The requirements set by the authority are in line with those prescribed by Basle, including the riskweight approach to assess capital adequacy, with weights of 0%, 20%, 50% and 100%, the division of the constituents of capital in tiers 1 and 2 and capital required to cover exchange risk and interest rate risk. Additional measures to strengthen prudential rules in Brazil included regulations issued in 1998 (internal controls), 1999 (credit risk classification) and 2000 (liquidity risk). As a result of the internal controls regulation (Resolution 2554), the board of directors is considered responsible for the smooth functioning of the internal control system, internal auditors must present semi-annual report on the quality and effectiveness of internal controls and supervision can restrict activities and operations where the internal controls are not satisfactory. Resolution 2682, on credit risk classification, introduced a forward-looking approach, specifying that loans must be classified not only according to their past due status, as it was previously done, but also based on the creditworthiness of borrower and on the nature of the transaction. Banks, according to Resolution 2.804 must follow specific liquidity management policies, such as: sound liquidity practices, the use of alternative scenarios and the application of stress tests (reviewed by supervisors). Returning to the implementation of Basle II, supervision in Brazil is as yet undecided with respect to the date of implementation or the timetable to be followed, as this will depend very much on the intentions and readiness of the banks and on the existence of robust and consistent databases and models.

Although we already have a number of supervisory agreements (MOUs) in place with most supervisory authorities of home supervisors to banks of importance in Brazil, which will help smoothening such issues, a real sense of the problems and the need of effective co-operation will only be truly felt at the moment of validations, that is, after the whole process begins. The legal and regulatory framework will, of course, have to undergo a number of modifications before the implementation of the New Accord. The greatest legal obstacle to the implementation of the New Accord is that, currently, Brazilian supervisors are not allowed to impose differentiated capital requirements for individual banks (at present, 11% must be applied across the board to all institutions). Changes of a smaller scale will also be needed in some regulations in order to allow for more effective supervisory discretion. No significant problems are envisaged with respect to the implementation of Pillar III as far as quantitative disclosure is concerned, given that Brazilian banks already comply with a reasonable amount of quantitative disclosure requirements. However, Brazilian banks will have to improve a lot in terms of qualitative disclosure, which is something they are not particularly accustomed to do. In terms of measuring economic capital, no doubt banks are usually more capable of correctly determining their own needs than the supervisor via regulatory capital. Nevertheless, for this to work properly, banks must develop the culture of using economic capital and employ appropriate internal models.