between the Retail and Corporate business lines while one-third of non-Government time deposits are allocated to Retail and the rest to Corporate; savings deposits (“ _poupança_ ”) are allocated exclusively to Retail. Acceptances that comprise of various types of ‘letras’ (e.g., _letras hipotecarias_ , _letras de cambio_ etc.) insured by FGC are allocated to Retail, while the remainder are assumed to belong to Corporate. Interbank deposits and reverse repos (a form of funding using pledged securities) are mapped to Treasury. The proportion of other deposits that represent so-called ‘special deposits’ by institutions such as FAT ( _Fundo de Amparo ao Trabalhador_ ) and are primarily held by state-owned banks are assumed to be used for directed lending purposes and are therefore allocated by business line based on the type of lending that they support (see below), while the remainder (mostly judicial deposits) are allocated equally between Retail and Corporate.

As can be seen in Table 2.1, the Retail business line holds 50 percent of total deposits, while Corporate controls 43 percent. Government and Treasury hold a small percentage, 4 percent and 3 percent respectively.

# **Allocation of Interest Expenses on Deposits, Acceptances and Repos**

Two types of data are required in order to estimate and allocate interest expenses on deposits, acceptances and repos by business line:

- Average 2007 balance by business line – this is estimated by taking the simple

- average of balances at the beginning and end of 2007

- Average interest rate by type of deposit during 2007 – this is estimated based on rate information in Bacen’s website, as well as on yield information found in the 20-F reports of Brazilian banks filed with the SEC<sup>43</sup> .

Total interest expenses by deposit product can be estimated by multiplying these two types of data; their accuracy can be assessed by comparing the resulting figure to the one published by Bacen for the banking system. The allocation of interest expenses by product and business line is then based on the volume of each product that belonged to each business line during 2007.

As can be seen in Table 2.1, the Retail business line is charged 26 percent of all interest expenses on deposits, acceptances and repos; Corporate and Treasury are charged 25 percent and 46 percent respectively, with the remainder (3 percent) charged to Government.

# **Allocation of Reserve Requirements on Deposits and of their Remuneration**

Not all demand, savings and time deposits collected by a business line are freely available to finance loans, because of the existence of reserve requirements (RR) that need to be estimated and appropriately allocated. Each type of deposit has its own RR, which vary with respect to the required proportion, utilization (placed with Bacen or invested in securities) and remuneration. For example, 53 percent of all demand deposits must be kept with Bacen as RR (of which only 8 percent is remunerated), while banks

> 43 The average interest rate by type of deposit is effectively a weighted average of rates of different maturities and currencies (both local and foreign currency) offered in each type of deposit.

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