.4
5.1.5
5.1.5.1
5.1.5.2
5.1.6
5.1.6.1
5.1.6.2
5.1.7
5.1.8
5.1.9
5.1.10
5.1.11
5.1.12
5.1.13
Management Objectives ............................................................................................................ 24
Credit Policy .............................................................................................................................. 25
Management Strategies ............................................................................................................ 25
Management Processes ............................................................................................................ 26
Communication and Information Processes ............................................................................. 28
Communication process for internal clients .............................................................................. 28
Communication process for external clients ............................................................................. 28
Measurement Systems .............................................................................................................. 28
Concentration ........................................................................................................................... 29
Regulatory Requirements ......................................................................................................... 29
Mitigation Policy......................................................................................................................... 29
Processes for Monitoring the Effectiveness of Mitigators ......................................................... 29
Exposure to Credit Risk ............................................................................................................. 30
Acquisition, Sale or Transfer of Financial Assets ..................................................................... 37
Securities (TVM) operations derived from securitization processes ........................................ 37
Exposure to counterparty credit risks ....................................................................................... 38
Mitigating instruments ............................................................................................................... 41
5.2
Market and Liquidity Risks ................................................................................................ 43
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Risk Management Report - Pillar 3 – 2T14
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.2.6
5.2.7
5.2.8
5.2.9
5.2.10
Management Objectives ............................................................................................................43
Management Policies and Strategies ........................................................................................43
Hedge Policies ...........................................................................................................................46
Risk measuring systems and communication and information processes ................................46
Market Risk Management Structure ..........................................................................................48
Market Risk Management Process ............................................................................................50
Negotiable Portfolios ..................................................................................................................52
Non-negotiable Portfolios ...........................................................................................................53
Liquidity Risk Management Structure ........................................................................................56
Liquidity Risk Management Process .........................................................................................58
5.3
Operational Risk................................................................................................................. 59
5.3.1
5.3.2
5.3.3
5.3.4
5.3.5
5.3.6
5.3.7
Management Objectives ............................................................................................................59
Operational Risk Policy ..............................................................................................................60
Management Processes and Strategies ....................................................................................61
Communication and Notification Processes ..............................................................................61
Measurement Systems ..............................................................................................................62
Operational Risk Mitigation ........................................................................................................62
Processes and Strategies to Monitor the Effectiveness of Mitigators ........................................62
5.4
Other Risks ......................................................................................................................... 63
5.4.1
5.4.2
Risk strategy, reputation, environmental and actuarial ..............................................................63
Shareholdings ............................................................................................................................65
6.
CAPITAL ...................................................................................................................................... 68
6.1
Capital Management .......................................................................................................... 68
6.2
Referential Equity (RE) Details ......................................................................................... 69
6.3
Regulatory Adjustments deducted from Referential Equity (methodology adopted from
October 2013): ..................................................................................................................................... 70
6.4
Minimum Reference Equity Required (MRER) ................................................................ 71
6.5
Capital Adequacy Ratio ..................................................................................................... 73
6.6
Assessment of Sufficiency and Adequacy of Referential Equity (PR) ......................... 74
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List of Tables
Table 1 - Timetable for Basel III Implementation in Brazil ......................................................... 16
Table 2 - Financial Balance Sheet x Consolidated Balance Sheet ........................................... 20
Table 3 - Composition of the Financial Conglomerate .............................................................. 22
Table 4 - Composition of the Economic and Financial Consolidation: ....................................... 23
Table 5 - Concentration of the ten and of the hundred largest customers in relation to the total of
transactions with credit granting feature ................................................................................... 30
Table 6 - Credit risk average exposure ..................................................................................... 30
Table 7 - PJ credit risk exposure by geographic regions ........................................................... 31
Table 8 - PF credit risk exposure by geographic regions .......................................................... 31
Table 9 - Credit risk exposure of the financial conglomerate, by economic sector .................... 32
Table 10 - Credit risk exposure of the agribusiness portfolio, segregated by economic sector
and businesses portfolio (PJ). .................................................................................................. 33
Table 11 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions ............ 33
Table 12 - Amount of overdue transactions by geographical regions. ....................................... 34
Table 13 - Amount of overdue transactions, segregated by economic sector. .......................... 34
Table 14 - Write-off transactions by economic sector. .............................................................. 35
Table 15 - Total allowances for loan and lease losses in the quarter and variations ................. 36
Table 16 - Credit risk exposure by FPR .................................................................................... 36
Table 17 - Loss operations assigned, with substantial transfer of risks and benefits ................. 37
Table 18 - Value of the portfolio granted with co-obligation, recorded in the off balance sheet . 37
Table 19 - Value of the exposures derived from acquiring FIDC and CRI ................................. 38
Table 20 - Notional value of contracts to be liquidated in clearing house liquidation systems, in
which clearing houses acts as central counterparty .................................................................. 39
Table 21 - Notional value of contracts subject to counterparty credit risk in which clearing
houses do not act as central counterparty, Segmented in uncollateralized agreements and
collateralized agreements. ........................................................................................................ 40
Table 22 - Positive gross value of the respective contracts, including derivatives, loans to settle,
assets loans and repurchase agreements, disregarded the positive values related to
compensation agreements defined in Resolution nº 3.263/05................................................... 40
Table 23 - The value of collaterals that cumulatively meet the requirements of paragraph VII,
Art.9, of Bacen Circular 3,678/13 .............................................................................................. 41
Table 24 - The value of collaterals that cumulatively meet the requirements of paragraph VII,
Art.9, of Bacen Circular 3,678/13: ............................................................................................. 41
Table 25 - Mitigated value of exposure, weighted by the respective risk factor ......................... 43
Table 26 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 2Q14 .................................................................................... 44
Table 27 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 1Q14 .................................................................................... 45
Table 28 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 4Q13 .................................................................................... 45
Table 29 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 3Q13 .................................................................................... 45
Table 30 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 2Q14 .................................................................................... 46
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Table 31 - Negotiable Portfolio by relevant market risk factor, divided into positions purchased
and positions sold. ....................................................................................................................53
Table 32 - Impact on income or in assessing the value of the institution due to shocks in interest
rates segmented by foreign currencies .....................................................................................55
Table 33 - Phases of the operational risk management process ...............................................60
Table 34 - Operational losses monitoring by loss events category. ...........................................63
Table 35 - Shareholdings – Banking Book ................................................................................67
Table 36 - RE Historical Series – Financial Conglomerate. .......................................................69
Table 37 - Regulatory Adjustments ...........................................................................................70
Table 38 - RE Historical Series – Financial Conglomerate ........................................................71
Table 39 - Minimum Reference Equity Required of the Financial Conglomerate .......................73
Table 40 - The Total Capital Ratio and RE margin - Financial Conglomerate............................74
Table 41 - Criteria and parameters for classification of the capital condition .............................75
List of Figures
Figure 1 - Governance Structure .................................................................................................9
Figure 2 - Risk Management Structure and Process .................................................................10
Figure 3 - Basel II Pillars ...........................................................................................................12
Figure 4 - Capital allocation Models ..........................................................................................13
Figure 5 - Pillar III Structure ......................................................................................................15
Figure 6 - Creditrisk management .............................................................................................24
Figure 7 - Credit risk management structure .............................................................................27
Figure 8 - Market risk management structure ............................................................................49
Figure 9 - Management Process ...............................................................................................52
Figure 10 - Liquidity Risk Management .....................................................................................56
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Risk Management Report - Pillar 3 – 2T14
1. Introduction
The purpose of this report is to inform the public about Banco do Brasil's structures,
processes and risk management policies.
Banking system sustainability is indissolubly linked with risk-management policies and
mechanisms. The methods of identifying, assessing, controlling, mitigating and
monitoring risk safeguard financial institutions in adverse situations and provide support
for positive, recurring earnings over time. BB considers essential risk and capital
management to the process of decision-making, providing greater stability, better capital
allocation and optimization of risk-return ratio.
As relevant as the increase in business volume should be the consistency of the
company's risk governance and efficiency of management processes. The institutions
that will overcome this challenge will be those that manage to transcend mere
compliance with regulatory requirements and consider the risk, in an agile and precise
way, in each decision-making.
Brazil’s participation in the Basel Committee on Banking Supervision encourages
broader, timelier adoption of international prudential standards. These new frontiers of
the regulatory environment require Brazilian financial institutions to become more agile
and adaptable.
Changes to the global financial environment, such as market integration through
globalization, the emergence of new transactions and products, increasing technological
sophistication, and new regulations, have made financial activities and processes - and
their risks - ever more complex.
Additionally, the lessons learned from financial disasters in the 90’s and most recently at
2008, have helped to show the essential need for risk management in the banking
industry.
These factors have influenced regulatory agencies and financial institutions to invest in
risk management, seeking to strengthen the financial health of banks and to prevent
detrimental effects on the financial system.
In concert with this outlook, BB has invested in the continual improvement of its riskmanagement process and practices, in line with international market benchmarks and
the New Basel Accord, known as Basel II, and by the fine-tuning provided by Basel III.
Banco do Brasil remains continuously aligned with best management practices, among
them, the risk management architecture with multidimensional scope whose specificities
are described in this report.
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2. Governance
2.1 Types of Risks
The main risks to which BB is exposed in its business are:
Market Risk: possibility of losses from fluctuations of the market value of positions
held by the institution. It includes the risks of transactions subject to fluctuations of
exchange rates, interest rates, share prices, and commodity prices.
Liquidity Risk: possibility of imbalances between tradable assets and liabilities
payable - "mismatches" between payments and receipts - which can affect the
institution’s payment ability, taking into account the different currencies and
settlement terms of its rights and obligations.
Credit Risk: possibility of losses associated with non-fulfillment by a borrower or a
counterparty of their respective financial obligations according to negotiated terms,
the devaluation of a loan agreement due to a drop in the borrower’s risk rating, a
decline in gains or earnings, benefits granted in renegotiation, and recovery costs.
Among other things, credit risk is defined as including:






Counterparty Credit Risk: Possibility of a given counterparty not fulfilling its
obligations related to settlement of transactions that involve trading financial
assets, including those related to the settlement of financial derivatives;
Country Risk: Possibility of losses associated with non-fulfillment of financial
obligations according to negotiated terms by a borrower or counterparty
located outside of the country, resulting from actions taken by the government
of the country where the borrower or counterparty is located;
Transfer risk, Possibility of difficulties occurred during currency conversion of
funds received;
Commitment Risk: Possibility of having to make disbursements to honor
guarantees, bonds, co-obligations, credit commitments, or other transactions
of a similar nature;
Intervener Risk: Possibility of losses associated with non-fulfillment of
financial obligations under the terms agreed by the mediator of loans;
Concentration Risk: Possibility of credit losses arising from significant
exposure to counterparty, a risk factor or groups of counterparties related by
common characteristics.
Operational Risk: possibility of losses due to failures, deficiencies, or improper
internal processes, people and systems or external events. This includes the
possibility of losses arising from legal risk.
Legal Risk: possibility of losses associated with improper or deficient contracts
signed by the institution, as well as sanctions resulting from noncompliance with
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Risk Management Report - Pillar 3 – 2T14
legal provisions and compensation for damages to third parties resulting from
activities engaged in by the institution.
Strategic Risk: possibility of loss arising from adverse changes in the business
environment, or use of inappropriate assumptions in decision making.
Compromises:
.



Systemic Risk: possibility of losses due to the financial difficulties of one or
more institutions that cause substantial damage to others, or a disruption of
normal operations of the national financial system.
Situational Risk: arises from the possibility of losses caused by changes to
political, cultural, social, economic, regulatory or financial conditions in Brazil
and other countries.
Corporate Risk: possibility of loss arising from the use of inappropriate
assumptions in making strategic decisions or failure of the organization in a
timely and proactively adjust its corporate strategy in relation to the current
and future situation, national and international.
Reputation Risk: possibility of negative perception about the institution on the part of
customers, counterparties, shareholders, investors, government agencies,
community or supervisors that can adversely affect the sustainability of the business.
Compromises:


Business and Relationships: Possibility of reputational damage associated
with the strategies, products, services, business transactions and external
relationships.
Controls and compliance: Possibility of reputational damage associated with
the ineffectiveness of the controls and the legal and regulatory noncompliance.
Social and Environmental Risk: possibility of losses arising directly or indirectly from:


Adverse environmental and social impacts resulting from administrative and
business practices of BB, or stakeholders; and
Adverse impacts to the Bank’s operations resulting from conjectural aspects related
to social and environmental unsustainability of the modes of production and the
existing consumption patterns.
Compromises:



Administrative practices - possibility of losses arising from environmental impacts
generated by the administrative activities of the institution;
Financial Support - possibility of losses arising from environmental impacts related to
the characteristics of the products and services or activities supported financially by
the institution, as well as identified in assets posted as collateral or in lieu of
payment.
Equity - possibility of losses arising from environmental impacts generated by
investments or shares in companies with absence or inefficiency of policies and
environmental management and / or high level exposure.
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
Environmental Scenario - possibility of losses arising from changes brought about in
the political, cultural, economic or financial conditions related to environmental
issues.
Actuarial Risk: Possibility of discrepancy between the actuarial assumptions used in the
calculation of contributions, benefits and technical provisions and the data effectively
carried out.
2.2 Corporate Risk Governance
The risk-governance model adopted by BB involves a committee and subcommittee
structure, with the participation of many units at the bank, addressing the following
issues:
a) separation of duties: business versus risk;
b) specific structure for risk management;
c) defined management process;
d) decisions at several hierarchical levels;
e) clear rules and authority structure; and
f) reference to best management practices.
Figure 1, below, represents the governance structure of the Bank’s risk management
Figure 1 - Governance Structure
All decisions related to risk management are made jointly and in accordance with BB’s
guidelines and rules.
Banco do Brasil’s risk governance is centralized in the Global Risk Committee (CRG),
composed by members of the Executive Board of Directors, consisting of a steering
committee, whose main purpose is to establish strategies for risk management,
appropriate overall risk-exposure limits to capital allocation in light of risks.
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Seeking to give flexibility the management process, several subcommittees were set up
to address Credit Risk (SRC), Market and Liquidity Risk (SRML), and Operational Risk
(SRO); they make decisions and/or instruct the CRG, and have delegated decisionmaking power.
The Risk Management Board (DIRIS) is responsible for managing credit, market and
liquidity and the Operational Risk Unit (URO) is responsible for managing operational
risks. These structures reports to the Office of the Vice President for Internal Controls
and Risk Management, providing synergy among processes and specialization and
contributing to better capital allocation.
Figure 2 demonstrates the decision-making flow of topics related to risk management:
Figure 2 - Risk Management Structure and Process
Decisions are reported to intervening units through documents that objectively express
the position taken by executive management, guaranteeing application throughout the
bank.
The Bank established concepts and management activities for strategy, reputational
and environmental risks in compliance with the requeriments of CMN Resolution
3.988/11 and Circular Bacen 3.547/11.
Additionally, BB assigned responsibility for managing these risks to the Risk
Management Unit, in conjunction with the Strategy and Organization Unit, in the case of
strategy and reputation risks, and in conjunction with the Sustainable Development Unit,
in the case of environmental risk.
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Risk Management Report - Pillar 3 – 2T14
The Board of Directors (CA), in conjunction with the Global Risk Committee (CRG) and
Operational Risk Subcommittee has been defined as the governance structure for
resolving matters related to these risks.
The interest rate risk of the banking book follows the established governance for market
risk and the concentration risk and the counterparty credit risk follow the established
governance for credit risk.
2.3 Risk Management Process
The risk-management process involves a continuous flow of information, abiding by the
following phases:
a) planning: data gathering and analysis phase and preparation of proposals;
b) decision: Proposals are assessed and deliberate collegiate way, in appropriate
levels and communicated to areas concerned;
c) execution: the intervening units implement the decisions made; and
d) monitoring: checking on the implementation of the resolutions and report to
subcommittees and CRG.
2.4 Reports
Risk-management reports support decision-making processes about risk in the
subcommittees, the Global Risk Committee, the Executive Board of Directors, and the
Board of Directors. The reports produced periodically have managerial information
(qualitative and quantitative) and subsidize the dissemination of information to the
market, as the Management Report and the Performance Analysis Report.
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3. Regulation
3.1 Basel II
In June 2004, the Committee published a document, commonly known as Basel II, with
the following objectives:
a) promote financial stability;
b) strengthen the capital structure of institutions;
c) favor the adoption of best risk-management practices; and
d) encourage greater transparency and market discipline.
Basel II proposes a more comprehensive approach in terms of strengthening banking
supervision and stimulating greater transparency in disclosing information to the market,
based on three major premises:
a) Pillar I - capital requirement for the coverage of credit, market and operational risks;
b) Pillar II - risks and capital supervision; and
c) Pillar III - information transparency and market discipline.
Figure 3 represents the pillars of Basel II.
Figure 3 - Basel II Pillars
Pillar I defines the treatment to be given to determine capital requirements in light of
risks incurred in the activities engaged in by financial institutions. In relation to the 1988
Accord, Basel II introduces a capital requirement for operational risk and refines the
discussion of credit risk, as shown in Figure 4.
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Figure 4 - Capital allocation Models
Basel II encourages the adoption of proprietary models to measure risks (credit, market,
and operational), with differing degrees of complexity, subject to regulatory approval,
which seeks to bring closer capital allocation and risk profile of the business.
Pillar II reaffirms and strengthens the role of internal and external oversight of risks and
capital of the institutions.
Pillar III stimulates market discipline through transparency of information on risk
management practices.
3.1.1 Pillar I
3.1.1.1 Minimum Capital Requirements
Under Pillar I, there are various alternatives to measure capital requirements depending
on its size, complexity, and technical capacity of the financial institution, in order to
measure risk, even considering the use of internal models (Advanced).
The main changes compared to Basel I are:
a) the sophistication of credit risk measurement methods; and
b) The addition of capital requirement for operational risk coverage.
Even though the internal models to calculate capital allocation require a greater degree
of complexity, sophistication and investment, they enable a greater degree of accuracy
in the evaluation of the capital required to support the risks incurred.
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3.1.2 Pillar II
3.1.2.1 Risk and Capital Supervisory Process
The Basel Committee established four essential principles of risk and capital
supervisory review which highlight the need for banks to evaluate capital adequacy in
relation to risks assumed and for supervisors to review their strategies and procedures
in light of these assessments. The principles of Pillar II are:
1) First Principle: banks must have a process to assess their capital adequacy in
relation to their risk profile and have a strategy to maintain adequate levels of
capital to cover risks;
2) Second Principle: supervisors should evaluate the banks’ strategies, the estimates
of capital, and the ability of banks to monitor and to guarantee their compliance
with minimum capital requirements;
3) Third Principle: supervisors expect, and may require, banks to operate above the
minimum capital requirements; and
4) Fourth Principle: supervisors may intervene in advance and require banks to take
prompt actions if their capital level falls below the minimum level. According to
Pillar II, executive management is responsible for both the risk-exposure strategy
and compatible levels of capital.
The main features that reflect a rigorous process to assess capital adequacy should
involve:
a) supervision of the bank’s senior management;
b) solid assessment of capital needs to tolerate business risks;
c) comprehensive assessment of risks;
d) monitoring and reporting; and
e) Review of internal controls.
Pillar II emphasizes need of the bank to have an adequate volume of capital to tolerate
all risks involved in the business. Besides the capital, the regulator also uses to address
the risk issue, internal controls and risk management processes that should be sufficient
and adequate.
3.1.3 Pillar III
3.1.3.1 Transparency
By encouraging information disclosure, Basel II seeks to increase market players’ power
of evaluation and action.
The purpose for creating this third pillar is to complement minimum capital requirements
(Pillar I) and the supervisory review process (Pillar II). This means that with the
development of rules that encourage and require more open information about banks’
risk profiles and capitalization levels, market players should feel encouraged to exercise
discipline in this market.
Pillar III covers the reference for the disclosure of qualitative information of internal
ratings systems structure and process to manage and recognize the risk mitigation.
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Risk Management Report - Pillar 3 – 2T14
To guarantee compliance with transparency, Basel II requires supervisors to have a
greater number of persuasive instruments, ranging from dialogue with the bank’s
management to financial fines, depending on the disclosure deficiency in question.
This represents the set of information-disclosure requirements which will allow market
players to evaluate the essential information in the institution’s structure, capital
measurements, risk exposure, risk-management processes, and capital adequacy.
Pillar III is based on four categories/divisions:
a) scope of application - represents the relationship between recommendations and
the bank’s structure;
b) capital - demonstrates the bank’s ability to absorb eventual losses;
c) risk exposure - evidence forms and the risk assessment itself; and
d) capital adequacy - enables the judgment of capital adequacy in light of risks
incurred.
Figure 5 represents the structure of Pillar III.
Figure 5 - Pillar III Structure
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Risk Management Report - Pillar 3 – 2T14
3.2 Basel III
On 1st March 2013, the Central Bank of Brazil (Bacen) published the Basel III rules
related to the definition of capital and capital requirements. Stand out, among the
measures included in the Brazilian regulatory:
a) definition of new methodology for calculating regulatory capital, which increases
the capacity to absorb losses and continues to be divided into Tiers I and II,
being Tier I composed of the Core Capital and Aditional Tier I Capital;
b) definition of new methodology for calculating the capital requirement
maintenance, adopting minimum requirements for Referential Equity, Tier I and
Core Capital, and the introduction of the Additional Core Capital;
c) greater transparency regarding the composition of capital; and
d) expansion of the risks’ scope captured by the capital structure.
The proposals related to the Leverage Ratio, to be applied as a complementary
measure to the minimum capital requirements, are under discussion in the Basel
Committee and will be implemented at a future time.
The regulations published by the Central Bank of Brazil are aligned with the procedures
of the regulators from developed countries, and can be consulted on the website of that
body.
It has established a schedule of gradual implementation of the capital requirement that
extends from October 2013 to January 2019 for which the transition is made gradually
and institutions can adapt over time. The timetable for implementing the Basel III
recommendations in Brazil is shown in Table 1.
Table 1 - Timetable for Basel III Implementation in Brazil
Indicator
A) Main Capital Requirement
B) Additional Main Capital (superior limit)
C) Requirem ents A + B
D) Minimum Capital Level I
E) Requirem ents D + B
F) Minimum PR
G) Requirem ents F + B
out/13
4,50%
4,50%
5,50%
5,50%
11,00%
11,00%
jan/14
4,50%
4,50%
5,50%
5,50%
11,00%
11,00%
jan/15
4,50%
4,50%
6,00%
6,00%
11,00%
11,00%
jan/16
4,50%
1,25%
5,75%
6,00%
7,25%
9,88%
11,13%
jan/17
4,50%
2,50%
7,00%
6,00%
8,50%
9,25%
11,75%
jan/18
4,50%
3,75%
8,25%
6,00%
9,75%
8,63%
12,38%
jan/19
4,50%
5,00%
9,50%
6,00%
11,00%
8,00%
13,00%
Complementarily, in 10/31/2013 Central Bank of Brazil issued new resolutions and
circulars aimed at adjusting the Basel III regulation in Brazil. These standards enhance
and detail specific points of existing regulations.
3.3 Basel II in Banco do Brasil
In order to continue the evolutionary process in risk management and business
practices, the Bank has decided to strategically adopt internal models for market risk,
credit and operational, aiming to be able to use the advanced approaches.
Implementation of Basel II at BB is under conduction by the Risk Management Unit
(DIRIS), which is in charge of coordination and preparation for meeting the
requirements of Basel II.
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Risk Management Report - Pillar 3 – 2T14
3.3.1 Market Risk
Within the framework of Banco do Brasil, its wholly-owned subsidiaries and Subsidiaries
of the financial conglomerate, is adopted a market risk management structure that aims
to identify, assess, monitor and control the exposures of their own positions. BB has
global and specific limits structure and Stress Testing Program of Capital Requirement
for Market Risk, both in line with the BACEN Circular 3.478/09.
3.3.2 Credit Risk
Regarding credit risk, BB uses proprietary methodologies to rate client’s risks.
Developed according to best market practices and concepts introduced by the Basel
Accord, these models (credit score and behavior score) consider both aspects, as
registration and historical use of banking products and customer credit with the Bank
and the market.
The Central Bank of Brazil Circular 3.648/13, of 03.04.2013, established minimum
requirements for the use of internal ratings based on Basel II approach for credit risk. At
the Bank, implementation of the approach is driven by strategic project with the
responsibility to build databases, develop models of risk parameters and validation
processes, ensuring integration with the management and documentation.
The Bank is carrying out the construction of models of risk parameters (probability of
default, exposure at the time of default, loss given default and effective maturity) and
review of risk mitigators provided in the New Capital Accord.
In order to support the process of managing credit risk, BB has also made significant
investments in solutions for information technology (TI), and the new tools have already
been installed.
3.3.3 Operational Risk
The operational risk management in the Banco do Brasil is based on best market
practices and in compliance with regulatory norms (Central Bank and supervisory
entities in countries where BB has dependencies installed). The operational risk
management is divided into five stages: identification, evaluation, control, mitigation and
monitoring.
To ensure greater focus on the operational risk management, in March 2014, it was
created the Operational Risk Unit, with a view to improve the operational risk
management and to provide the necessary condition with focus in reduce operational
losses, dissemination of the risk management culture and improvement of instruments
and tools used in mitigation.
This semester, the Bank improved the identification of operational risks using process
mapping, detailed analysis of operational loss events, information ombudsman, among
other sources.
17
Risk Management Report - Pillar 3 – 2T14
In this context, it is available methodology that allows the manager to identify
operational risks associated with processes under his responsibility, including the
identification of the occurrence of faults/inadequacies, assessing the possibility of loss,
identification of risk factors, identification of operational risks and their classification.
Furthermore, there is the implementation of integrated management processes, risks
and controls tool, aiming at integration between the areas of risks and controls with
process managers. This tool will allow, in a single environment, process mapping,
documentation, identification and analysis of operational risks and the monitoring of
mitigation actions.
All these measures are intended mainly to reduce and prevent major events that
generate operating loss, moreover, strengthen the structure of operational risk of the
Bank.
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Risk Management Report - Pillar 3 – 2T14
4. Financial Conglomerate
The risk management in Banco do Brasil's financial conglomerate covers
comprehensively the risks underlying the activities of Banco do Brasil. Management
activities are carried out by specific and specialized structures, as goals, policies,
strategies, processes and systems described in each of these risks.
The Bank adopts mechanisms to ensure the capital adequacy to cover other risks
incurred.
In line with Pillar II of Basel II, and in accordance with CMN Resolution 3.988/11 and
Central Bank Circular 3.547/11, Banco do Brasil initiated process seeking to implement
methodologies of management and evaluation of capital requirements for other relevant
risks incurred in their activities.
4.1 Balance Sheet
Following there is the composition of the Financial Balance Sheet compared to the
Balance Sheet disclosed in the Consolidated Financial Statements, as well as the
reference values in the "Attachment 1 - Composition of the Reference Equity".
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Risk Management Report - Pillar 3 – 2T14
Table 2 - Financial Balance Sheet x Consolidated Balance Sheet
2 Q 14
R$ thousands
ASSETS
Current assets and long-term receivables
Cash and Cash Equivalents
Short-term Interbank Investm ents
Open market investments
Interbank deposits
Securities and Derivative Financial Instrum ents
Ow n portfolio
Funding instruments issued by institution authorized by Banco Central do Brasil
Other
Subject to repurchase agreements
Deposits w ith Banco Central do Brasil
Pledged in guarantee
Derivative financial instruments
(Allow ance for securities losses)
Interbank accounts
Payments and receipts pending settlement
Restricted deposits
Banco Central do Brasil deposits
National Treasury - rural credits resources
National Housing Finance System
Interbank onlendings
Correspondent banks
Interdepartm ental Accounts
Internal transfers of funds
Loan Operations
Public sector
Private sector
Loan operations linked to assignment
(Allow ance for loan losses)
Lease Transactions
Private sector
(Unearned income on leasing transactions)
(Allow ance for leasing transactions losses)
Other Receivables
Receivables from guarantees honored
Foreign exchange portfolio
Receivables
Securities trading
Specific credits
Insurance, pension plans and capitalization
Sundry
Tax credits
Resulting from tax losses and negative basis of social contribution on net income
Resulting from temporary differences
Excess of 10% from Core Capital
Excess of 15% from Core Capital
Tax credits resulting from temporary differences not deducted from RE
Tax credits resulting from temporary differences for loan losses
Actuarial assets related to defined benefit pension funds
Other
(Allow ance for other losses)
Other Assets
Assets not for ow n use and stock materials
(Allow ance for impairment)
Prepaid expenses
PERMANENT ASSETS
Investm ents
Investments in subsidiaries and associated companies
Domestic
Goodw ill
Investments
Investments in insurance companies and entities similar to financial institutions
Excess of 15% from Core Capital
Investments not deducted from RE
Other Investments
Funding instruments issued by institution authorized for Banco Central do Brasil
Other
Abroad
Goodw ill
Other
Other investments
(Accumulated impairment)
Property, plant and equipm ent
Land and buildings
Revaluation of land and buildings
Other property, plant and equipment
(Accumulated depreciation)
Leased assets ( 1 )
Leased assets
(Accumulated depreciation)
Intangible
Intangible assets
Goodw ill
Other Intangible assets
Constituded from October 1, 2013
Constituded before October 1, 2013
(Accumulated amortization)
Goodw ill Amortization
Other Amortization
Intangible assets constituded from October 1, 2013 amortization
Intangible assets constituded before October 1, 2013 amortization
Deferred
Organization and expansion costs
(Accumulated amortization)
TOTAL ASSETS
(1)
Reference in
Attachm ent 1
(t)
(g)
(j1 )
(l)
(v)
(h 1 )
(e 1 )
(k)
(u)
(n)
(e 2 )
(e 3 )
(f 1 )
(f 2 ) ( o 1 )
(e 4 )
(f 3 )
(f 4 ) ( o 2 )
(m 1 )
(m 2 )
Financial
Econom ic and Financial
1.237.066.253
11.409.358
296.326.805
255.177.045
41.149.760
105.240.574
45.483.955
6.084
45.477.871
52.185.121
16
6.798.761
772.721
-97.091.973
7.014.546
88.859.926
86.567.017
69.278
2.223.631
229.205
988.296
227.880
227.880
562.182.339
27.580.414
556.400.814
188.976
(21.987.865)
234.279
580.803
(320.687)
(25.837)
163.458.088
144.266
15.444.236
2.789.452
1.278.017
1.468.760
-143.792.256
23.455.379
1.496.731
21.958.648
1.699.871
1.513.257
4.763.277
13.982.243
9.826.752
110.510.125
(1.458.899)
894.957
293.805
(138.877)
740.029
30.363.813
12.426.301
12.316.683
12.121.872
885.427
11.236.445
5.987.888
1.443.665
4.544.223
5.248.557
3.706.985
1.541.572
194.811
45.944
148.867
161.594
(51.976)
6.544.567
5.681.963
144.716
8.222.559
(7.504.671)
937.449
1.083.875
(146.426)
10.416.326
16.634.791
4.961.028
11.673.763
3.927.620
7.746.143
(6.218.465)
(1.890.961)
(4.327.504)
(257.435)
(4.070.069)
39.170
1.659.270
(1.620.100)
1.267.430.066
1.379.313.204
11.811.629
297.619.287
255.750.827
41.868.460
208.264.719
145.062.992
--53.502.969
16
8.433.244
1.299.206
(33.708)
97.146.263
7.014.720
88.891.791
86.598.882
69.278
2.223.631
250.865
988.887
228.568
228.568
585.824.016
31.382.314
577.963.810
188.976
(23.711.084)
1.074.072
1.127.593
-(53.521)
173.108.241
458.454
16.110.754
2.157.213
1.358.981
1.469.391
4.067.839
149.464.796
---------(1.979.187)
4.236.409
687.780
(159.247)
3.707.876
21.814.563
3.327.492
1.784.330
1.250.389
--------533.941
--1.632.657
(89.495)
7.671.359
6.585.412
-9.264.474
(8.178.527)
---10.767.757
17.264.739
----(6.496.982)
----47.955
1.683.537
(1.635.582)
1.401.127.767
Leasing t ransact ions were considered based on t he f inancial met hod, and t he amount s were reclassif ied f rom t he heading of leased asset s t o t he heading of leasing t ransact ions, af t er deduct ion of residual amount s received in advance.
20
Risk Management Report - Pillar 3 – 2T14
2 Q 14
In thousands of Reais
LIABILITIES
Current liabilities and long-term liabilities
Deposits
Demand deposits
Savings deposits
Interbank deposits
Time deposits
Securities sold under repurchase agreem ents
Ow n portfolio
Third-party portfolio
Free movement portfolio
Funds from Acceptance and Issuance of Securities
Funds from real state, mortgage, credit and similar bonds
Funds from debentures
Foreign securities
Certificates of structured operations
Interbank accounts
Receipts and payments pending settlement
Correspondent banks
Interdepartm ental Accounts
Thrid-party funds in transit
Internal transfers of funds
Borrow ings
Domestic loans - other institutions
Foreign borrow ing
Dom estic Onlending - Official Institutions
National Treasury
BNDES
Caixa Econômica Federal
Finame
Other institutions
Foreign Onlending
Foreign Onlending
Derivative Financial Instrum ents
Derivative Financial Instruments
Other Liabilities
Billing and collection of taxes and contributions
Foreign exchange portfolio
Shareholders and statutory distributions
Taxes and social security
Provision for deferred tax liabilities arising from positive adjustments of benefit pension funds
Provision for deferred tax liabilities arising from tax credits
Other
Securities trading
Technical provisions for insurance, pension plans and capitalization
Financial and development funds
Special operations
Subordinated debts
In accordance w ith the CMN Resolution No.4,192/2013 as Tier II
In accordance w ith regulations preceding the CMN Resolution No.4,192/2013 as Tier II
Other Subordinated debts
Equity and debt hybrid securities
In accordance w ith regulations preceding the CMN Resolution No.4,192/2013 as Capital Management
Other
Debt instruments eligible as capital
Instruments eligible as capital Management
Instruments eligible as Tier II
Instruments w ainting authorization from Banco Central do Brasil to compose the RE
Other liabilities
DEFERRED INCOME
SHAREHOLDERS' EQUITY
Capital
Local residents
Domiciled abroad
Capital Reserves
Revaluation Reserves
Profit Reserves
Accum ulated Other Com prehensive Incom e
(Treasury Shares)
Noncontrolling Interests
TOTAL LIABILITIES
Reference in
Attachm ent 1
(h2 )
(j2 )
(s) (x)
(q) (w )
(p)
(r)
(a)
(c1 )
(c2 )
(b)
(c3 )
(i)
(d)
Financial
Econom ic and Financial
1.196.982.814
477.444.491
69.332.577
146.460.984
27.829.549
233.821.381
280.523.585
50.966.245
229.557.340
-137.625.597
109.010.302
-28.612.359
2.936
5.182.305
5.159.692
22.613
3.907.172
3.904.755
2.417
17.258.058
-17.258.058
90.991.453
395.420
42.685.546
8.046.383
30.070.406
9.793.698
477
477
3.172.238
3.172.238
180.877.438
5.901.980
18.313.586
987.872
19.301.541
1.935.548
1.080.117
16.285.876
1.664.982
-8.405.067
2.141
48.405.820
19.614.708
23.071.865
5.719.247
12.223.583
11.292.755
930.828
16.270.037
13.376.542
1.716.498
1.176.997
49.400.829
403.606
70.043.646
54.000.000
43.136.853
10.863.147
10.768
4.524
23.652.588
(6.667.188)
(1.558.272)
601.226
1.267.430.066
1.328.920.990
479.882.803
69.376.605
146.460.984
28.842.030
235.203.184
289.099.406
59.238.389
229.656.954
204.063
149.691.821
116.936.274
761.630
31.975.698
18.219
5.183.513
5.160.900
22.613
3.928.855
3.925.709
3.146
18.645.933
292.690
18.353.243
93.019.520
435.787
43.785.224
8.046.383
30.958.428
9.793.698
477
477
3.770.728
3.770.728
285.697.934
5.992.586
18.663.250
1.088.221
22.782.130
---1.455.505
89.553.063
8.405.067
2.141
52.187.090
---12.223.583
--16.326.904
---57.018.394
416.152
71.790.625
54.000.000
43.136.853
10.863.147
10.768
4.524
23.260.140
(6.667.188)
(1.558.272)
2.740.653
1.401.127.767
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Risk Management Report - Pillar 3 – 2T14
4.2 Composition of the Financial Conglomerate
Institutions included in the scope of consolidation of the financial balance sheet,
segregated by business segments:
Table 3 - Composition of the Financial Conglomerate
2Q14
Activity Total Assests
R$ mil
Equity
B a nk ing S e gm e nt
B anco do B rasil - A G. Viena
(1)
(2)
B anking
39.489.179
B B Leasing Co mpany Ltd.
(1)
(2)
Leasing
100.888
660.461
100.825
B B Leasing S.A . - A rrendamento M ercantil
(1)
(2)
Leasing
47.411.334
3.799.487
B B Securities A sia P te. Ltd.
(1)
(2)
B ro ker
13.065
12.834
B B Securities LLC.
(1)
(2)
B ro ker
109.733
105.917
B B Securities Ltd.
(1)
(2)
B ro ker
463.732
122.548
B B USA Ho lding Co mpany, Inc.
(1)
(2)
Ho lding
3.835
3.409
B rasilian A merican M erchant B ank
(1)
(2)
B anking
8.790.103
993.951
B B A mericas
(1)
(2)
B ank
443.892
70.690
B esc Distribuido ra de Título s e Valo res M o biliário s S.A .
(1)
(2)
A sset M anagement
7.328
7.167
B anco P atago nia S.A .
(1)
(2)
B ank
9.964.495
1.465.180
(1)
(2)
Investment B ank
5.629.024
2.792.293
(1)
(2)
A sset M anagement
827.033
131.524
(1)
(2)
Service Rendering
3.910
3.810
Inv e s t m e nt S e gm e nt
B B B anco de Investimento S.A .
S e gm e nt o f F und M a na ge m e nt
B B Gestão de Recurso s-Distribuido ra de Título s e Valo res M o biliário s S.A .
O t he r S e gm e nt s
B B M o ney Transfers Inc.
(1) Subsidiaries.
(2) The Financial Statements refers to June/2014.
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Risk Management Report - Pillar 3 – 2T14
4.3 Composition of the Economic and Financial Consolidated
Following is shown the institutions included in the scope of consolidation of the
disclosed balance sheet, segregated by business segments
Table 4 - Composition of the Economic and Financial Consolidated:
R$ mil
Activity
2Q14
Total Assests
Equity
660.461
B a nk ing S e gm e nt
B anco do B rasil - A G. Viena
(1)
(4)
B anking
39.489.179
B B Leasing Co mpany Ltd.
(1)
(4)
Leasing
100.888
100.825
B B Leasing S.A . - A rrendamento M ercantil
(1)
(4)
Leasing
47.411.334
3.799.487
B B Securities A sia P te. Ltd.
(1)
(4)
B ro ker
13.065
12.834
B B Securities LLC.
(1)
(4)
B ro ker
109.733
105.917
B B Securities Ltd.
(1)
(4)
B ro ker
463.732
122.548
B B USA Ho lding Co mpany, Inc.
(1)
(4)
B rasilian A merican M erchant B ank
(1)
(4)
B B A mericas
(1)
B esc Distribuido ra de Título s e Valo res M o biliário s S.A .
(1)
B anco P atago nia S.A .
B anco Vo to rantim S.A .
3.835
3.409
B anking
8.790.103
993.951
(4)
B ank
443.892
70.690
(4)
A sset M anagement
7.328
7.167
(1)
(4)
B ank
9.964.495
1.465.180
(2)
(4)
B ank
97.325.670
7.586.576
B B B anco de Investimento S.A .
(1)
(4)
Investment B ank
5.629.024
2.792.293
Kepler Weber S.A .
(2)
(4)
Industry
745.237
402.070
Co mpanhia B rasileira de Securitização - Cibrasec
(3)
(5)
Credits A cquisitio n
127.061
74.575
Neo energia S.A .
(2)
(4)
Energy
9.380.642
9.253.436
(1)
(4)
A sset M anagement
827.033
131.524
B B Seguridade P articipaçõ es S.A .
(1)
(4)
Ho lding
6.348.799
6.338.898
B B Co r P articipaçõ es S.A .
(1)
(4)
Ho lding
642.320
43.451
B B Co rreto ra de Seguro s e A dministrado ra de B ens S.A .
(1)
(4)
2.067.460
35.009
B B Seguro s P articipaçõ es S.A .
(1)
(4)
5.619.203
5.613.287
B B Capitalização S.A (sucesso r o f No ssa Caixa Capitalização S.A .)
(1)
(4)
B B M apfre SH1P articipaçõ es S.A .
(2)
(4)
Co mpanhia de Seguro s A liança do B rasil
(2)
(4)
M apfre Vida S.A .
(2)
(4)
Vida Segurado ra S.A .
(2)
B rasilprev Seguro s e P revidência S.A .
Ho lding
Inv e s t m e nt S e gm e nt
S e gm e nt o f F und M a na ge m e nt
B B Gestão de Recurso s-Distribuido ra de Título s e Valo res M o biliário s S.A .
S e gm e nt o f Ins ura nc e . P riv a t e P e ns io n F und a nd C a pit a liza t io n
B ro ker
Ho lding
Capitalizatio n
5.642
5.514
11.582.925
2.130.127
Insurance Co mpany
10.233.071
1.455.727
P ensio n plan
841.277
365.812
(4)
Insurance Co mpany
501.408
173.560
(2)
(4)
P ensio n/Insurance
99.163.627
1.531.188
B rasilcap Capitalização S.A .
(2)
(4)
Capitalizatio n
M apfre B B SH2 P articipaçõ es S.A .
(2)
(4)
A liança do B rasil Seguro s S.A .
(2)
(4)
Insurance Co mpany
1.293.501
176.829
B rasilveículo s Co mpanhia de Seguro s
(2)
(4)
Insurance Co mpany
3.057.427
566.752
M apfre Seguro s Gerais S.A .
(2)
(4)
Insurance Co mpany
9.932.957
1.938.414
M apfre A ffinity Segurado ra S.A .
(2)
(4)
Insurance Co mpany
1.158.840
447.251
B B M apfre A ssistência S.A .
(2)
(4)
Service Rendering
4.236
2.530
Vo to rantim Co rreto ra de Seguro s S.A .
(2)
(4)
B ro ker
170.021
137.496
Segurado ra B rasileira de Crédito à Expo rtação - SB CE
(2)
(4)
Insurance Co mpany
59.867
26.592
IRB - B rasil Resseguro s S.A .
(2)
(4)
Reinsurer
11.571.908
2.773.721
B B A dministrado ra de Cartõ es de Crédito S.A .
(1)
(4)
Service Rendering
B B Elo Cartõ es P articipaçõ es S.A .
(1)
(4)
Elo P articipaçõ es S.A .
(2)
(4)
Co mpanhia B rasileira de So luçõ es e Serviço s CB SS - A lelo
(2)
(4)
Service Rendering
Elo Serviço s S.A .
(2)
(4)
Service Rendering
74.529
39.747
Cielo S.A .
(2)
(4)
Service Rendering
12.361.954
3.637.642
Tecno lo gia B ancária S.A . - Tecban
(3)
(4)
Service Rendering
875.968
312.295
A tivo s S.A . Securitizado ra de Crédito s Financeiro s
(1)
(4)
Credits A cquisitio n
935.324
885.579
A tivo s S.A . Gestão de Co brança e Recuperação de Crédito
(1)
(4)
Credits A cquisitio n
5
5
B B A dministrado ra de Co nsó rcio s S.A .
(1)
(4)
Co nso rtium
298.483
159.165
B B Tur Viagens e Turismo Ltda.
(1)
(5)
To urism
80.883
13.333
B B M o ney Transfers Inc.
(1)
(4)
Service Rendering
3.910
3.810
B B Tecno lo gia e Serviço s S.A .
(1) Subsidiaries.
(1)
(4)
IT
341.016
189.961
Ho lding
Ho lding
11.673.900
354.809
12.643.820
2.768.167
S e gm e nt o f P a ym e nt M e t ho ds
Ho lding
Ho lding
101.423
27.404
541.993
541.858
1.050.771
1.049.940
3.253.139
899.535
O t he r S e gm e nt s
(2) Jo int venture, pro po rtio nately included in co nso lidatio n.
(3) A sso ciated co mpanies, pro po rtio nately included in co nso lidatio n as B acen’ s Regulatio n.
(4) The Financial Statements refers to June/2014.
(5) The Financial Statements refers to M ay/2014.
23
Risk Management Report - Pillar 3 – 2T14
5. Risk Management
5.1 Credit Risk
5.1.1 Management Objectives
Exposures subject to credit risk form a big part of Banco do Brasil’s assets. Therefore,
the risk management of these exposures is fundamental for the bank to achieve its
objectives.
Banco do Brasil’s credit risk is managed according to best market practices and follows
the banking supervision and regulatory rules. It seeks to identify, assess, control, and
mitigate the risk exposures, monitor the management process, contribute to maintain
the bank’s health and solvency, and ensure the interests of the shareholders.
Credit risk management in the financial conglomerate involves credit policy, risk
appetite and tolerance, strategies, processes, procedures and credit risk management
systems, as the figure below:
Figure 6 – Credit risk management
Note: CA = Board of Directors; CRG = Global Risk Committee; SRC = Credit Risk Subcommittee; DICRE = Credit Board; DIRAO = Asset Restructuring
Board; DIRIS = Risk Management Board.
In accordance with CMN Decision 3.721/09, the Board of Directors (CA) approved the
credit risk management structure of Banco do Brasil, composed by Global Risk
24
Risk Management Report - Pillar 3 – 2T14
Committee (CRG), Credit Risk Subcommittee (SRC), Credit Board (DICRE),
Operational Asset Restructuring Board (DIRAO), and Risk Management Board (DIRIS).
This credit risk management structure is compatible with the nature of transactions, the
complexity of products and services, and in proportion to the size of the credit-risk
exposure incurred by Banco do Brasil.
In view of Diris is the unit at the bank in charge of overall risk management and does
not have any ties to the management of third-party resources administration or to
performing transactions subject to credit risk, the CA stated the Director of Risk
Management as the person in charge of BB’s credit risk management before the Bacen.
5.1.2 Credit Policy
Banco do Brasil’s credit policy contains strategic guidelines to direct credit-risk
management actions in the financial conglomerate. It is approved by the Board of
Directors and reviewed every year. It applies to all businesses that involve credit risk
and is available to all employees. It is expected that the Subsidiaries, Affiliates and
Investments companies define their paths from these guidelines, taking into account the
specific needs and legal and regulatory issues to which they are subject.
The credit policy is divided into four blocks: General Aspects, Assuming Credit Risk,
Collections and Credit Recovery, and Credit Risk Management. Each block contains a
comprehensive set of statements which encompass all stages of credit-risk
management at Banco do Brasil.
Some topics addressed in Banco do Brasil’s credit policy are listed below:
‐
‐
concept of credit risk;
separation of duties;
‐
‐
‐
‐
‐
‐
joint decisions;
risk appetite;
risk limits;
client rating;
‐
‐
‐
conditions for assuming risk;
guidelines for collections and credit
recovery;
Capital planning
allowance and capital levels; and
stress tests.
5.1.3 Management Strategies
Aligned to the objectives of credit risk management, the Board of Directors (CA)
establishes the credit policy and the risk appetite of Banco do Brasil and approves
management strategies, which are defined by the Global Risk Committee (CRG) and
operationalized by the Credit Risk Subcommittee (SRC). The CRG also sets global
limits and approves the capital allocation.
The permanent voting members in CRG are the President, the Vice-President of
Financial Management and Investor Relations, the Vice President of Wholesale,
International Business and Private Bank, the Vice President of Retail, Distribution and
Operations, the Vice President of Internal Controls and Risk Management and the Vice
25
Risk Management Report - Pillar 3 – 2T14
President of Human Resources Management and Sustainable Development. The other
vice presidents are non-permanent voting members.
The SRC was created to give more agility to decisions about credit risk management. It
is a structure subordinated to CRG, which has delegated decision-making authority to
deliberate on certain issues, equipping the CRG on other issues. The SRC is composed
of the directors of the areas involved with the management of credit risk, being
coordinated by the Director of the Risk Management Board.
Credit-risk management strategies guide actions at the operational level, comprising:
a) approving credit risk management models;
b) setting goals for timely payment, recovery, maximum loss, and quality of the loan
portfolio;
c) setting risk and concentration limits; and
d) keeping appropriate levels of allowances and capital;
5.1.4 Management Processes
According to Banco do Brasil’s credit risk management structure, the Credit (DICRE),
Operational Asset Restructuring (DIRAO) and Risk Management (DIRIS) units are
responsible for implementing strategic decisions approved by the CA, CRG and SRC,
keeping exposure at the risk levels set by the executive management.
DICRE focuses on clients and operations, whose main products are: registration,
marketing studies and information on economic sectors, methodologies (risk, risk
components, and credit limits), risk analysis (clients, operations, projects, economic
sectors, countries, and projects), validation and monitoring of risk methodology and
credit-risk components, study of investment and leasing transactions,
economic/financial evaluation and diagnosis of businesses/corporate groups, monitoring
the credit portfolio, and producing inputs for pricing credit risk.
The DIRAO operates in collecting, and recovering problem credits, whose main
products are: models to rate clients under collections and recovery, collection and
recovery strategies, recovery quality indicators, management of collections and
recovery channels, rescheduling debt, restructuring transactions, setting negotiating
floors and methodologies for dealing with problem credits or defaults.
The DIRIS focuses on managing the credit risk of aggregate positions, whose main
products are: policies, risk limits, credit risk models, information on credit risk, indicators
of credit portfolio quality, capital allocation as a function of risk, management of the
credit portfolio’s risk, controlling of credit risk exposure and stress testing.
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Risk Management Report - Pillar 3 – 2T14
Figure 7 summarizes the responsibilities of the units:
Figure 7 - Credit risk management structure
The processes and procedures of the credit risk management structure are validated
and performed by two internal units at different points in time, a fact that ensures the
adequate separation of duties and the independence of work. The Internal Control
Board (DICOI) is responsible for validating the financial conglomerate’s risk
determination and measurement models and the bank’s internal control system. Internal
Audit (AUDIT) periodically evaluates credit risk management processes to verify
whether they are consistent with the strategic guidelines, credit policy, and regulatory
and internal rules.
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Risk Management Report - Pillar 3 – 2T14
5.1.5 Communication and Information Processes
Disclosure of credit risk information is a continual and ongoing process whose premises
considered when selecting and disclosing information include: best practices, banking
laws, user needs, the bank’s interests, confidentiality, and the relevance of the
information.
The communication and information on credit risk management is provided to internal
and external clients, according to the following processes:
5.1.5.1 Communication process for internal clients
The operational units of the credit risk management structure communicate permanently
to upper management about risk exposure in order to monitor management actions and
decision-making by the Senior Management.
The communication process involves several reports on credit risk management, which
are produced periodically and are the result of analyzes conducted by professionals
from the units. They demonstrate the credit risk of all exposure or in certain portfolios,
such as:
a) Presentation of the Bank’s credit portfolio X National Financial System;
b) Comparative BB credit portfolio x main competitors;
c) Credit Risk Panel; and
d) Stress test for credit risk;
5.1.5.2 Communication process for external clients
The operational units of the credit risk management structure produce information for
external users and send it to the Investor Relations Unit (URI) that, as a practice of
transparency, discloses this information to the market, as a transparent governance
practice, allowing investors and interested parties to monitor risk-management actions
and the evolution of credit risk, and to prove the Bank’s capital adequacy to cover all
risks assumed.
Information for external users is provided on a publicly accessible location, easily found
on the bank’s website. The following documents are published in the following
documents:
a) Management Discussion and Analyses;
b) Explanatory Notes to Financial Statements; and
c) Annual Report.
5.1.6 Measurement Systems
Credit risk is measured in many ways: by default, arrears, portfolio quality, and
allowance for doubtful accounts, concentration, expected losses, and regulatory
requirements, among others.
The quantity and nature of our operations, the diversity and complexity of our products
and services, and the volume exposed to credit risk require systematic measurement of
28
Risk Management Report - Pillar 3 – 2T14
credit risk at Banco do Brasil. The bank has enough databases and corporate system
infrastructure to ensure comprehensive measurement of credit risk.
Some of these risk measures are highlighted.
5.1.6.1 Concentration
The bank has developed and implemented a system to measure and monitor credit risk
concentration in businesses. The model is based on the Herfindahl Index. It evaluates
concentration based on borrower’s credit risk, and it considers the interrelationship
among the various economic sectors that comprise the businesses credit portfolio.
5.1.6.2 Regulatory Requirements
The Bank measures the Regulatory Capital requirement for credit risk through
Regulatory Simplified Standardized Approach, whose procedures for calculating the
potion of risk-weighted assets (RWA) regarding exposure to credit risk (RWA CPAD) were
released by the BACEN through Circular 3.644/13. These procedures were
implemented in a proprietary system that determines the capital requirements quickly
and securely, allowing timely verification of the bank’s solvency under the regulator’s
rules. The Bank uses Regulatory Capital information to assess the efficiency of capital
allocation and planning.
5.1.7 Mitigation Policy
Banco do Brasil adopts a conservative attitude toward credit risk. In conducting any
business subject to credit risk, the bank’s general rule is to tie it to a mechanism that
provides partial or complete hedging of risk incurred. In managing credit risk on the
aggregate level, to keep exposure within the risk levels established by the High Staff,
the Bank has the prerogative to transfer or to share credit risk.
The use of credit risk mitigating instruments is stated in the Credit Policy, present in
strategic decisions, and formalized in credit rules, reaching all levels of the organization
and covering all stages of credit risk management.
Credit rules provide clear, comprehensive guidelines for the operational units. Among
other aspects, the rules address ratings, requirements, choices, assessments,
formalization, control, and reinforcement of guarantees, ensuring the adequacy and
sufficiency of the mitigator throughout the transaction’s cycle.
5.1.8 Processes for Monitoring the Effectiveness of Mitigators
Monitoring the effectiveness of mitigators is part of the bank’s credit risk management
processes. We quote, as an example, monitoring exposures subject to credit risk, the
risk ratings of loans, capital management, and collections and recovery of credits.
The processes of monitoring credit risk exposure and rating loans risks produce
important information for verifying the effectiveness of mitigating instruments. The low
default ratio in certain segments of the credit portfolio and the lowest level of allowances
29
Risk Management Report - Pillar 3 – 2T14
in certain transactions may mean that the existence of guarantees tied to exposure
reducing credit risk and capital requirements for its coverage.
The process of collecting and recovering credits generates information that enables the
bank to verify which mitigators were the most important for receiving credits of default
loans and for recovering problem credits, allowing the review of the criteria for choosing
guarantees, allowances, and capital allocation.
5.1.9 Exposure to Credit Risk
The table below shows the concentration levels of the ten largest customers in relation
to total transactions with credit granting feature.
Table 5 - Concentration of the ten and of the hundred largest customers in relation to the
total of transactions with credit granting feature
1st to 10th 1st ao 100th
2Q14
10.7%
27.3%
1Q14
11.2%
27.3%
4Q13
12.2%
27.4%
3Q13
12.3%
27.9%
2Q13
13.5%
30.2%
The following table shows credit risk average exposure of individual portfolios (PF) and
businesses (PJ).
Table 6 - Credit risk average exposure
R$ million
Exposure
2Q14
Balance * Average Balance
Individuals
Agrobusiness
111.413
37.138
Mortgage
23.678
7.893
Payroll Loan
61.565
20.522
Auto Loans
22.582
7.527
Credit Cards
64.050
21.350
Others
51.081
17.027
334.369
111.456
Agrobusiness
49.088
16.363
Investiments
71.802
23.934
Import/Export.
15.694
5.231
Working Capital
221.425
73.808
Others
153.146
51.049
511.155
170.385
845.524
281.841
Total Individuals
Com panies
Total Com panies
Total
* Includes BB internal portfolio and loans to concede
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Risk Management Report - Pillar 3 – 2T14
The next table presents the credit risk exposure of the businesses portfolio (PJ),
segregated by geographic regions in Brazil.
Table 7 - PJ credit risk exposure by geographic regions
R$ million
Region
Midw est
Northeast
North
Southeast
South
Foreign
Total
Agrobusiness
1.440
359
184
38.994
8.111
49.088
Investim ents
8.654
4.527
3.837
37.603
12.847
4.334
71.802
2Q14
Im port/Export. Working Capital
248
13.806
569
17.318
45
6.514
12.513
139.266
2.320
31.845
12.676
15.694
221.425
Others
6.284
9.255
2.199
91.063
13.338
31.007
153.146
The table below presents the credit risk exposure of the individuals portfolio (PF),
segregated by geographic regions in Brazil.
Table 8 - PF credit risk exposure by geographic regions
R$ million
Region
Midw est
Northeast
North
Southeast
South
Foreign
Total
Agrobusiness
26.808
7.042
4.936
34.189
38.438
111.413
Mortgage
3.841
3.235
833
11.233
4.535
23.678
2Q14
Payroll Loan
11.522
13.416
4.181
27.643
4.804
61.565
Auto Loans
13.279
2.518
880
3.714
2.191
22.582
Credit Cards
9.387
11.065
3.283
28.777
11.539
64.050
Others
5.745
8.936
2.902
23.214
8.488
1.795
51.081
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Risk Management Report - Pillar 3 – 2T14
The next table shows the behavior of the total credit risk exposure, segregated by
economic sector
Table 9 - Credit risk exposure of the financial conglomerate, by economic sector
R$ million
Government
Foodstuffs of Animal Origin
Foodstuffs of Vegetable Origin
Bulding Specif ic Activities
Automotive
Beverages
Wholesale Trade and Industries
Retail Trade
Heavy Construction
Leather and Shoes
Other Activities
Electrical and Electronic Goods
Eletricity
Housing
Agricultural Consumables
Timber and Furniture
Metalw orking and Steel
Pulp and Paper
Oil and Gas
Chemicals
Services
Telecommunication
Textile and Garments
Transport
Individuals
Total(1)
2Q14
32,692,28
15,634,55
39,865,11
19,246,13
34,936,57
3,042,04
9,968,20
24,749,35
9,566,97
4,073,01
13,896,73
13,915,08
34,699,88
26,050,13
12,192,12
8,790,78
44,702,73
12,270,18
46,613,25
14,503,00
32,974,52
11,267,22
16,226,18
29,278,93
334,369,36
845,524
1Q14
30,400,15
15,279,67
37,272,36
17,608,26
31,710,23
2,797,87
9,416,84
23,414,44
8,457,87
3,992,01
39,483,59
13,870,46
30,661,17
24,891,85
11,897,14
8,682,25
43,111,45
11,627,26
38,401,27
12,925,84
31,445,58
11,343,99
15,574,89
28,004,73
321,034,94
823,306
4Q13
29,423,67
14,497,31
36,564,92
17,582,52
31,783,83
2,629,44
8,323,63
21,887,53
8,725,13
3,520,41
13,318,85
13,410,44
30,528,47
20,957,85
10,532,94
8,008,78
42,973,87
10,998,85
44,868,46
11,546,15
30,612,50
12,720,42
14,521,93
27,832,56
342,523,99
810,294
3Q13
25,517,02
13,288,37
33,895,66
16,952,33
29,536,00
2,484,96
7,692,82
20,967,48
8,557,94
3,177,50
11,548,05
13,494,80
28,244,42
19,220,83
9,557,65
7,503,30
41,255,14
10,438,82
40,733,10
10,846,91
28,644,29
12,954,15
13,884,08
25,249,59
328,126,78
763,772
2Q13
20,410,68
13,417,70
32,595,41
16,650,66
29,354,33
2,546,54
7,444,88
20,380,07
8,724,15
3,353,44
11,144,13
12,879,31
26,799,01
17,504,53
9,700,16
7,502,06
41,777,32
10,522,22
40,310,30
10,483,98
27,733,53
12,345,98
13,912,37
23,604,01
324,205,60
745,302
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Risk Management Report - Pillar 3 – 2T14
The table below shows the behavior of the total credit risk exposure of the agribusiness
portfolio, segregated by economic sector and businesses portfolio (PJ).
Table 10 - Credit risk exposure of the agribusiness portfolio, segregated by economic
sector and businesses portfolio (PJ).
Agrobusiness
Investim ents
0,01
Foodstuffs of Animal Origin
6.343,36
Foodstuffs of Vegetable Origin
14.933,55
Bulding Specif ic Activities
168,26
Automotive
368,60
Beverages
203,65
Wholesale Trade and Industries
1.288,70
Retail Trade
1.612,07
Heavy Construction
6,59
Leather and Shoes
0,31
Other Activities
549,91
Electrical and Electronic Goods
7,72
Eletricity
3.922,27
Housing
9,16
Agricultural Consumables
2.442,23
Timber and Furniture
711,05
Metalw orking and Steel
3.500,20
Pulp and Paper
2.529,29
Oil and Gas
9.292,08
Chemicals
146,96
Services
103,77
Telecommunication
Textile and Garments
621,82
Transport
326,55
Total(1)
49.088,09
(1)* Includes BB internal portfolio and loans to concede
2Q14
Others
Im port/Export
Working Capital
8.840,24
0,15
23.347,65
504,23
1.274,04
6.167,49
3.447,47
5.327,11
474,60
991,74
1.893,02
1.206,37
307,06
384,31
1.048,48
7.305,02
814,68
1.289,35
1.265,10
3.011,27
1.136,65
4.036,71
1.598,07
6.057,47
146,82
1.404,95
12.373,72
71.801,73
1.142,32
4.220,58
384,38
3.141,14
229,80
128,09
55,22
15,17
324,56
307,84
15,80
0,26
837,59
199,38
3.042,64
684,18
251,62
198,58
64,61
113,02
190,79
145,80
15.693,51
5.066,51
9.871,01
7.872,19
15.763,88
840,42
5.499,89
12.671,39
4.059,05
2.252,75
1.598,30
6.670,38
10.440,34
7.548,63
4.149,97
4.509,30
25.910,45
5.275,78
20.280,74
7.517,07
17.892,84
5.496,91
9.166,51
7.723,33
221.425,29
1.808,32
4.672,47
7.373,83
10.335,84
1.293,56
2.059,77
8.517,65
4.279,79
1.188,32
11.364,21
5.880,65
13.016,46
17.677,41
3.472,97
2.105,97
9.238,17
2.644,29
12.752,11
5.042,31
8.855,83
5.510,48
4.842,12
8.709,53
153.146,31
R$ million
Government
The next table presents the credit risk exposure of individual portfolios (PF) and
businesses (PJ), segregated by maturity of the transactions
Table 11 - Credit risk exposure of PF and PJ portfolios by maturity of the transactions
R$ mi l l i on
Exposure
Agrobusiness
Mortgage
Payroll Loan
Auto Loans
Credit Cards
Others
Total Individuals
Agrobusiness
Investiments
Import/Export.
Working Capital
Others
Total Com panies
Total
2Q14
until 6 m onths 6 m onths to 1 year 1 to 5 years
24,820,05
17,002,45
542,88
84,33
356,01
10,483,57
53,289,30
10,300,47
56,502,94
8,322,90
4,988,59
37,902,54
118,017,45
171,306,75
13,260,65
680,43
1,273,78
6,20
1,042,61
13,571,26
29,834,93
8,966,18
15,794,25
4,519,15
2,043,67
15,381,86
46,705,10
76,540,03
29,418,40
24,50
39,242,79
261,68
20,963,81
19,720,07
109,631,25
18,855,90
105,420,96
2,851,46
14,038,66
76,321,81
217,488,79
327,120,04
Above 5 years
43,914,11
46,342,99
20,506,03
23,325,48
219,67
7,305,60
141,613,89
10,105,71
43,707,14
50,730,81
24,399,92
128,943,58
270,557,47
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Risk Management Report - Pillar 3 – 2T14
The table below shows the amount of overdue transactions, gross of allowances and
excluded the write-offs, segregated by geographical regions in Brazil
Table 12 - Amount of overdue transactions by geographical regions.
R$ m illions
Region
15 to 60 days
61 to 90 days
91 to 180 days
181 to 360 days
Above 360 days
Midw est
757,21
242,55
607,95
610,31
47,93
Northeast
908,68
307,10
773,03
895,77
90,63
North
373,24
125,69
297,06
337,61
38,12
Southeast
2,697,95
1,147,40
2,522,23
3,038,43
311,29
South
1,071,82
390,49
802,19
1,163,32
137,81
Foreign
12,21
2,88
170,55
11,15
22,59
TOTAL
5,821,10
2,216,10
5,173,00
6,056,59
648,36
Below are presented the amount of overdue transactions, gross of allowances and
excluded the write-offs of the financial group, segregated by economic sector.
Table 13 - Amount of overdue transactions, segregated by economic sector.
R$ m illion
2Q14
Macro-sector
15 to 60 days 61 to 90 days 91 to 180 days 181 to 360 days
Government
12,56
1,24
1,22
1,05
Foodstuf f s of Animal Origin
159,81
123,25
108,70
67,36
Foodstuf f s of Vegetable Origin
620,28
487,68
451,44
166,80
Bulding Specif ic Activities
612,04
455,24
375,66
223,88
Automotive
796,17
595,51
490,45
297,32
Beverages
37,62
23,28
11,81
9,50
Wholesale Trade and Industries
308,36
240,70
182,24
117,64
Retail Trade
921,06
706,73
600,61
335,80
Heavy Construction
375,54
331,01
311,92
225,12
Leather and Shoes
160,75
122,98
95,93
52,41
Other Activities
11,11
7,74
6,46
4,62
Electrical and Electronic Goods
470,64
381,85
325,06
185,53
Eletricity
10,33
8,14
7,40
2,70
Housing
653,66
398,85
281,91
161,15
Agricultural Consumables
226,04
194,57
178,17
135,66
Timber and Furniture
442,97
338,56
289,50
158,29
Metalw orking and Steel
789,66
559,74
469,25
237,24
Pulp and Paper
179,70
142,91
126,38
81,74
Oil and Gas
512,95
436,41
394,58
143,83
Chemicals
343,86
267,09
226,30
131,04
Services
1.371,64
1.007,02
851,75
472,29
Telecommunication
85,49
68,48
56,71
32,79
Textile and Garments
744,23
601,40
523,16
299,49
Transport
573,89
419,51
348,96
202,74
Total
10.420,38
7.919,87
6.715,57
3.745,98
Above 360 days
0,00
14,77
16,25
14,66
12,05
0,57
23,69
18,06
3,62
3,08
0,31
12,38
0,38
10,05
4,02
15,23
18,85
5,33
6,21
11,11
30,39
0,63
18,99
7,28
247,89
34
Risk Management Report - Pillar 3 – 2T14
The following table shows the flow of write-off transactions, segmented by economic
sector
Table 14 – Write-off transactions by economic sector.
R$ Millions
Econom ic Sector
2T14
Write-off
Government
0,01
Foodstuffs of Animal Origin
77,28
Foodstuffs of Vegetable Origin
157,40
Bulding Specif ic Activities
118,69
Automotive
134,76
Beverages
7,68
Wholesale Trade and Industries
61,07
Retail Trade
139,91
Other Activities
1,48
Heavy Constructions
51,70
Leather and Shoes
26,72
Electrical and Electronic Goods
112,26
Eletricity
0,98
Housing
90,70
Agricultural Consumables
22,76
Timber and Furniture
73,31
Metalw orking and Steel
154,58
Pulp and Paper
45,33
Oil and Gas
49,47
Chemicals
46,63
Services
197,53
Telecomunication
13,80
Textile and Garments
122,66
Transport
Total
66,61
1.773,32
Individual
Total
1.759,01
1.759,01
35
Risk Management Report - Pillar 3 – 2T14
The table below shows the amount of allowances for loan and lease losses, segmented
by economic sector and its quarterly change
Table 15 - Total
allowances for loan and lease losses in the quarter and variations
R$ m illion
Macro-sector
Government
Foodstuffs of Animal Origin
Foodstuffs of Vegetable Origin
Bulding Specif ic Activities
Automotive
Beverages
Wholesale Trade and Industries
Retail Trade
Heavy Construction
Leather and Shoes
Other Activities
Electrical and Electronic Goods
Eletricity
Housing
Agricultural Consumables
Timber and Furniture
Metalw orking and Steel
Pulp and Paper
Oil and Gas
Chemicals
Services
Telecommunication
Textile and Garments
Transport
TOTAL
2Q14
4,09
247,56
1,206,84
491,61
628,27
32,59
267,96
679,22
432,08
128,51
43,00
453,19
123,23
447,44
235,23
329,93
704,45
168,15
306,86
436,65
1,045,94
62,26
627,03
517,35
9,619,44
over 1Q14
(7,79)
(33,72)
121,05
19,33
81,24
1,28
40,00
46,60
64,23
15,29
(112,41)
48,57
(1,29)
56,41
58,39
32,47
97,51
(6,67)
38,10
54,83
100,97
5,02
40,43
69,03
828,88
Below are presented the behavior of credit risk exposure, observed settings of Circular
BACEN 3.644/13, segmented by Risk-Weighting Factor (FPR), along with the average
exposure of the quarters.
Table 16 - Credit risk exposure by FPR
R$ thousand
Exposure by Risk Factor
2Q14
0%
401,555
1Q14
548,414
4Q13
3Q13
2Q13
567,021
687,906
694,498
1,578,798
1,286,258
20%
753,081
1,395,065
1,597,602
35%
19,838,582
17,135,911
14,446,624
-
-
50%
6,953,595
4,679,237
5,660,017
4,085,220
3,743,943
75%
163,979,017
163,661,922
166,097,426
313,351,108
303,988,148
85%
170,576,198
187,442,559
169,282,722
100%
208,886,832
186,292,760
199,293,268
191,309,764
187,581,403
150%
39,486,931
35,904,682
33,387,800
32,329,159
29,982,008
300%
6,043,228
5,655,366
5,822,886
5,952,360
5,983,765
616,919,019
602,715,916
596,155,366
549,294,316
533,260,022
610,841,197
599,097,288
576,382,641
542,716,108
516,484,031
Total
(1)
Average Exposure in the Quarter
(1)
-
-
(1) Includes lo ans, leasing, co mmitments after applying the co nversio n facto r, credits to release and guarantees rendered.
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Risk Management Report - Pillar 3 – 2T14
5.1.10 Acquisition, Sale or Transfer of Financial Assets
It is BB’s policy to assign credits from non-performing retail loans, recorded in losses
and for which the bank has full risk, after all collection procedures defined in the
collections and credit-recovery process have been exhausted, and the selected
transactions have reached the savings point, that is, the cost-benefit ratio does not
justify keeping the transactions under collections at a commercial bank.
Credit assignment is also used punctually to dispose of specific credits, when such an
operation is considered a viable alternative for its recovery, even if partial.
Below we show the flow of operations ceded with substantial transfer of risks and
benefits.
Table 17 - Loss operations assigned, with substantial transfer of risks and benefits
R$ Thousands
2T14
1T14
4T13
3T13
Operation Quantity (in thousands)
1,613
926
36
Value
4,925,119
4,404,571
228,392
Observation: The data refers to credit assigments ceded to Átivos S.A. Write-off Portfolio Values
2T13
-
BB has no exposure in the following categories:
a) exposures assigned with no substantial transfer or retention of risks and benefits;
b) exposures assigned with substantial retention of risks and benefits; and
c) exposures assigned in the quarter with substantial retention of risks and benefits,
which were written off as losses.
Below are presented the value of the portfolio granted with co-obligation, recorded in
the off balance sheet, not in the Assets
Table 18 - Value of the portfolio granted with co-obligation, recorded in the off balance sheet
R$ thousands
Risk Retention in Loan operations - Operations w ritten off
2Q14
6,433
1Q14
6,763
4Q13
8,353
3Q13
8,440
2Q13
10,017
5.1.11 Securities (TVM) operations derived from securitization processes
The securities acquired by BB are classified in the following categories:
a) category I - securities for trading - securities acquired with the intent of actively
and frequently trading them must be registered here;
b) category II - securities available for sale - securities that do not fall under
categories I or III must be registered here; and
c) category III - securities held to maturity – securities, except non-redeemable
shares, which the institution has the intent and financial capacity to keep in its
portfolio until maturity must be registered here.
Following are the exposures due to TVM operations derived from securitization
processes.
a) types of securities:
i. Receivables Investment Funds (FIDC) = resource pool that allots most of its net
assets to be applied in receivables. These are the rights and securities
37
Risk Management Report - Pillar 3 – 2T14
representing rights arising from operations carried out in the financial,
commercial, industrial and real-estate, mortgage, financial leasing, and serviceprovision sectors, as well as other financial assets and investment modes
admitted under the terms of CVM Instructions Nos. 356/2001 and 444/2006;
and
ii. Real Estate Receivables Certificates (CRI) = these are fixed-income securities
backed by real estate credits – counter installments flows of payments to
purchase real estate properties or rent - issued by securitization companies.
Table 19 - Value of the exposures derived from acquiring FIDC and CRI
R$ thousand
FIDC
CRI - category II
CRI - category III
7
11
3
2Q14
1,628,213
500,450
148,839
6
11
3
1Q14
1,520,527
538,882
184,595
7
13
3
TOTAL
21
2,277,501
20
2,244,004
23
Note: Information includes BB branches in Brazil and abroad (BB-Multiple Bank).
4Q13
1,526,161
520,555
174,129
2.220.845
7
12
3
22
3Q13
1,538,265
525,251
164,339
2,227,855
7
11
3
21
2Q13
1,457,102
503,311
171,489
2,131,903
b) type of credit backing the issue:
i. FIDC = vehicles financing, company cash flow receivables, debentures,
promissory notes, bank credit certificates, bank credit bill certificates, real estate
credit certificates, real estate letters of credit, export and other credit rights
credit bills; and
ii. CRI = real estate loans.
c) type of security:
i. FIDC and CRI = senior quota.
5.1.12 Exposure to counterparty credit risks
Banco do Brasil admits assuming counterparty credit risks with clients who have been
previously analyzed by the risk calculation methodology, with a credit limit applicable to
their profile established, subject to the existence of a sufficient operational margin to
cover such operations.
In this way, the counterparty credit risk exposures fall in line with other exposures in l
the customer’s loans on the credit limit assigned to it.
In the event of a default, these types of operations affect the client’s credit risk
according to the estimated value of the counterparty credit risk exposure--applicable
credit risk mitigators being taken into consideration, such as the adjacent asset issuer
risk, the volatility of the asset, the collateral given (haircut), and the rules for additional
collateral margin calls, according to the characteristics of the operation performed.
In operations conducted via Clearing Houses (Clearings), there is a risk transfer, where
the value of the operations is reflected in the credit limit of the Clearing House.
The approval of operations depends, at least, on the collateral required by the credit
limit order, and on those defined as mandatory by the credit line, being that the level of
demand for collaterals varies according to the client’s credit risk.
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Risk Management Report - Pillar 3 – 2T14
In collateralization, preference is given:
a) to assets acquired, produced, or processed with the credit;
b) to collaterals that offer self-liquidity to the operation;
c) to goods that are easily commercialized and non-perishable;
d) to goods of the same type, kind and category as the ones to be acquired or to be
hold with the credit; and
e) To goods that will produce income to pay for the operation.
In order to link goods as collateral, it is assessed through a technical evaluation or
through an opinion of value, whose period of validity is up to twelve months. In the case
of personal collateral, the economic-financial situation of guarantors or sureties is
analyzed, in addition to direct and indirect liabilities at the Bank, with debts to third
parties being considered, especially those related to tax, social security, and labor
debts.
When accepting a good or right as collateral, the maximum value considered is
obtained by applying a percentage on the value of said good or right, according to the
type and kind of good. In the case of a trade bills and checks in custody, the maximum
value is obtained by applying the percentage of the advance corresponding to the
Annual Liquidity Ratio (ILA) of the client’s portfolio on the bound value as collateral.
Goods received as collateral for loans must be backed until the operation is concluded,
or, in the case of funds given as collateral, remain blocked until the operation is
concluded.
Collaterals linked to loans are registered on a corporate basis, which allows automated
control of the linked goods and rights, and the generation of administrative information,
such as the collateral sufficiency analysis, and the adequacy analysis.
For operations subject to counterparty credit risk, Banco do Brasil follows the BACEN
Circular 3,068/01, considering such risk as a parameter when adjusting the market
value of such exposures, which affects the profit/loss of the period, or in separated
account of the Stockholder’s Equity, subject to the exposure’s classification. Below is
the notional value of contracts subject to counterparty credit risk to be liquidated in
clearing house liquidation systems, in which clearing houses acts as central
counterparty.
Table 20 - Notional value of contracts to be liquidated in clearing house liquidation systems, in
which clearing houses acts as central counterparty
R$ thousand
Stock Market Negotiation Counterparty
Futures Contracts
Purchase commitments
B
Options Market
Short Position
B
Note: Counterpart = (B) Stock Market
2Q14
1Q14
4Q13
3Q13
2Q13
15,041,532
15,041,532
6,331,737
6,331,737
18,047,792
18,047,792
9,221,096
9,221,096
12,602,133
12,602,133
4,979,401
4,979,401
13,317,052
13,317,052
6,238,176
6,238,176
15,495,617
15,495,617
4,811,157
4,811,157
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Risk Management Report - Pillar 3 – 2T14
In the next table, it is showed the notional value of the contracts subject to the
counterparty credit risk, in which there’s no work of the clearing houses as central
counterparty, segmented in uncollateralized agreements and collateralized agreements
Table 21 - Notional value of contracts subject to counterparty credit risk in which clearing
houses do not act as central counterparty, Segmented in uncollateralized agreements and
collateralized agreements.
R$ Thousand
Without guarantees
Forw ard operations (C)
"Sw aps" contracts (C)
Other derivative financial instruments
Currency arbitrage (future and prompt settlement)
Inter-bank exchange (future and prompt settlement)
With guarantees
Forw ard operations (IF)
"Sw aps" contracts (IF)
Reverse Repo
Repo
Note: Counterpart = (C) Client and (IF) Financial Institution.
2T14
6,474,151
7,245,134
1,571,374
2,195,682
429,400
2T14
17,656
10,197,816
254,491,820
279,120,064
1T14
11,043,960
6,157,882
5,016,856
211,575
2,251,909
1T14
125,208
11,888,051
247,802,314
269,038,522
4T13
7,187,094
4,353,755
5,119,037
87,403
3,173,794
4T13
6,616
32,942,758
192,039,995
220,591,113
3T13
6,646,837
5,468,110
5,107,750
197,452
2,436,161
3T13
176,521
12,341,807
194,380,278
226,371,724
2T13
6,908,252
3,832,566
7,932,991
477,978
272,636
2T13
131,934
10,165,547
185,044,868
205,595,852
The following table shows the positive gross value of contracts subject to counterparty
credit risk, including derivatives, outstanding operations, asset loans and repo
transactions, disregarding the positive values from compensation agreements, as set
forth in CMN Resolution 3,263/05.
Table 22 - Positive gross value of the respective contracts, including derivatives, loans to settle,
assets loans and repurchase agreements, disregarded the positive values related to
compensation agreements defined in Resolution nº 3.263/05.
R$ Thousand
Total Gross Positive Value
Derivative Financial Instruments
Currency arbitrage (future and prompt settlement)
Inter-bank exchange (future and prompt settlement)
Reverse Repo
Repo
2T14
5,709,420
772,721
6,493
381
1,339,014
3,590,811
1T14
3,808,075
1,110,623
90
550
978,404
1,718,408
4T13
6,407,909
984,679
37
1,470,961
3,952,232
3T13
7,794,929
1,049,826
305
461
3,768,857
2,975,480
2T13
5,286,036
1,171,838
916
6,424
3,909,584
197,275
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Risk Management Report - Pillar 3 – 2T14
Next, the positive gross collateral received in operations subject to credit risk that
cumulatively attends the following requirements, as art.9.º, section VII, of the Central
Bank Circular 3.678/13:
a) be kept or held in custody by the institution itself;
b) whose exclusive purpose is to guarantee operations to which they are linked;
c) are subject to movement, exclusively, by order from the depositary institution; and
d) are immediately available to the depositary institution in the event default by the
debtor or need for its realization.
Table 23 - The value of collaterals that cumulatively meet the requirements of paragraph VII,
Art.9, of Bacen Circular 3,678/13
R$ thousand
Financial investments – fixed-income Checks
Checks
Agricultural products – w ith w arrant
Financial investments – variable yield
2Q14
4,046,504
565,655
74,438
417
1Q14
4,164,181
596,250
87,072
445
4Q13
9,949,925
650,575
75,339
445
3Q13
9,634,257
664,811
78,659
445
2Q13
9,798,453
697,642
72,849
440
TOTAL
4,687,013
4,847,948
Note: Information includes BB branches in Brazil and abroad (BB-Multiple Bank).
10,676,283
10,378,172
10,569,384
According to the classification of types of collaterals adopted by BACEN, we have
identified those that cumulatively meet the conditions established in BACEN Circular
3,678/13, being that for the purpose of collateral’s calculation it was considered the
value committed as collateral to the linked operation.
Following, it is showed the global exposure to the counterparty credit risk, net of
compensation agreements effects and the collateral received.
Table 24 - The value of collaterals that cumulatively meet the requirements of paragraph VII,
Art.9, of Bacen Circular 3,678/13:
R$ thousand
Counterparty Credit Risk
Guarantees Rendered Value
Global Exposure(1)
2Q14
1Q14
4Q13
3Q13
2Q13
529,124,492
976,911,241
733,459,539
764,896,947
751,075,571
59,723,177
50,756,127
57,874,114
75,813,271
55,870,899
(1) net o f the effects fro m the guarantees value
5.1.13 Mitigating instruments
When accepting guarantees in loans, preference is given to guarantees which help the
operation self-liquidate.
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Risk Management Report - Pillar 3 – 2T14
In order to accept a guaranty, the maximum value considered is reached by applying a
certain percentage on the value of said good or right. Below are presented the
percentages used:
Table 25 – Collateral coverage.
Asset
Credit rights
- Receipt for bank deposit
- Certificate of bank deposit (1)
- Saving deposits
- Fixed income investiment founds
PledgeAgreement – cash collateral (2)
- Standby letter od credit
- Others
Guerantee Funds
- Guarantee Fund for Generation of Employment and Income (Funproger)
- Guarantee Fund for Micro and Small Business (Fampe)
- Guarantee Fund for Operations (FGO)
- Guarantee Fund for Investments (FGI)
- Others
Guarantee(3)
Credit insurance
PledgeAgreement – securities (4)
Offshore Funds - BB Fund(5)
Livestock(6)
PledgeAgreement - cashcollateral (7)
Others (8)
Coverage (%)
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
77%
77%
70%
70%
50%
(1)Except the ones possessing swap agreement
(2) In the same currency of the operation.
(3) Provided by a banking institution taht has a credit limit at the bank, with sufficient margin to suport the co-obligation.
(4) Contract of deposit / Transfer of Customer funds
(5) Exclusive or retail.
(6) Excpet in Rural Product Notes Transactions (CPR).
(7) Celebrated in a different currency of the operations supported and wich have no hedding mechanism.
(8) According to certain characteristics, real state, vehicle, machinery and equipment can be received with highest percentage of guarantee.
The credit rights guarantees represented by financial investments must be internalized
at the Bank and are blocked by the institution. This block must remain until the
operation is concluded. When the financial investment matures, the Bank may, at its
discretion, use it to liquidate the balance of remaining installments, with no notice or
notification to the assignor/borrower.
Besides credit assignment or credit rights assignment clauses, the credit instrument--for
linked mitigators--the credit instrument has a guarantee reinforcement clause to ensure,
for the duration of the operation, the coverage percentage agreed on when it was
contracted.
The fund guarantees, such as the Guarantee Fund for Generation of Employment and
Earnings (Funproger), Operations Guarantee Fund (FGO), Investments Guarantee
Fund (FGI) and the (Endorsement for Micro and Small Enterprises Fund (Fampe) are
used as collateral by Banco do Brasil, mitigating the risks of operations. Overall, the
fund guarantees have the following characteristics:
a) maximum coverage percentage limits when using the fund to back operations,
according to the type of operation: Investment or Working Capital;
b) target market, according to the billing or the client’s risk;
c) whether or not a counter guarantee was given;
42
Risk Management Report - Pillar 3 – 2T14
d) maximum limits on the amount of resources that constitute the Fund’s Net Worth
(Leverage Ratio); and
e) limits for accrued losses, or, the Stop Loss Limits.
Guarantee fund managers keep up with whether an operation falls under the funds’
rules before granting them in guarantees, as well as manage guarantee operations and
fund assets, freezing the use of these funds in guarantee operations, if necessary,
before the amount of linked resources surpasses the leverage established for each
fund.
Considering the credit risk mitigating instruments defined in articles 36 to 39 of BACEN
Circular 3.644/13, the following table shows the total mitigated value in terms of
exposure, weighted by risk factor, and segmented by the mitigator type and FPR.
Table 26 - Mitigated value of exposure, weighted by the respective weighting factor
R$ thousand
2Q14
1Q14
4Q13
3Q13
2Q13
Mitigator
29,579,201
28,641,279
28,566,534
22,445,785
19,066,343
Guarantee given by the National Treasury or the Banco Central do Brasil
0%
22,648,638
21,510,949
21,713,938
15,034,669
11,431,113
Guarantee given by Guarantee Funds
0%
1,602,680
1,620,716
1,690,472
1,654,266
1,699,621
Guarantee given by Guarantee Funds
50%
4,101,585
3,883,355
3,824,807
3,392,235
3,284,270
Guarantee constituted w ith resources from the States Participation Fund
(FPE) or the Cities Participation Fund (FPM)
0%
121
241
345
450
555
Deposits held by the institution itself
0%
614,789
935,287
555,447
1,491,115
1,624,006
Guarantee from financial institutions
50%
611,388
690,731
781,524
873,051
1,026,779
Total(1)
(1) To tal value mitigated by the instruments defined in articles 36 and 39 o f B A CEN Circular 3.644/2013 fo r expo sures in lo ans, leasing, co mmitments after applying the co nversio n facto r, credits to release and
guarantees rendereds.
5.2 Market and Liquidity Risks
5.2.1 Management Objectives
The objective of Banco do Brasil’s market and liquidity risk management process is to
identify, assess, monitor, and control risks related to each individual institution, and to
the financial conglomerate, as well as identify and accompany the risks associated with
the rest of the companies who are part of the consolidated economic and financial.
Aligned with the best market practices, the Bank regularly uses procedures that enable
managing the market and liquidity risks of its positions, taking internal and external
economic scenarios under consideration in order to minimize possible effects on the net
financials.
5.2.2 Management Policies and Strategies
The Bank has established policies and strategies for managing market and liquidity
risks, and to manage derivative financial instruments. These policies and strategies
determine the Company’s operating directives in the risk management process.
Additionally, the market and liquidity risks management process uses mechanisms
set forth in regulatory systems which detail the operational procedures necessary to
implement the organizational decisions concerning to the Company’s business and
activities and to meet legal, as well as regulatory and oversight bodies’ requirements.
43
Risk Management Report - Pillar 3 – 2T14
Finally, records that in market and liquidity risks management, systems are used that
guarantee that positions registered in negotiable and non-negotiable portfolios are
measured, monitored, and controlled, as are operations aimed at meeting the hedge
objectives established.
With respect to hedging policies adopted for the management of market risks and
liquidity, are defined objectives to be achieved with hedging operations on
consolidated basis, guaranteed the effectiveness of each individual transaction, in
accordance to the regulations of each jurisdiction.
It’s also worth noting that negotiating with derivative financial instruments is subject
to prior evaluation of the nature and scale of risks involved.
The tables below represent the total exposure to derivative financial instruments by
category of market risk factor, segmented into positions bought and sold in the
following way:
I.
Derivative financial instrument transactions carried out with a central
counterpart, subdivided into those in Brazil and those abroad; and
II.
Derivative financial instrument transactions carried out without a central
counterpart, subdivided into those in Brazil and those abroad.
Table 27 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 2Q14
Risk Factor
Long position
Interest rates
Exchange rates
Share price
Com m odities price
Short position
Interest rates
Exchange rates
Share price
Com m odities price
Net position
Negotiation
location
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Brazil
Reference
Cost value
value
41,669,984
1,114,278
12,426,158
1,554
10,787,342
493,762
8,565,937
60,183
9,444,997
539,961
375,250
10,055
--5,924
-64,376
8,763
62,609,655
(3,667,073)
42,590,620
(2,422,161)
9,454,886
(622,300)
4,048,300
(162,939)
5,854,361
(442,292)
557,493
(12,981)
--91,310
(2,922)
12,685
(1,478)
(20,939,671)
4,781,351
Abroad
Market
Reference
value
value
1,109,226
5,191,760
--518,295
-52,465
-497,746
5,191,760
9,756
-----30,964
-(3,591,035)
4,606,961
(2,575,680)
-(575,620)
145,309
(153,255)
-(272,090)
4,461,652
(12,275)
---(1,303)
-(812)
-4,700,261
584,799
Cost value
144,416
---144,416
----(92,310)
---(92,310)
----236,726
Market
value
186,465
---186,465
----(178,455)
---(178,455)
----364,920
Consolidated-BB
Reference
Cost value Market value
value
46,861,744
1,258,694
1,295,691
12,426,158
1,554
-10,787,342
493,762
518,295
8,565,937
60,183
52,465
14,636,757
684,377
684,211
375,250
10,055
9,756
---5,924
--64,376
8,763
30,964
67,216,616
(3,759,383)
(3,769,490)
42,590,620
(2,422,161)
(2,575,680)
9,600,195
(622,300)
(575,620)
4,048,300
(162,939)
(153,255)
10,316,013
(534,602)
(450,545)
557,493
(12,981)
(12,275)
---91,310
(2,922)
(1,303)
12,685
(1,478)
(812)
(20,354,872)
5,018,077
5,065,181
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Risk Management Report - Pillar 3 – 2T14
Table 28 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 1Q14
Risk Factor
Long position
Interest rates
Exchange rates
Share price
Com m odities price
Short position
Interest rates
Exchange rates
Share price
Com m odities price
Negotiation
location
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Net position
Brazil
Reference
Cost value
value
54,257,817
1,406,794
21,251,690
276,176
4,554,770
243,197
13,808,166
139,197
14,350,692
730,127
214,320
7,760
--14,948
68
63,231
10,269
70,729,001
(3,668,528)
51,159,753
(2,753,411)
3,013,825
(176,437)
7,182,890
(153,304)
8,885,051
(571,985)
314,001
(9,383)
--157,173
(2,196)
16,308
(1,812)
(16,471,184)
5,075,322
Abroad
Market
Reference
Cost value
value
value
1,446,900
7,243,028
145,661
234,487
--293,001
--145,509
3,867,815
115,641
731,338
3,375,213
30,020
6,494
-----93
--35,978
--(3,670,545) 10,489,295
(143,796)
(2,874,516)
--(185,442)
223,950
-(143,725)
3,298,024
(76,684)
(453,796)
6,967,321
(67,112)
(8,447)
-----(452)
--(4,167)
--5,117,445
(3,246,267)
289,457
Market
value
158,193
--123,993
34,200
----(251,790)
--(179,935)
(71,855)
----409,983
Consolidated-BB
Reference
Cost value Market value
value
61,500,845
1,552,455
1,605,093
21,251,690
276,176
234,487
4,554,770
243,197
293,001
17,675,981
254,838
269,502
17,725,905
760,147
765,538
214,320
7,760
6,494
---14,948
68
93
63,231
10,269
35,978
81,218,296
(3,812,324)
(3,922,335)
51,159,753
(2,753,411)
(2,874,516)
3,237,775
(176,437)
(185,442)
10,480,914
(229,988)
(323,660)
15,852,372
(639,097)
(525,651)
314,001
(9,383)
(8,447)
---157,173
(2,196)
(452)
16,308
(1,812)
(4,167)
(19,717,451)
5,364,779
5,527,428
Table 259 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 4Q13
Risk Factor
Long position
Interest rates
Exchange rates
Share price
Com m odities price
Short position
Interest rates
Exchange rates
Share price
Com m odities price
Negotiation
location
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Net position
Brazil
Reference
Cost value
value
59,786,503
1,018,160
35,291,580
256,921
2,226,924
30,782
10,902,916
210,979
11,040,817
509,976
305,600
8,562
--9,931
-8,735
940
70,981,724
(3,194,352)
52,267,206
(2,436,946)
2,468,124
(115,095)
7,411,934
(166,117)
8,722,618
(470,883)
16,700
(456)
--79,457
(2,149)
15,685
(2,706)
(11,195,221)
4,212,512
Abroad
Market
Reference
Cost value
value
value
1,367,391
7,397,675
137,774
267,773
--71,755
--254,601
4,014,265
110,191
763,948
3,383,410
27,583
7,207
-----16
--2,091
--(3,390,112) 11,887,010
(189,954)
(2,649,017)
1,999,704
-(136,218)
--(191,910)
2,840,854
(95,767)
(406,326)
7,046,452
(94,187)
(154)
-----(2,203)
--(4,284)
--4,757,503
(4,489,335)
327,728
Market
value
152,299
--118,409
33,890
----(301,394)
--(200,812)
(100,582)
----453,693
Consolidated-BB
Reference
Cost value Market value
value
67,184,178
1,155,934
1,519,689
35,291,580
256,921
267,773
2,226,924
30,782
71,755
14,917,181
321,170
373,009
14,424,227
537,559
797,838
305,600
8,562
7,207
---9,931
-16
8,735
940
2,091
82,868,734
(3,384,306)
(3,691,506)
54,266,910
(2,436,946)
(2,649,017)
2,468,124
(115,095)
(136,218)
10,252,788
(261,884)
(392,722)
15,769,070
(565,070)
(506,908)
16,700
(456)
(154)
---79,457
(2,149)
(2,203)
15,685
(2,706)
(4,284)
(15,684,556)
4,540,240
5,211,195
Table 30 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 3Q13
Risk Factor
Long position
Interest rates
Exchange rates
Share price
Com m odities price
Short position
Interest rates
Exchange rates
Share price
Com m odities price
Net position
Negotiation
location
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Brazil
Reference
Cost value
value
41,897,113
1,337,561
16,337,805
221,156
3,665,307
252,918
10,021,085
356,637
10,742,344
484,083
1,095,098
20,574
--20,981
-14,492
2,194
70,159,871
(3,950,922)
44,331,348
(285,578)
8,941,570
(2,928,713)
6,667,222
(142,567)
9,112,380
(565,517)
990,110
(20,716)
--92,494
(1,983)
24,746
(5,848)
(28,262,758)
5,288,483
Abroad
Market
Reference
Cost value
value
value
1,505,745
7,542,230
89,423
297,551
--296,199
--207,252
4,422,064
64,140
682,469
3,120,166
25,283
18,542
-----8
--3,725
--(4,299,904)
8,312,832
(175,941)
(403,863)
1,695,561
-(2,848,162)
--(113,096)
--(918,553)
6,617,271
(175,941)
(8,057)
-----(2,080)
--(6,092)
--5,805,649
(770,602)
265,364
Market
value
94,804
--70,498
24,306
----(272,124)
---(272,124)
----366,928
Consolidated-BB
Reference
Cost value Market value
value
49,439,343
1,426,984
1,600,549
16,337,805
221,156
297,551
3,665,307
252,918
296,199
14,443,149
420,777
277,750
13,862,510
509,366
706,775
1,095,098
20,574
18,542
---20,981
-8
14,492
2,194
3,725
78,472,703
(4,126,863)
(4,572,028)
46,026,909
(285,578)
(403,863)
8,941,570
(2,928,713)
(2,848,162)
6,667,222
(142,567)
(113,096)
15,729,651
(741,458)
(1,190,677)
990,110
(20,716)
(8,057)
---92,494
(1,983)
(2,080)
24,746
(5,848)
(6,092)
(29,033,360)
5,553,847
6,172,577
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Risk Management Report - Pillar 3 – 2T14
Table 261 - Derivative financial instruments in the country and abroad, by market risk factor, with
and without central counterpart – 2Q14
Risk Factor
Negotiation
location
Long position
Interest rates
Exchange rates
Share price
Com m odities price
Short position
Interest rates
Exchange rates
Share price
Com m odities price
Net position
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Stock market
Counter
Brazil
Reference
Cost value
value
40,710,787
1,306,505
15,980,285
228,850
1,839,946
163,065
10,725,885
419,384
10,671,009
460,983
1,419,345
31,876
--26,291
-48,026
2,347
67,662,378
(3,142,468)
43,170,669
(283,433)
7,303,352
(2,250,002)
7,188,436
(99,288)
8,444,668
(484,338)
1,407,210
(13,505)
--140,211
(3,194)
7,832
(8,707)
(26,951,590)
4,448,972
Abroad
Market
Reference
value
value
1,836,243
8,567,279
212,796
-180,798
-530,328
2,320,516
833,731
6,246,763
74,855
-----3,736
-(3,840,631)
5,899,579
(326,034)
977,275
(2,161,622)
-(246,034)
2,191,856
(1,043,026)
2,730,448
(48,253)
---(5,107)
-(10,556)
-5,676,874
2,667,700
Cost value
79,995
--2,778
77,217
----(156,143)
--(52,181)
(103,962)
----236,138
Consolidated-BB
Market
value
140,713
--56,786
83,927
----(305,018)
--(190,014)
(115,004)
----445,731
Reference
Cost value Market value
value
49,278,066
1,386,500
1,976,956
15,980,285
228,850
212,796
1,839,946
163,065
180,798
13,046,401
422,162
587,114
16,917,772
538,200
917,658
1,419,345
31,876
74,855
---26,291
--48,026
2,347
3,736
73,561,957
(3,298,611)
(4,145,649)
44,147,944
(283,433)
(326,034)
7,303,352
(2,250,002)
(2,161,622)
9,380,292
(151,469)
(436,048)
11,175,116
(588,300)
(1,158,030)
1,407,210
(13,505)
(48,253)
---140,211
(3,194)
(5,107)
7,832
(8,707)
(10,556)
(24,283,890)
4,685,110
6,122,605
5.2.3 Hedge Policies
With respect to hedging policies adopted for market and liquidity risks management, are
defined the objectives to be achieved with hedging operations on a consolidated basis,
guaranteed the individual effectiveness of each transaction, subject to the regulations of
each jurisdiction.
5.2.4 Risk measuring systems and communication and information processes
The market risk measuring process makes use of corporate systems and of the
Riskwatch application, developed by the Canadian company Algorithmics, The
infrastructure of information technology associated with this process is installed in
environments located in Brasília (DF) and in Rio de Janeiro (RJ).
The main objectives of the Riskwatch application are to:
I.
consolidate management information of the Bank, ascertaining and providing
information for market and liquidity risk management and for assets and
liabilities management; and
II.
provide market and liquidity risk measurements (products/cash flows by
currency and index), as well as assets and liabilities management.
Riskwatch functions that merit special emphasis are:
I.
calculate market risk indicators, such as Value-at-Risk (parametric and
nonparametric), duration, yield, and;
II.
elaborate cash flow reports, either consolidated or by product, marked to
market or nominal;
III.
determine the portfolio sensitivity to the fluctuations in national and
international interest rates;
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Risk Management Report - Pillar 3 – 2T14
IV.
calculate the theoretical result of portfolios after the application of historical
and stress scenarios; and
V.
Elaborate reports on the mismatching of maturities, rates, indexes and
currencies.
In the Bank, proprietary positions are segregated in trading portfolio and no trading
portfolio. Through a resolution issued by the CRG, a policy is stipulated for classification
of transactions in the trading portfolio, This document defines that in the sphere of
Banco do Brasil, its subsidiaries and controlled companies, operations with own
positions carried out with the intention of trading or to hedge the trading portfolio, for
which there is the intention of trading them prior to their contractual period, observing
normal market conditions, and in cases where they are not nonnegotiable, are classified
in the trading portfolio.
Transactions with proprietary positions not classified in the trading portfolio are
considered components of the non-trading portfolio, the proprietary positions held by
companies that are not part of the Bank are not subject to classification in the trading
portfolio.
For the market risk management process, the Bank makes use of a structure of
management groups and books, both for the domestic area and for the international
area, with specific objectives and limits of exposure to risks.
As regards the limits of exposure to market risks, the CRG establishes the following
classification criteria:
Global limits: applied to the trading and banking book portfolios, to the set of
transactions subject to capital requirements and to the interest rate risk in the banking
book portfolio (RBan) and approved by CRG, The main metrics used for management
are Value-at-Risk, stress and financial volume.
Specific limits: applied to the management groups and books of the trading and banking
book portfolios or to both portfolios, to the market risk factors of transactions subject to
capital requirements and to the market risk factors sensitive to the interest rate risk in
the banking book portfolio (risk factors of RBan) and approved by the SRML, The main
metrics used for management are Value-at-Risk and stress.
Operational limits: applied to transactions that make up the management groups and
books, enabling the disclosure of the effective risk level of assumed exposures and
aiming to ensure compliance with the strategies and the global and specific limits
established, They are defined and approved by DIRIS presenting as main metrics the
Value-at-Risk and operating bands of exposure to market risks.
DIRIS reports daily to the managers of the groups and books of the trading and banking
book portfolios, on the consumption of the specific and operational limits. It reports
monthly to the strategic committees on the consumption of overall limits, through the
market risk management report.
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Risk Management Report - Pillar 3 – 2T14
In case limits exceeded, DIRIS, responsible for controlling and monitoring the portfolio,
issues a document called the "Limit Exceeding Form". The managers of groups and
books should submit their reasons for exceeding limits and specify the deadline for
regularization. In turn, the hierarchical level with the authority to manage the case
should issue an opinion on the manager's pronouncement. The team responsible for
monitoring the limit is responsible for keeping track of the categorization actions.
The communication of the Bank risks to Senior Management occurs at the monthly
ordinary meetings of the strategic risk committees and subcommittees.
5.2.5 Market Risk Management Structure
The CMN Resolution 3.464/07 states the implementation of the market risk
management structure, compatible with the nature of operations, the complexity of
products and the dimension of the institution's market risk exposure.
Risk Management Unit (Diris), which reports to the Office of the Vice President for
Internal Controls and Risk Management (Vicri), is responsible for managing market
risks.
The governance model adopted by BB is organized in risk committee and
subcommittees structure, with participation of several areas of the institution.
All decisions related to risk management are conjointly made and in accordance with
the guidelines and internal rules.
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Risk Management Report - Pillar 3 – 2T14
The figure below shows the structure of BB's market risk management:
Figure 8 - Market risk management structure
The main forums involved in market risk management are:
Board of Directors (CA)
The Board of Directors (CA) Banco do Brasil S.A. defines general business of the Bank
and its subsidiaries. The Board has, in the manner provided by law and the Statute,
strategic, guidance, elective and monitoring assignments, not covering operating and
executive functions. The composition and management term of the Council is defined
by the Bank's bylaws. The Board of Directors shall decide on:
 Specific policies for market risk management;
 Policy of the use of financial derivative instruments; and
 Appetite and risk tolerance.
Global Risk Committee (CRG):
Purposes:
 establish strategy for market risk management;
 set overall limits for market risk exposure; and
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Risk Management Report - Pillar 3 – 2T14

approve capital allocation due to market risk.
Market and Liquidity Risk Subcommittee (SRML):
Purposes:
 decide on models for market risk management, observing the strategies adopted
in the Global Risk Committee - CRG;
 define specific limits for market risk exposure;
 analyze and propose to CRG global limits for market risk exposure;
 analyze and propose to CRG capital allocation to cover market risk;
 evaluate the results of backtesting and adopt, when necessary, corrective
measures in the models for market risk management; and
 monitor and evaluate the measures implemented by the Subcommittee.
Asset-Liability and Liquidity Management Committee (CGAP)
Purposes:
 establish the Bank's strategy regarding assets, liabilities and liquidity
management;
 set guidelines for Treasury operation, subject to overall limits set by Global Risk
Committee (GRC); and
 follow recommendations and guidelines decided by the Committee.
Asset-Liability and Liquidity Management Subcommittee (SGAP)
Purposes:
 propose guidelines for Treasury operation to CGAP, subject to overall limits set
by the Global Risk Committee (CRG);
 evaluate Treasury’s performance, showing its results to the conglomerate and
informing the CGAP;
 define opportunity curve models;
 evaluate backtesting results and adopt, when necessary, corrective measures in
the models of asset-liability management; and
 Monitor and evaluate the measures implemented by the Subcommittee.
5.2.6 Market Risk Management Process
Banco do Brasil uses statistical and simulation methods to analyze the market risk of its
exposures. Among the metrics used in the application of these methods, we highlight
the following:
 sensitivities;
 Value at Risk (VaR); and,
 Stress.
Sensitivity metrics simulate the effects in the value of exposures resulting from
variations in the level of market risk factors.
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Risk Management Report - Pillar 3 – 2T14
VaR is a metric used to estimate the potential loss under routine market conditions,
dimensioned daily in monetary values, under a set confidence interval and time frame.
The risk factors used in VaR metrics to measure the market risk of exposures are
classified into the following categories:
 interest rates;
 exchange rates;
 share prices; and,
 Commodity prices.
The VaR metrics performance is monthly evaluated by a backtesting process.
Finally, BB uses stress metrics resulting from simulations on the behavior of its
exposures subject to market risks under extreme conditions, such as financial crises
and economic shocks. The objective of stress tests is to calculate the impact of events
which are plausible, but very unlikely to occur, on regulatory requirements. Stress tests
include exposure simulations, retrospective--based on historical series of shocks to
market risk factors--and prospective--based on projections of economic and financial
scenarios.
For more information on the sensitivities, VaR, and stress metrics, visit our website at
bb.com.br/relacoescominvestidores, at the Análise do Desempenho (Performance
Analysis) link, chapter 8: Gestão dos Riscos – Risco de Mercado (Risk Management Market Risk).
The models used to measure market risk and backtesting models are subject to
validation process by Dicoi, segregated of areas responsible for the development and
for the use of the models.
In turn, the independent validation process of models is subjected to independent
evaluation, conducted by Internal Auditing.
Therefore, it is seen that Banco do Brasil uses three layers of control over its market
risk measurement models, which are the following:
 1st Layer: development and use of models;
 2nd Layer: validation of models; and,
 3rd Layer: evaluation of model validation.
The process of market risk management involves continuous flow of information,
according phases in chapter process risk management. The next figure illustrates the
process of market risk management.
The processes and procedures of the market risk management structure are validated
and performed by two internal units at different points in time, a fact that ensures the
adequate separation of duties and the independence of work. The Internal Control
Board (DICOI) is responsible for validating the financial conglomerate’s risk
determination and measurement models and the bank’s internal control system. Internal
Audit (AUDIT) periodically evaluates credit risk management processes to verify
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Risk Management Report - Pillar 3 – 2T14
whether they are consistent with the strategic guidelines, market policy, and regulatory
and internal rules.
The next figure illustrates the process of market risk management:
Figure 9 - Management Process
5.2.7 Negotiable Portfolios
The Bank’s market risk management processes own positions are divided into
Negotiable Portfolios and Non-negotiable Portfolios. Through a resolution issued by the
Global Risk Committee (CRG), a policy for classification of operations in the negotiable
portfolio is stipulated. This document defines that, for the Financial Conglomerate,
Negotiable Portfolios cover all operations in own positions carried out with the intent to
52
Risk Management Report - Pillar 3 – 2T14
negotiate, or intended to hedge the negotiable portfolio for which there is intended for
negotiation before their contractual deadline, given normal market conditions, and which
are not non-negotiable.
For measuring the VaR of the Negotiable Portfolio, Banco do Brasil adopts the
Historical Simulation technique, and the following parameters:
a) Total VaR: (VaR + Stressed VaR) x Multiplier, where:
a.1) VaR: the potential expected loss considering a series of 252 daily shocks
(business days), a confidence level of 99% and a holding period of 10 business
days (Central Bank of Brazil, Circular 3,568);
a.2) Stressed VaR: the potential expected loss considering a series of daily
shocks under stress scenarios within 12 months periods starting at January
2nd, 2004, a confidence level of 99% and a holding period of 10 business days
(Central Bank of Brazil, Circular 3,568); and
a.3) Multiplier: M, as defined by Central Bank of Brazil, Circular 3,568.
The following table show the total value of the Negotiable Portfolio by relevant market
risk factor, divided into positions purchased and positions sold.
Table 27 - Negotiable Portfolio by relevant market risk factor, divided into positions
purchased and positions sold.
R$ Thousand
Risk Factor
2T14
1T14
4T13
3T13
2T13
Prefixed
purchased
6,636,749
6,388,385
13,371,180
11,220,880
10,272,420
sold
5,658,426
5,177,751
10,646,356
11,323,415
9,242,668
1,745,948
2,154,030
2,769,935
CDI/TMS/FACP
purchased
sold
2,893,101
2,955,208
-
-
-
482,046
31,295
30,046
76,843
61,147
29,799
39,211
-
-
-
-
-
Price index
purchased
sold
Foreign currency /gold
purchased
sold
1,885,589
2,027,831
1,237,328
1,481,440
1,434,512
167,339
573,048
232,774
568,032
139,186
3,176
-
2,356
-
Shares
purchased
sold
-
-
-
Note: Patagônia Bank included.
5.2.8 Non-negotiable Portfolios
The Financial Conglomerate’s own operations positions not classified under the
Negotiable Portfolio are considered components of the Non-negotiable Portfolio. Note
too that the own positions held by the companies that are not a part of the Financial
Conglomerate cannot be classified under the Negotiable Portfolio.
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Risk Management Report - Pillar 3 – 2T14
In accordance with best market practices and the requirements of regulators, Bank sets
policies for managing market risk, including interest rate risk transactions classified in
the non-trading portfolio. These policies are in accordance with the strategic guidelines
of the institution and the general objectives of the management process and predict:






control of exposures by setting limits;
portfolio management considering the best risk-return relationship and the
internal and external scenarios;
performing operations to reduce the risks arising from changes in market value or
cash flows of the assets and liabilities;
Management of foreign exchange exposure to minimize the effects on the
outcome of the institution;
Assessment of impacts on exposures during the creation or modification of
products and services; and
Performing monthly stress testing of interest rate exposures.
For measuring the VaR of the Non-negotiable Portfolio, Banco do Brasil adopts the
Historical Simulation technique, and the following parameters:



99% one-tailed confidence interval;
1,260 retrospective scenarios of daily shock factors; and,
Holding period of 21 business days.
Among other aspects, it’s emphasized that the Historical Simulation VaR technique:







includes all operations which are sensitive to variations in interest rates, and uses widely
accepted risk-measurement techniques and financial concepts;
considers data on fees, deadlines, prices, optionality, and other suitably specified
information;
requires that suitable premises be defined to transform positions into cash flow;
measures sensitivity to changes in the temporal structure of interest rates, between the
different rate frameworks and in the premises;
is integrated into daily risk management practices;
allows the simulation of extreme market conditions (stress tests); and,
Allows an estimation of the Referential Equity (PR) that is compatible with the risks, as
determined in Article 3 of CMN Resolution 3.490/07.
Banco do Brasil adopts statistical and econometric methods, as referenced in literature,
to analyze temporal series, more specifically, methods known as ARIMA
(Autoregressive, Integrated, and Moving Average) for treatment of products with no set
maturity.
In line with the Historical Simulation methodology adopted by Banco do Brasil to
calculate the Value-at-Risk (VaR) metrics, the models for products with no set maturity
assume the hypothesis that the retrospective behavior of the variations observed in the
balances is relevant to forecasting the future behavior of cash flow from redemptions
(random variable of interest) of the balances of funding products referenced. Therefore,
such methods assume the possibility of future balance (financial amount of partial
redemptions) fluctuations with a scope similar to that observed in the historical series.
The criteria for identifying operations that may be classified in Non-negotiable Portfolio
follow the definitions and objectives defined in the resolution issued by the Global Risk
54
Risk Management Report - Pillar 3 – 2T14
Committee. It’s also worth noting that the definitions, criteria, and procedures
established must be reviewed annually.
The Negotiable and Non-negotiable Portfolios are divided into Groups and Books,
always observing the internal norms (technical notes and resolutions) approved by the
Liquidity and Market Risks Subcommittee (SRML) and by the Global Risk Committee
(CRG), which establish the objectives, makeup, financial limits, and market and liquidity
risk limits for each Group or Book. The main types of limits used for market risk
management are:


Value-at-Risk – VaR; and,
Stress.
In order to provide suitable conditions for assessing the capacity for loss absorption and
identifying future risk reduction measures, global limits are defined as a percentage of
Referential Equity (PR).
The VaR and Stressed VaR metrics are used to demonstrate the level of market risk
generated by exposures, and the respective effect in terms of capital required to cover
said risk, for the VaR limits of the Negotiable Portfolio.
The models of products that have no defined maturity assume the hypothesis that the
retrospective behavior of variations in the balances constitutes relevant information for
predicting the future behavior of the cash flow redemptions (random variable of interest)
balances of the funding products under reference. Therefore, such methods assume as
feasible the possibility of future balance (financial amount of partial redemptions)
fluctuations with a scope similar to that observed in the historical series.
The table below shows the impact on income or in assessing the value of the institution
due to shocks in interest rates segmented by foreign currencies.
Table 28 - Impact on income or in assessing the value of the institution due to shocks in
interest rates segmented by foreign currencies
R$ Thousand
Risk Factor-Interest Rate
Prefixed
US$ Dollar
Euro
Sw iss Franc
Yen
Pound Sterling
TR
TJLP
TBF
IPCA
IGP-M
INPC
Others
2T14
4,766,177
1,488,860
156,037
27,757
49,122
82,969
1,891,203
28,761
470
32,979
74,494
115,807
249,811
1T14
3,861,375
1,403,451
166,808
40,359
43,979
82,603
2,280,397
30,396
506
62,570
76,124
115,926
330,020
Hypothetical result
4T13
3T13
4,272,092
5,139,765
1,092,351
1,703,389
169,212
178,393
49,054
718
46,344
58,566
62,816
66,833
2,492,555
3,059,792
25,841
1,506,428
525
634
73,165
83,002
75,833
64,749
131,799
147,352
524,442
578,463
2T13
4,611,576
2,049,152
112,475
53
26,320
65,610
4,040,942
1,505,615
223
73,257
54,345
148,634
662,603
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Risk Management Report - Pillar 3 – 2T14
5.2.9 Liquidity Risk Management Structure
CMN Resolution 4.090/12 addresses the implementation of liquidity risk management
structure, observing the operations nature, the complexity of products and the
Institution´s dimension of liquidity risk exposure.
The Diretoria de Gestão de Riscos (Diris), subordinated to Vice Presidency of Internal
Controls and Risk Management, is the unit responsible for liquidity risk management of
Banco do Brasil SA.
The governance model adopted by BB is organized in risk committee and
subcommittees structure, with participation of several areas of the institution.
All decisions related to risk management are conjointly made and in accordance with
the guidelines and internal rules.
Liquidity risk management held by the Bank in Diris applies to the following managerial
visions:
 Banco do Brasil’s National Currency Liquidity;
 Banco do Brasil’s Foreign Currency Liquidity; and
 Liquidity of each Liquidity Center and Banco do Brasil’s abroad.
The figures below shows Banco do Brasil S.A. liquidity risk management structure:
Figure 10 - Liquidity Risk Management
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Risk Management Report - Pillar 3 – 2T14
The main forums involved in the management of liquidity risk with their respective
purposes are described below:
Board of Directors (CA)
Banco do Brasil S.A. Board of Directors defines general business of the Bank and its
subsidiaries.
The Board has, in the manner provided by law and the Statute, strategic, guidance,
elective and monitoring assignments, not covering operating and executive functions.
The composition and management term of the Council is defined by the Bank's bylaws.
The Board of Directors shall decide on:
 Specific policies for the management of liquidity risk; and
 Apetites and risk tolerance.
Global Risk Committee (CRG):
Purposes:
 establish strategy for market risk management;
 set the overall limits of risk exposure;
 decide on the minimum reserve and liquidity contingency plans for liquidity; and
 Approve the allocation of capital on a risk basis.
Market and Liquidity Risk Subcommittee (SRML):
Purposes:
 decides on models for managing liquidity risk, observing the strategies adopted
in the Global Risk Committee - CRG;
 propose to the CRG minimum reservation and limits overall liquidity risk;
 propose to the CRG contingency plans for liquidity; and
 Evaluate the results of backtesting and adopt, where necessary, corrective
measures in the management models of liquidity risk.
Asset-Liability and Liquidity Management Committee (CGAP)
Purposes:
 establish the Bank's strategy regarding assets, liabilities and liquidity
management;
 set guidelines for Treasury operation, subject to overall limits set by Global Risk
Committee (GRC);
 set the guidelines for liquidity management conglomerate; and
 Follow the recommendations and guidelines decided by the Committee.
Asset-Liability and Liquidity Management Subcommittee (SGAP)
Purposes:
 analyze the impact of different variables on the financial management of assets
and liabilities and liquidity;
 propose to the Committee of Management of Assets and Liabilities and Liquidity
(CGAP) the Bank's strategy with regard to the management of assets and
liabilities and liquidity;
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Risk Management Report - Pillar 3 – 2T14





propose guidelines for Treasury operation to CGAP, subject to overall limits set
by the Global Risk Committee (CRG);
evaluate Treasury’s performance, showing its results to the conglomerate and
informing the CGAP;
define opportunity curve models;
evaluate backtesting results and adopt, when necessary, corrective measures in
the models of asset-liability management; and
Monitor and evaluate the measures implemented by the subcommittee.
5.2.10 Liquidity Risk Management Process
Banco do Brasil maintains liquidity levels suitable to the Institution’s commitments in
Brazil and abroad, as a the result of its broad and diversified base of depositors, the
quality of its assets, the capillarity of its network of external offices and of its access to
international capital markets. The strict liquidity risk control is in line with the Liquidity
and Market Risks Policy established for the Conglomerate, meeting the requirements of
national banking oversight, as well as of the other countries in which the Bank operates.
The process of managing liquidity risk involves continuous flow of information, following
the steps listed in the section of the risk management process.
Banco do Brasil’s liquidity risk management segregates the liquidity in Reais from the
liquidity in Foreign Currencies. For this, the following instruments are used:
 Liquidity Forecasts;
 Stress test;
 Liquidity Risk Limits; and,
 Liquidity Risk Limits.
The liquidity risk management instruments are regularly monitored and reported to the
institutions’ Strategic Committees.
The Liquidity Forecasts allow a prospective assessment of the effect of the mismatch
between funding’s and investments, in order to identify situations that could compromise
the liquidity of the Institution, taking into account both budgetary planning and market
conditions.
Periodically, Short-term Liquidity Forecasts are assessed under alternative and stress
scenarios. If the result of any of these liquidity projection scenarios remain below the
adopted liquidity level limit, then the previously established Contingency Measures
Potential is put into effect, in order to recover the Institutions’ liquidity.
Furthermore, Banco do Brasil uses the following metrics:
 Liquidity Reserve (RL);
 Liquidity Cushion; and
 Free Resources Statement (DRL).
Liquidity Reserve is the metric used in short-term liquidity risk management. It is the
minimum level of high liquidity assets the Bank must maintain, compatible with the risk
exposure arising from the nature of its operations and market conditions. The Liquidity
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Risk Management Report - Pillar 3 – 2T14
Reserves methodology is used as a parameter to identify a liquidity contingency and to
activate the Liquidity Contingency Plan, being monitored daily.
The Liquidity Cushion limit aims to monitor the daily liquidity under stressed conditions,
while the Liquidity Reserve limit monitors the going - concern daily liquidity and the
liquidity forecast.
The Availability of Free Resources (DRL) indicator, used in planning and in the
execution of its annual budget, is intended to ensure a balance between funding and
resources invested, with a focus on Commercial Divisions and provide liquidity
financing.
The DRL limit used to guide the execution and planning of the budget, according to the
funding and investment goals, is defined annually by the Global Risk Committee (CRG),
and its monitoring occurs on a monthly basis.
The Liquidity Contingency Plan, on its turn, establishes procedures and responsibilities
to be adopted on liquidity stress situations. On this case, one or more measures may be
adopted so that the institution can assure its payment capacity. The measurement of
the potential measures is made monthly.
The processes and procedures of the liquidity risk management structure are validated
and performed by two internal units at different points in time, a fact that ensures the
adequate separation of duties and the independence of work. The Internal Control
Board (DICOI) is responsible for validating the financial conglomerate’s risk
determination and measurement models and the bank’s internal control system. Internal
Audit (AUDIT) periodically evaluates credit risk management processes to verify
whether they are consistent with the strategic guidelines, liquidity policy, and regulatory
and internal rules.
5.3 Operational Risk
5.3.1 Management Objectives
The operational risk management at BB aims to identify, assess, mitigate, control and
monitor the exposure to operational risks inherent to the Bank’s processes, business,
products and services.
After the changes made in the structure of operational risk management, the functions
and activities related to the management of that risk was centralized in Operational Risk
Unit (URO), leaving the Risk Management Unit (Diris) the calculation of the values of
capital allocation.
The responsible of the Banco do Brasil for operational risk management in the Central
Bank of Brazil became the Vice President of Internal Controls and Risk Management.
The Internal Controls Unit (DICOI) is responsible for the 2nd layer of control that
includes, among other activities, control and compliance assessment and risk
management models validation. The Board of Directors remains responsible for the
disclosed information.
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Risk Management Report - Pillar 3 – 2T14
Internal Audit is responsible for verifying operational risk management and its structure.
It should be noted that the operational risk analysis process is assessed by external
audit, and its results are submitted to the Executive Board, Fiscal Council and Board of
Directors.
In order to fulfill strategies and policies set up for and meeting the regulatory
requirements, activities relating to phases of management, are summarized in the
following table:
Table 29 - Phases of the operational risk management process
Managem ent Phase Sum m ary of Activities
Consists of identify and classify the operational risk events w hich ones the Bank is exposed,
Identification
indicating incidence areas, causes an potentials finance impacts associated to organization’s
processes, products and services.
It is the quantification of the operational risk exposure w ith the objective of to assess the impact in the
Assessm ent
Bank business. Consist; also, of the qualitative assess of the identified risks, analyzing their
probability to happen and their impact, determining the risk tolerance level.
Consists of register the behavior of operational risks, limits, indicators and operational loss events, as
Control
w ell as to implement mechanisms, to ensure that the limits and operational risk indicators remain w ithin
desired levels.
Consists of create and implement mechanisms to modify the risk, w ith the objective to reduce the
Mitigation
operational losses by removing the cause of the risk, changing the probability of occurrence or
changing the risk events consequences.
The objective is identifying operational risk management process deficiencies so that the w eaknesses
Monitoring
detected are reported to the Board. It is the feedback phase of the operational risk management
process, w hich it is possible to detect w eaknesses in the previous phases.
5.3.2 Operational Risk Policy
The Operational Risk Policy reviewed and approved annually by the Board of Directors
(CA) contains guidance for the Bank’s units, intended to ensure the effectiveness of the
operational risk management model and it is expected that the Subsidiaries, Affiliates
and investments Companies define their directions based on these guidelines, taking
into account the specific needs, legal and regulatory issues to which they are subject.
In adherence to recommended in Basel II and the requirements of CMN Resolution
3.380/06, politics permeates the activities regarding to operational risk management.
The Bank follows operational risk management in order to identify, assess, monitor,
control and mitigate operational risks associated with each individual institution's
Financial Conglomerate, even as identify and monitor the risks associated with other
group companies of the Economic Financial Consolidated.
The Bank also has other policies that make up the list of policies associated with the
management of operational risk, such as the Prevention and Combating of Money
Laundering and Terrorism Financing; Business Continuity Management; Relationships
with suppliers; and Information Security.
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5.3.3 Management Processes and Strategies
Banco do Brasil performs the operational risk management conservatively, segregating
the functions of risk management, in compliance to the standards and guidelines for
supervision and bank regulation.
The Bank`s current Strategic Plan, approved by the Board of Directors (CA), inserts the
Financial Perspective the strategic objective of reducing operational losses.
Strategic management takes place at the Global Risk Committee (CRG), composed of
the Chairman and Vice Chairmen, whose purpose is to propose policies and decide
about the risk guidelines.
Banco do Brasil defines Global Operational Loss Limit, which is based on the maximum
amount of losses for the period of one year. That limit is in line with the strategy of
reducing operating losses and with the values established in the institution's budget.
The Bank also uses Specific Limits Operating Loss with the definition responsible area
for identifying the causes generating losses as well as for proposing mitigation actions.
In order to speed up the management process, operational issues related to operational
risk are deliberate in SRO, which aims monitor operational risk through specific limits of
operational losses and key risk indicators.
It also is among the assignments of the SRO, the measures proposition / adoption to
keep the risk parameters (exposure, limits etc.) within the pre-defined tolerance
approved by CRG.
With the goal of promoting the sharing of projects and actions taken, as well as
technical discussions on issues related to managing operational risk, the Bank uses the
Forum called “Fórum de Gestão Integrada de Risco Operacional”. It also evaluates the
risks of greater relevance; the models used for the identification of operational risks and
controls associated with these, as well as it promotes the integration of actions related
to operational risk.
The Bank also has other Forum called “Fórum Técnico Preventivo de Risco Legal” subordinate to SRO - with the aim of contributing to the reduction of operational losses
by identifying, evaluating and proposing mitigating actions, within the legal service.
Mainly aims to identify the main causes of litigation, case law and decisions that may
impact the Bank and evaluate action plans for treatment of risks and control their
effectiveness in mitigation.
5.3.4 Communication and Notification Processes
Monthly, are presented in CRG and SRO the position of global limit, specific limits and
Key Risk Indicators (KRI). The behavior of operational losses (losses and provisions for
contingent claims), mitigation actions, as well as the main operational risks are detailed.
Monthly is communicated to managers of processes, products and services operating
losses position, the position of legal issues and the specific limit position of their
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Risk Management Report - Pillar 3 – 2T14
respective areas. The reports, through the internet, are designed to allow the manager
to identify operational risks and their main causes in order to propose mitigation actions.
The Operational Risk Unit participates in some of the Bank's strategic forums where are
discussed topics related to operational risk. This dynamic promotes the sharing
information about projects and actions willing the operational risk’s identification and
mitigation.
Regarding the culture of operational risk management is continuously reviewed internal
certification of internal controls, compliance and operational risk, as well as courses
related to operational risk management. These courses are available for whole staff of
the institution and are important means of dissemination. Instead of the advice to
managers of processes, products and services in the identification and mitigation of
operational risk are widespread concepts and best practices in operational risk
management.
5.3.5 Measurement Systems
Bank uses a model based on the Alternative Standardized Approach (ASA) to calculate
capital for operational risk.
The capital portion value for Operational Risk corresponds to the Referential Equity
(PR) consumption with capital for operational risk. This metric monitoring is defined by
strategic committees - CRG and SRO.
Beyond the capital monitoring, BB has set operational losses global limit and specific
limits that correspond to the unfolding of internal area global limit, segmented by
network and product managers or by losses type’s managers. Are also monitored global
and specific limit for external branches. Operating losses of BB are distributed by loss
events categories, as described in Table 32. Operational losses managers receive a
monthly report containing information about losses for analysis and proposition of
mitigation actions.
5.3.6 Operational Risk Mitigation
The units that manage processes, products, and services must create and implement
action plans and instruments to mitigate operational risk, based on the causes noted in
the operational risk identification phase and on the decisions made by the CRG and/or
SRO. The Diris and Diges advising the manager about making action plans to mitigate
operational risks.
The action plans are registered in a specific tool that allows the monitoring of measures
and its reporting to CRG and SRO.
5.3.7 Processes and Strategies to Monitor the Effectiveness of Mitigators
The monitoring of operating losses is conducted monthly by calculating the amounts of
losses observed in comparison to the global limit of operational losses, reporting to
Operational Risk Subcommittee (SRO) and the Global Risk Committee (CRG).
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Risk Management Report - Pillar 3 – 2T14
If any specific limits are exceeded, a document called Extrapolation Report is issued to
the responsible area in order to explain the reasons, as well as mitigating actions to
reestablish the values under the limits.
Aiming to prevent, correct or inhibit weaknesses or deficiencies that may generate risks,
the Bank may issue Technical Risk Recommendation - RTR, so the manager submits
an action plan aimed at mitigating operational risk, and strengthen the culture risk
management in the institution.
The following table shows the monitoring of BB’s operational losses performed in each
risk event category, expressed in percentages. Banco do Brasil considers the
constitutions and reversal of provisions – notably for contingent liabilities, in total
calculated operational losses for the categories of Labor Issues, Business and Process
Failures.
Table 30 - Operational losses monitoring by loss events category.
4T13
3T13
2T13
Business Failures
55,9%
56,1%
4,0%
Labor Issues
24,0%
29,8%
61,9%
External Fraud and Theft
17,2%
11,7%
20,2%
Processes Failures
1,4%
1,4%
11,7%
Internal Fraud
1,2%
0,5%
1,3%
Damage to Physical Assets
0,2%
0,4%
1,0%
Systems Failures
0,0%
0,1%
0,0%
Disruption of Activities
0,0%
0,0%
0,0%
Total
100,0%
100,0%
100,0%
*1st quarter/2014: not considered the extraordinary effects in provisions.
2T14
1T14*
49,6%
28,8%
9,5%
10,6%
1,2%
0,3%
0,0%
0,0%
100,0%
41,6%
46,5%
9,5%
0,8%
0,8%
0,8%
0,0%
0,0%
100,0%
5.4 Other Risks
5.4.1 Risk strategy, reputation, environmental and actuarial
On the adequacy of the Bank to the requirements of CMN Resolution 3988/11 and
Central Bank Circular 3547/11 process, work was developed in order to structure the
management of risks strategy , reputational and environmental.
The Bank instituted the concepts, and management activities for these risks, assigning
responsibility for management, as follows:
a) Board Risk Management (DIRIS) - develop evaluation models to assist the
development of methods for identification, exposure control and verify the
adequacy of the management process, the latter in conjunction with the
Directorate of Strategy and Organization (DIREO) to the risks of strategy and
reputation, and in conjunction with the Unit for Sustainable Development (UDS) for
the environmental risk;
b) Strategy and Organization (DIREO) - to develop models identifying risk,
evaluating events, assist in mitigating and verify the adequacy of the risk
management strategy and reputation process, the latter in conjunction with DIRIS;
c) Unit of sustainable development (UDS) - develop models for identifying, evaluating
events, assist in risk mitigation and verify the adequacy of the management
process, the latter in conjunction with DIRIS;
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Risk Management Report - Pillar 3 – 2T14
d) Other strategic units - identify events, mitigate and verify the adequacy of
identification and mitigation of risks.
In addition, the Subcommittee of Operational Risk, CRG and the CA, were defined as
the governance structure to resolve issues related to these risks.
Currently, the Bank has established procedures related to reputational risk, among
which we can mention those listed below:
a) Crisis Management - the process of the Board of Marketing and Communication
(DIMAC) which consists in treating disseminated in the news media that can
affect the image of the Bank;
b) Customer Satisfaction Survey - process of the Board of Strategy and
Organization (DIREO) which consists of measuring customer satisfaction
regarding products and services, as well as meeting the service channels;
c) CARPS - control and monitoring of risks of products, services and self-service
channels - system under the management of DIREO, keeps track of the creation,
modification and deletion of the Bank's products, features and questions
recorded by several product managers answers channels and risks, identifying
potential risks, including those related to the image of the Bank.
With regard to the risk strategy during the process of formulation of corporate strategy,
the Bank has a policy analysis of macroeconomic scenarios and the financial industry in
order to better assess the opportunities and threats in the market and mitigate the risks
of decisions strategic mistaken.
The institution has processes to monitor its performance against strategic objectives
and also the negotiation and administrative goals.
With respect to environmental risk, the Bank has processes that contribute to the
implementation of social and environmental actions. Examples are, Dow Jones
Sustainability Index, Agenda 21, the Stakeholders Panel, the Forum for Sustainability
Executives, the Equator Principles and IFC Performance Standards, which corroborate
with strategic planning and continuous improvement of sustainability issues and the
environmental risk.
In addition, the Bank has structured an area with activities related to environmental risk
in DICRE, whose duties include the development of methodology for environmental risk
analysis for credit, monitoring standards and legal requirements and preparation of
sectoral guidelines.
Additionally, the creation of the Division of Environmental Management in Agribusiness,
the Board of Agribusiness (DIRAG) assists in managing processes related to
environmental responsibility, since it aims, advise on agribusiness market linked to
environmental issues, propose adjustments in products and services to include
attributes related to environmental responsibility, among others.
The Bank also has a Plan Supply Division, Eco-efficiency and Supplier Development, in
the Board of Operations and Business Support (DINOP), which aims to monitor and
develop Plan Supplier of Goods, Services and Materials Engineering, coordinate and
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Risk Management Report - Pillar 3 – 2T14
monitor the implementation of projects under implementation in fixed investment Bank,
to develop strategies for the development of suppliers, develop strategies for
implementing programs and actions related to eco-efficiency, among others.
With regard to the actuarial risk, the Bank of Brazil, in the role of sponsor pension funds
and health care, through the Employee Relations Board and sponsored entities (DIREF)
develops activities that contribute to the control of any impacts related to this risk.
Among the activities developed by DIREF, it is worth mentioning:
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
manage solutions for governance of Sponsoring Entities;
relate to entities sponsored by the Bank and employees;
relate to the regulatory and supervisory bodies;
supervise and inspect the pension funds and health sponsored by BB;
develop solutions to actuarial calculation;
monitoring solutions, methodologies, criteria and standards for the
management of actuarial calculation implemented;
monitoring, under the actuarial technical aspect, the commitments of the
Bank with health care, pension plans and other retirement obligations
complementation of employees;
an opinion on documents formulated by the Sponsoring Entities actuarial
nature as to be signed by representatives of the Bank;
provide advice to the Board of Deliberative sponsored entities in matters
relating to actuarial calculation;
manage the process of calculating gains and losses relating to pension
plans and health sponsored by the Bank.
Notwithstanding the existing processes, there are actions in progress in the institution in
order to identify and implement necessary improvements to the managements of these
risks.
Moreover, the process of identifying relevant risk to the Bank of Brazil, considering
those incurred in banking activities and also in other companies where the Bank holds
interest, undergoes periodic review and may indicate new risks to be managed.
5.4.2 Shareholdings
Banco do Brazil SA has wide range of businesses, products, services and customers.
By organizational, strategic choice or by legal and regulatory requirements, the
operation of its business and processes are distributed between multiple bank and its
Related Entities (ELBB), located in the country and abroad, under various
organizational and legal forms.
In the regulatory field, the National Monetary Council (CMN), through Resolutions No.
3380, 3464, 3721 and 4090 established, among other things, that the structure of
management of market risks and liquidity must identify, evaluate, control and monitor,
as well as the management structure of credit risk and operational shall identify,
evaluate, control, mitigate and monitor risks associated with the financial conglomerate.
As well as identify and monitor market risks, liquidity, credit and operational risks
associated with the other companies of the Consolidated Financial and Economic.
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Risk Management Report - Pillar 3 – 2T14
Additionally, through Resolution No. 3988, the CMN established that the structure of
capital management should encompass all institutions and financial conglomerate also
consider the possible impacts in its capital coming from the risks associated with other
companies of the economic-financial consolidated .
As a leading institution of economic-financial consolidated, it is the Bank of Brazil
responsibility for ensuring the effectiveness and integrity of this business model,
establishing corporate governance mechanisms that promote the alignment of the
Related Entities of the Bank of Brazil (ELBB).
In February/2013 was approved by the Director (CD), the benchmark assignments for
Organizational Units model. Among other things defines the responsibilities of the units,
with regard to the relationship with the Affiliated Entities to the Bank from the following
roles:
a) guidelines;
b) monitoring and control;
c) providing the Services;
d) Governance.
The area of risk management accounts for the roles of Guidance, Control and
Monitoring and Service Provider Management and Risk Management Unit Entities of
the role of governance.
In June/13 was approved by CD, the Process Guidance on Risk Management of ELBB
consisting of the risk assessment model of enterprises. Procedures for the identification
and assessment were developed based on two dimensions: qualitative and quantitative.
In qualitative terms, the form covers aspects related to risk management in the
companies such as:
a)
b)
c)
d)
e)
risk appetite;
existence of policies and strategies applied to risk management;
organizational structure;
processes, procedures and systems;
concepts, criteria, models and methodologies, metrics, indicators, parameters
and limits applied to risk management;
f) reporting tools;
g) existence of strategic committees for deliberations and monitoring risks;
h) segregation between the areas responsible for the business management and
risk management.
The quantitative assessment uses methods of measuring the risks incurred.
After the evaluations of the companies, the area of risk management presents the
degree of risk exposure of companies, the weaknesses identified, the guidance for risk
management, among other aspects process. The process is complemented with
guidance along the Bank's representatives to ELBB's on the adoption of measures for
reducing risks, which is held by the respective areas of governance.
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Below is the equity holdings not classified in the trading portfolio, segregated by
business segments as requested in Article 14 of Circular 3678/13:
Table 31 - Shareholdings
– Banking Book
% of Total
Shares
Activity
R$ thousands
Banking Segm ent
Banco Votorantim S.A.
Investm ent Segm ent
Kepler Weber S.A.
Companhia Brasileira de Securitização - Cibrasec
Neoenergia S.A.
Segm ent of Insurance. Private Pension Fund and
BB Seguridade Participações S.A.
Seguradora Brasileira de Crédito à Exportação - SBCE
Segm ent of Paym ent Methods
BB Administradora de Cartões de Crédito S.A.
BB Elo Cartões Participações S.A.
Cielo S.A.
Tecnologia Bancária S.A. - Tecban
Other Segm ents
Ativos S.A. Securitizadora de Créditos Financeiros
Ativos S.A. Gestão de Cobrança e Recuperação de Crédito
BB Administradora de Consórcios S.A.
BB Tur Viagens e Turismo Ltda.
BB Tecnologia e Serviços S.A.
Cadam S.A.
Cia Hidromineral Piratuba
Estrutura Brasileira de Projetos - EBP
Provisão para Investimentos
Book Value of Market Value
Value of
Equity
of Equity
Capital
Interests
Interests
Requirem ent
(4 (6)
Bank
5000,00%
3,706,985
-
(4 (6)
(5 (7)
(4 (6)
Industry
Credits Acquisition
Energy
17.56%
12.12%
11.99%
67,873
9,039
1,094,114
7,466
2,126
120,353
(3 (6)
(5 (6)
Holding
Insurance Company
66.25%
12.09%
3,407,623
3,185
801,537
749
(3
(3
(4
(5
(6)
(6)
(6)
(6)
Service Rendering
Holding
Service Rendering
Service Rendering
100.00%
100.00%
28.76%
13.53%
27,404
541,858
1,046,216
42,254
6,446
115,913
246,090
4,648
(3
(3
(3
(3
(3
(5
(5
(5
(6)
(6)
(6)
(7)
(6)
(6)
(6)
(6)
(8)
Credits Acquisition
Credits Acquisition
Consortium
Tourism
IT
mining
Tourism
Project Development
100.00%
100.00%
100.00%
100.00%
99.97%
2164,00%
15.46%
11.11%
885,579
5
159,165
13,333
188,282
22,886
2,520
8,372
(6,770)
208,305
1
37,439
1,467
20,711
2,517
277
921
(1) Value for the minimum capital requirement for equity interests registered in the fixed assets and included in the calculation of risk-weighted assets regarding exposure to credit risk (RWA CP A D ) under Central Bank Circular No.
3,644/2013.
(2) According to Resolution CM N No. 4,192/2013, the value of the investment in Banco Votorantim S.A. is deducted from the Reference Equity, with no capital requirement.
(3) Subsidiaries, evaluated by the equity method.
(4) Joint venture, evaluated by the equity method.
(5) Associated companies, evaluated by the equity method.
(6) The Financial Statements, evaluated by the equity method, refers to June/2014.
(7) The Financial Statements, evaluated by the equity method, refers to M ay/2014.
(8) Unrealized, but acknowledged losses, referring to companies Cadam S.A. and Kepler Weber S.A., whose value is computed in the calculation of Common Equity.
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6. Capital
6.1 Capital Management
On June 30, 2011, in line with Pillar II of Basel, Bacen issued the Resolution CMN
3.988/11, which established the need to implement a capital management framework
for financial institutions. Pursuant to the Resolution, Banco do Brasil defined as part of
this structure, the Department of Accounting and the Units of Risk Management,
Controlling and Finance. Also in line with the Resolution, in January, 2012, BB’s Board
of Directors indicated the director of the Controlling Unit as responsible to Capital
Management with the Bacen.
The areas defined in the capital management structure respond jointly or individually by:

identification of relevant risks;

assessment of the capital required to support them;

projection of risk and capital indicators;

calculation of the Referential Equity (PR);

elaboration of the capital plan and contingency plan and;

evaluating capital sources and its restoration.

ICAAP, Stress Tests, and Managerial Report, and

Capital Management Policy.
For Capital Management, BB calculates the Core Capital Ratio (ICP), Tier 1 Capital
Ratio, Capital Adequacy Ratio (IB). The Prudential Capital Adequacy Ratio (IBP) that
represents the Bank's directive to keep the IB two points above the minimum regulatory
in order to sustain the risk of interest rate transactions not included in the trading book
(plot RBAN) and serve as a prudential margin to face the other risks not considered in
Pilar I.
The Resolution CMN 3.988/11 yet established the need for Internal Capital Adequacy
Assessment Process (ICAAP), which the Risk Management Unit is responsible for. At
BB, the Unit of Internal Controls, independent area of capital management structure, is
responsible for the validation of the ICAAP. Already Internal Audit annually evaluates
the process of capital management.
BB constituted a technical forum for capital management, so-called Forum de Capital,
which has members from the Units of capital management structure. The Forum meets
monthly, and has as main activities the preparation of the capital structure projections,
the analysis of the main variations and trends of the Institution’s IB, and the impacts of
changes in the regulatory and business environment.
Banco do Brasil also periodically prepares managerial reports on capital adequacy for
intervening areas and strategic committees, such as Subcommittee of Risks
(Operational, Market and Liquidity and Credit), the Global Risk Committee, the
Executive Board and the Board of Directors.
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6.2 Referential Equity (RE) Details
On 10.01.2013 the Conselho Monetário Nacional (CMN) approved changes in the rules
for defining and determining the RE of financial institutions by CMN Resolution No.
4,192/2013, included in the regulatory scope of Basel III.
The new rules adopted address the following issues:
i.
new methodology for calculating regulatory capital, which continues to be
divided into Tier I and II, the Tier I consists of the Core Capital (net of
Regulatory Adjustments) and Additional Tier I Capital;
ii.
new methodology for calculating the capital requirement maintenance,
adopting minimum requirements for Referential Equity, Tier I and Core
Capital, and the introduction of the Additional Core Capital.
The consolidation scope used as the basis for establishing the operating limits was also
amended, considering the Consolidated Financial Report from 10.01.2013 until
12.31.2014 (considering the information relating to Banco Votorantim by the Equity
Method - MEP as determined by Bacen), and the Prudential Conglomerate, defined in
CMN Resolution No. 4,280/2013, from 01.01.2015
All quotes to the Referential Equity - RE, prior to 10.01.2013, refer to the Basel II
methodology and were determined according to the criteria established by CMN
Resolution No. 3,444/2007.
Table 32 - RE Historical Series – Financial Conglomerate.
2Q14
Financial
R$ Thousand
2Q13
Econom ic and
Financial
Financial
118,042,870
116,351,017
117,975,571
84,276,305
74,607,192
76,417,089
62,049,999
63,416,113
64,954,526
Shareholders' equity
70,043,646
63,182,901
64,721,314
Regulatory adjustments (1)
(7,993,647)
RE - Referential equity
Tier I
Core Capital
(1)
--
Revaluation reserves (2)
Deferred assets
Mark-to-market
(2)
(2)
Capital Managem ent
(1)
--
(4,605)
(4,605)
--
(95,241)
(95,241)
--
333,058
333,058
11,191,079
11,462,563
22,226,306
13,376,542
Hybrid instruments authorized in accordance w ith CMN Resolution No. 4,192/2013
--
--
--
8,849,764
11,191,079
11,462,563
Tier II
33,766,565
45,125,190
45,743,633
Subordinated Debt Qualifying as Capital
33,772,649
38,193,524
38,193,524
Hybrid instruments authorized in accordance w ith regulations preceding the CMN Resolution No. 4,192/2013
Subordinated Debt authorized in accordance w ith CMN Resolution No. 4,192/2013 - Financial Bills
(3) (4)
1,716,498
--
--
Subordinate debt authorized in accordance w ith regulations preceding the CMN Resolution No. 4,192/2013
32,056,151
38,193,524
38,193,524
Funds obtained from the FCO (5)
19,614,708
17,635,766
17,635,766
6,341,472
6,506,572
6,506,572
311,678
1,261,564
1,261,564
5,788,293
12,789,622
12,789,622
Funds obtained abroad (6)
Funds obtained from the CD (6)
Funds raised in Financial Bills
(6)
Excess of subordinated debt instruments
(2) (7)
--
(889,927)
Deduction from Tier II (1)
(6,084)
--
Funding instruments issued by financial institutions
(6,084)
--
--
Mark-to-market (2)
(333,058)
---(333,058)
Hybrid instruments (2) (3)
--
8,150,046
7,878,562
Revaluation reserves
--
4,605
4,605
(2)
-(3,381,365)
(4,185,151)
Deduction from the RE (2)
Financial instruments excluded from RE
-(3,381,365)
(4,185,151)
(1) Methodology adopted from October 1, 2013, in accordance to CMN Resolution No. 4,192/2013.
(2) Methodology adopted until September 30, 2013, in accordance to CMN Resolution No. 3,444/2007.
(3) According to CMN Resolution No, 3,444/2007, Hybrid Instruments authorized by Bacen to compose Tier I of the RE are limited to 15% of the total of Tier I, including the value of the
Hybrid Instruments itself, The values of the Hybrid Instruments that may exceed that limit are added to Tier II of the RE.
(4) The Instruments authorized by Bacen to compose the Referential Equity according to CMN Resolution No. 3,444/2007 and do not fulfill the requirements established by CMN
Resolution No. 4,192/2013 suffer the decrease of 10% per year from 2013 to 2022, on the values that composed the RE on December 31, 2012.
(5) According to CMN Resolution No. 4,192/2013, balances of the FCO are eligible to compose the RE.
(6) On June 30, 2014, it w as considered the current balance of subordinated debt instruments, applying on it a maturity term reducer, as determined by CMN Resolution No. 4,192/2013.
(7) The Subordinated Debt Instruments allow ed to select Level II of RE, are limited to 50% of Tier I, according to CMN Resolution No, 3,444/2007, The value that exceeds this limit should
be excluded from Tier II RE.
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6.3 Regulatory Adjustments deducted from Referential Equity (methodology
adopted from October 2013):
The regulatory adjustments are deductions from the Core Capital of heritage elements
that can compromise its quality due to their low liquidity, difficulty to evaluate or reliance
on future profits to be realized.
The following items relating to regulatory adjustments started to be deducted from the
Referential Equity from January 2014:
i. Goodwill;
ii. Intangible assets constituded from October 1, 2013;
iii. actuarial assets related to defined benefit pension funds net of deferred tax
liabilities;
iv. Non-controlling interest;
v. investments, directly or indirectly, greater than 10% of the capital of
unconsolidated entities similar to financial institutions, and insurance companies,
reinsurance companies, capitalization companies and open pension entities
(superior investments);
vi. Tax credits resulting from temporary differences that rely on the generation of
future taxable profits or revenues for its realization;
vii. Tax credits resulting from tax loss of excess depreciation;
viii. Tax credits resulting from tax losses and negative basis of social contribution on
net income.
According to CMN Resolution No. 4,192/2013, these deductions will be gradually
implemented, 20% per year, from 2014 to 2018, with the exception of deferred assets
and funding instruments issued by institutions authorized to operate by Banco Central
do Brasil (Bacen) which are already being fully implemented since October 2013.
Table 33 - Regulatory Adjustments
R$ thousands
2Q14
Funding instruments issued by financial institutions
(3,706,985)
Actuarial assets related to defined benefit pension funds net of deferred tax liabilities (1)
(1,578,241)
Goodw ill (2)
(800,288)
Intangible assets constituded from October 2013
(734,037)
Superior investments and tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for its
realization (excess of 15%)
(591,384)
Tax credits resulting from tax losses and negative basis of social contribution on net income
(257,610)
Tax credits resulting from temporary differences that rely on the generation of future taxable profits or revenues for its realization (excess of
10%)
(123,951)
Non-controlling interest
(120,245)
Tax credits resulting from tax loss of excess depreciation
(41,736)
Deferred assets
(39,170)
Total
(7,993,647)
(1) See notes 27.e – Benefits for Employee and 25.d - Taxes.
(2) The base value for calculating the goodw ill is composed of: R$ 931,371 thousand in investment and R$ 3,070,067 thousand in intangible assets (Notes 14 Investments and 16 - Intangible Assets). In Intangible assets, refers to the goodw ill paid for the acquisition of Banco Nossa Caixa, incorporated in November/2009.
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Risk Management Report - Pillar 3 – 2T14
Table 34 - RE Historical Series – Financial Conglomerate
R$ mil
Patrim ônio de Referência
Nível I
Capital Principal ( 1 )
Patrimônio líquido
Ajustes prudenciais (1)
Ágios pagos na aquisição de investimentos com fundamento em expectativa de rentabilidade futura
Ativos intangíveis constituídos a partir de outubro de 2013
Ativos atuariais relacionados a fundos de pensão de benefício definido líquidos de passivos fiscais diferidos a eles
Participação de não controladores
Créditos tributários decorrentes de diferenças temporárias que dependam da geração de lucros (excesso dos 10%)
Investimentos superiores e créditos tributários decorrentes de diferenças temporárias que dependam da geração de
lucros (excesso dos 15%)
Créditos tributários decorrente de prejuízo fiscal de superveniência de depreciação
Créditos tributários decorrentes de prejuízos fiscais e de base negativa de contribuição social sobre o lucro líquido
Ativos diferidos
Instrumentos de captação emitidos por instituições financeiras
Reservas de reavaliação (2)
Ativo permanente diferido (2)
Ajustes ao valor de mercado (2)
Capital Com plem entar ( 1 )
IHCD autorizados em conformidade com a Resolução CMN n.º 4.192/2013
IHCD autorizados segundo normas anteriores à Resolução CMN n.º 4.192/2013 (3) (4)
Nível II
Dívidas Subordinadas Elegíveis a Capital
Dívidas Subordinadas autorizadas em conformidade com a Resolução CMN n.º 4.192/2013 - Letras Financeiras
Dívidas Subordinadas autorizadas segundo normas anteriores à Resolução CMN n.º 4.192/2013
Recursos captados do FCO (5)
Recursos captados no exterior (6)
Recursos captados com CDB (6)
Recursos captados com Letras Financeiras (6)
Excesso de Instrumentos de Dívidas Subordinadas (2) (7)
Dedução do Nível II (1)
Instrumentos de Captação emitidos por instituição financeira
Ajustes ao valor de mercado (2)
Instrumentos híbridos de capital e dívida (2) (3)
Reservas de reavaliação (2)
Deduções do PR ( 2 )
Instrumentos financeiros excluídos do PR
2T14
118,042,870
84,276,305
62,049,999
70,043,646
(7,993,647)
(3,706,985)
(1,578,241)
(800,288)
(734,037)
(257,610)
(123,951)
1T14
112,293,282
80,571,363
63,520,399
72,096,740
(8,576,341)
(3,547,425)
(2,283,281)
(843,911)
(687,425)
(284,166)
(81,236)
4T13
118,234,351
85,500,897
67,055,163
70,537,211
(3,482,048)
(3,433,968)
-
3T13
118,377,268
75,972,957
64,577,013
64,472,574
-
2T13
116,351,017
74,607,192
63,416,113
63,182,901
-
(120,245)
(126,437)
(44,500)
(43,392)
17,050,964
8,201,200
8,849,764
31,721,919
31,741,950
31,741,950
19,103,867
4,800,822
1,292,346
6,544,915
(20,031)
(20,031)
-
(48,080)
18,445,734
8,489,750
9,955,984
32,733,454
32,747,645
32,747,645
18,529,802
5,400,925
1,453,889
7,363,029
(14,191)
(14,191)
-
(4,585)
(93,074)
202,098
11,395,944
11,395,944
45,807,226
38,324,519
38,324,519
18,041,929
6,420,672
1,004,486
12,857,432
(338,041)
(202,098)
8,018,261
4,585
(3,402,915)
(3,402,915)
(4,605)
(95,241)
333,058
11,191,079
11,191,079
45,125,190
38,193,524
38,193,524
17,635,766
6,506,572
1,261,564
12,789,622
(889,927)
(333,058)
8,150,046
4,605
(3,381,365)
(3,381,365)
(41,736)
(39,170)
22,226,306
13,376,542
8,849,764
33,766,565
33,772,649
1,716,498
32,056,151
19,614,708
6,341,472
311,678
5,788,293
(6,084)
(6,084)
-
(1) M eto do lo gia utilizada a partir de 01.10.2013, co nfo rme Reso lução CM N n.º 4.192/2013.
(2) M eto do lo gia utilizada até 30.09.2013, co nfo rme Reso lução CM N n.º 3.444/2007.
(3) Co nfo rme Reso lução CM N n.º 3.444/2007, o s Instrumento s Híbrido s de Capital e Dívida – IHCD auto rizado s pelo B acen a co mpo r o Nível I do P R estão limitado s a 15% do to tal do Nível I, incluído o pró prio valo r do IHCD. Os IHCD que
venham ultrapassar esse limite são adicio nado s ao Nível II do P R.
(4) Os Instrumento s auto rizado s pelo B acen a co mpo r o P R co nfo rme Reso lução CM N n.º 3.444/2007 e que não se enquadram no s requisito s exigido s pela Reso lução CM N n.º 4.192/2013 so frerão decaimento de 10% ao ano , de 2013 a 2022,
so bre o s valo res que co mpunham o P R em 31.12.2012.
(5) De aco rdo co m a Reso lução CM N n.º 4.192/2013, o s saldo s do FCO são elegíveis a co mpo r o P R.
(6) P ara 30.06.2014, co nsidero u-se o saldo co rrente do s instrumento s de Dívida Subo rdinada, aplicando -se so bre ele o reduto r po r decurso de prazo de vencimento , co nfo rme determina a Reso lução CM N n.º 4.192/2013.
(7) Os Instrumento s de Dívidas Subo rdinadas auto rizado s a co mpo r o Nível II do P R, são limitado s a 50% do P R Nível I, co nfo rme Reso lução CM N n.º 3.444/2007. O valo r que exceder a esse limite deverá ser excluído do Nível II do P R.
To learn more about the composition of Referential Equity consult the “Attachment 1 Composition of the Reference Equity".
6.4 Minimum Reference Equity Required (MRER)
The Minimum Reference Equity Required (MRER) is the equity required (capital volume
required) of institutions, financial conglomerates, and other institutions authorized to
operate by Bacen, to face the risks to which they are exposed in light of the risks to
which they are exposed due to the activities they are involved in, and it is definied by
CMN Resolution 4.193/13.
The MRER, which relaced the Required Referential Equity (PRE) from 10.01.2013,
corresponds to the application of the factor "F" to the amount of RWA, with:





11% of RWA, from 10.01.2013 to 12.31.2015;
9.875% from RWA 01.01.2016 to 12.31.2016,
9.25% of RWA from 01.01.2017 to 31.12.2017;
8.625% of RWA from 01.01.2018 to 31.12.2018; and
8% of the RWA from 01.01.2019.
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Risk Management Report - Pillar 3 – 2T14
In determining the amount of risk-weighted assets, we consider the sum of the following
portions:



I - RWACPAD concerning credit risk exposures subject to the calculation of capital
requirements under the standardized approach;
II - RWAMPAD concerning market risk exposures subject to the calculation of capital
requirements under the standardized approach, and,
III - RWAOPAD on the calculation of the capital requirement for operational risk under
the standardized approach.
In 01.10.2013 took effect in Brazil the legislative set that implemented the
recommendations of the Basel Committee on Banking Supervision regarding the capital
structure of financial institutions, known as Basel III. The new rules adopted address the
following issues:


I - new methodology for calculating regulatory capital, which continues to be
divided into Tier I and II, the Tier I consists of the Core Capital (net of Regulatory
Adjustments) and Additional Tier I Capital;
II - new methodology for calculating the capital requirement maintenance,
adopting minimum requirements for Referential Equity, Tier I and Core Capital,
and the introduction of the Additional Core Capital.
The consolidation scope used as the basis for establishing the operating limits was also
amended, considering the Consolidated Financial Report of 10.01.2013 until
12.31.2014, and the Prudential Conglomerate, defined in CMN Resolution n.º
4.280/2013, from 01.01.2015.
All quotes to the Required Referential Equity (RRE), prior to 10.01.2013 dates, refer to
the Basel II methodology and were determined according to the criteria established by
CMN Resolution 3.490/2007.
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Risk Management Report - Pillar 3 – 2T14
The tables below show the PRE of the Financial Conglomerate and the Consolidated
Economic and Financial, by type of risk.
Table 35 - Minimum Reference Equity Required of the Financial Conglomerate
R$ thousand
RWACPAD
2%
Credit Risk
20%
4Q13
3Q13
2Q13
761,431,384
725,288,153
695,439,137
1,908
2,250
7,528
9,159,634
9,288,966
8,874,952
-
-
2,400,052
1,494,731
6,943,504
5,997,569
5,056,319
50%
17,435,975
16,070,332
17,112,938
28,469,916
23,763,653
75%
129,523,956
130,667,437
132,895,552
234,521,288
231,432,079
85%
133,804,526
148,006,249
132,841,948
100%
380,274,980
352,982,079
367,037,068
388,871,757
371,018,261
150%
59,166,606
53,815,658
50,023,455
48,426,681
44,883,496
250%
23,268,750
23,820,150
24,117,371
21,721,836
20,910,092
22,549,210
875,477
1.250%
Credit Value Adjustment (CVA)
RW A OPAD
Asset Management
Operational Risk
1Q14
763,068,276
35%
300%
Commercial
Retail Brokerage
Corporate Finance
-
-
-
-
-
-
-
22,598,459
22,846,916
870,032
534,439
-
295,461
637,463
380,602
-
36,578,814
36,578,814
36,951,723
36,951,723
33,436,225
1,130,176
1,130,176
1,126,657
1,126,657
1,130,989
13,457,208
13,457,208
13,625,178
13,625,178
10,749,055
44,065
44,065
42,045
42,045
845,308
-
845,308
-
386,066
-
386,066
-
40,351
-
67,117
Trading and Sales
9,939,540
9,939,540
9,463,981
9,463,981
10,275,276
Payments and Settlements
4,291,040
4,291,040
4,291,234
4,291,234
4,220,126
972,638
972,638
967,705
967,705
951,877
7,589,455
7,589,455
7,820,989
7,820,989
6,135,667
12,534,491
11,727,133
15,239,976
11,115,560
1,879,909
166,518
169,344
114,898
182,253
717,916
2,017,763
2,022,121
1,530,899
790,188
1,101,591
50,783
Financial Agent Services
Retail
RW A MPAD
Prefixed interest rate, in reais - RWAJUR[1]
Market Risk
2Q14
782,472,612
Foreign currency coupons - RWAJUR[2]
Price index coupons - RWAJUR[3]
42,448
38,905
47,277
49,642
Interest rate coupons - RWAJUR[4]
-
-
-
-
-
Share price fluctuations - RWAACS
-
-
-
7,212
3,437
6,181
Commodity price fluctuations - RWACOM
Exchange rate fluctuations - RWACAM
Risk Weighted Assets (RWA) (1)
Minim um Referential Equity Requirem ent (MRER) (2)
8,203
3,968
13,868
11,354
10,299,558
9,492,795
13,533,033
10,074,912
831,585,917
811,374,223
813,623,083
773,355,436
730,755,270
91,474,451
89,251,164
89,498,539
85,069,098
80,383,080
-
(1) A cco rding to CM N Reso lutio n No . 4.193/2013. Fo r perio ds prio r to 10.01.2013, the values ​were o btained fro m the Required Referential Equity acco rding to the criteria o f CM N Reso lutio n
No . 3.490/2007, which was co nverted in RWA .
(2) In co mpliance with CM N Reso lutio n No . 4.193/2013, co rrespo nds to the applicatio n o f the facto r "F" to the amo unt o f RWA , with "F" equals to 11% o f RWA , fro m 10.01.2013 to 12.31.2015;
9.875% fro m RWA 01.01.2016 to 12.31.2016, 9.25% o f RWA fro m 01.01.2017 to 31.12.2017; 8.625% o f RWA fro m 01.01.2018 to 31.12.2018, and 8% o f the RWA fro m 01.01.2019. Fo r perio ds prio r to
10.01.2013, the values ​refer to the Required Referential Equity and were determined acco rding to the criteria established by CM N Reso lutio n. No 3.490/2007.
6.5 Capital Adequacy Ratio
In compliance with the recommendations of the Basel Committee on Banking
Supervision, BACEN established operational limits to be observed by financial
institutions, among which the Total Capital Ratio (IB), the Core Capital Ratio (ICP) and
the Tier 1 Capital Ratio stand out.
The Capital Adequacy Ratio was determined according to the criteria established by
CMN Resolutions n. º 4.192/2013 and n. º 4.193/2013, which refer to the calculation of
the Referential Equity (RE) and Minimum Reference Equity Require (MRER) in relation
to Risk Weighted Assets (RWA ), respectively.
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Risk Management Report - Pillar 3 – 2T14
BACEN has determined that financial institutions must permanently maintain, a PR
value higher than the PRMR value. Complementarily CMN Resolution 4.193/13
established minimum requirements for core capital (4.5% of RWA) and Tier I (5.5% of
RWA and 6% until 31.12.2014, from 01.01.2015), also demanding that institutions
maintain sufficient PR to address the banking book interest rate risk (RBAN portion).
The following tables show the evolution of the ratio (IB), Core Capital Index (PCI), Tier I
Capital Ratio (ICN1), the RBAN portion and the margin of compatibility of PR.
Table 36 - The Total Capital Ratio and RE margin - Financial Conglomerate.
Referential Equity (RE) (R$ thousand) (1)
Tier I (R$ thousand)
Core Capital (R$ thousand)
Minim um Referential Equity Requirem ents (MRER) (R$ thousand) (2)
Risk Weighted Assets (RWA) (R$ thousand) (3)
Capital Adequacy Ratio
Tier I Ratio
Core Capital Ratio
Interest rate risk of operations not classified under
negotiable portfolio (RBAN) (R$ thousand)
Com patibility Margin of RE (RE - MRER - RBAN) (R$ thousand)
2Q14
1Q14
4Q13
3Q13
2Q13
118,042,870
112,293,282
118,234,351
118,377,268
116,351,017
84,276,305
80,571,363
85,500,897
75,972,957
74,607,192
62,049,999
63,520,399
67,055,163
64,577,013
63,416,113
91,474,451
89,251,164
89,498,539
85,069,098
80,383,080
831,585,917
811,374,223
813,623,083
773,355,436
730,755,270
14,19%
13,84%
14,53%
15,31%
15,92%
10,13%
9,93%
10,51%
9,82%
10,21%
7,46%
7,83%
8,24%
8,35%
8,68%
3,333,193
2,669,626
2,710,568
3,268,427
3,166,235
23,235,225
20,372,491
26,025,244
30,039,743
32,801,702
(1) In co mpliance with CM N Reso lutio n No 4.192/2013. To perio ds prio r to 10.01.2013 values ​were o btained using criteria fro m Reso lutio n CM N 3.444/2007.
(2) In co mpliance with CM N Reso lutio n No . 4.193/2013, co rrespo nds to the applicatio n o f the facto r "F" to the amo unt o f RWA , with "F" equal to 11% o f RWA , fro m 10.01.2013 to 12.31.2015; 9.875% fro m
RWA 01.01.2016 to 12.31.2016, 9.25% o f RWA fro m 01.01.2017 to 31.12.2017; 8.625% o f RWA fro m 01.01.2018 to 31.12.2018, and 8% o f the RWA fro m 01.01.2019. Fo r perio ds prio r to 10.01.2013, the values ​refer to
the Required Referential Equity and were determined acco rding to the criteria established by CM N Reso lutio n. No 3.490/2007.
(3) A cco rding to CM N Reso lutio n No . 4.193/2013. Fo r perio ds prio r to 10.01.2013, the values ​were o btained fro m the Required Referential Equity acco rding to the criteria o f CM N Reso lutio n No .
3.490/2007, which was co nverted in RWA .
6.6 Assessment of Sufficiency and Adequacy of Referential Equity (PR)
Banco do Brasil annually prepares/reviews its capital planning considering a minimum
time horizon of 36 months and linking the matter to the business and economic
guidelines from its Corporate Strategy, aiming to ensure that its capital is sufficient to
support, beyond relevant risks, the business growth.
The Capital Plan is submitted for analysis of technical forums and approved by the
Board of Officers and the Board of Directors. The Capital Plan aims to guarantee that
the strategy adopted is appropriate to ensure the solvency ratios of the institution,
without compromising the results. For this purpose, projections for PR and RWA are
prepared, incorporating the impact of full implementation of Basel III in Brazil.
The monitoring of the Capital Plan is performed monthly by the Forum and reported to
the management. In this monitoring, projections and needs of realignment of the
strategy are evaluated, taking into account the amounts realized, regulatory changes
and business expectations.
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Risk Management Report - Pillar 3 – 2T14
In this context, the Bank assesses the projections based on the limits of each indicator
and the deadline for any breach, as shown below:
Table 37 - Criteria and parameters for classification of the capital condition
Capital Index
Common Equity
Tier 1 Index
Tier 1 Index
Basel Prudential
Index
0 to 6
Period of noncompliance (months)
7 to 12
13 to 18
19 to 24
25 to 30
CRITICAL
CRITICAL
CRITICAL
ALERT
ALERT
ALERT
From 31st month
SURVAILLANCE
SURVAILLANCE
SURVAILLANCE
According to Table 41 above, the projections indicate that when extrapolating Basel
Prudential Index (IBP) - currently at 13% - or other indicator of capital, the Company will
have enough time to promote strategic changes to prevent the extrapolation of the
same.
The capital control conditions are monthly reported by the Capital Forum at the regular
meetings of strategic risk committees related to the capital management structure
(SRC, SRML, SRO and CRG), containing, when necessary, suggestions of capital
contingency measures to be adopted.
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