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. the intention is to achieve implementation as closely as possible to the g10 schedule. examples of tricky issues to be considered with care are : how to ( or whether to ) apply operational risk requirements for smaller institutions ; how to carry out the validation of internal models for both market risk ( we still do not allow banks to use them for capital purposes ) and irb ; how to encourage more complex banks to adopt irb. there are, however, more pressing priorities for brazilian supervision at present, such as the improvement of recently implemented processes of risk focused supervision, the consolidation of the new credit information system, the studies underway for the introduction of a supervisory rating system geared towards the determination of the adequate frequency and intensity of supervision for each particular financial institution / conglomerate and the definition of strategies for consolidated supervision and international co - operation. the new accord will be most likely implemented in brazil in a gradual manner, the new rules co - existing for a while with the old ones. this will be the case, for example, of the smaller banks, to which will be applied either the simplified standardised approach, which does not depend on external credit assessment institutions, or the current approach. one possibility is the application of the current approach with slight modifications, such as a review of the present weights and the incorporation of some innovations from the standardised approach. for these less complex institutions, the capital requirement for operational risk might not be explicit, but only covered under pillar ii. at best, some small banks might be required to allocate capital for operational risk through the basic indicator approach. in the case of larger institutions, they will be allowed, at first, to implement only the foundation irb approach. for the advanced irb approach more time will be necessary for the banks to improve database quality and for supervisors to improve their

which is why adequate training to carry out the validation of models and capital adequacy assessments will be of fundamental significance. supervisors still have a lot of work to be done in order to implement basel ii. we understand that it is important to disclose, as soon as possible, an overview of our implementation plans to the industry while we internally make all the studies necessary to support the numerous decisions to be made. the next steps include, for example, the evaluation of simpler alternatives for smaller institutions ( non - bank and small banking institutions, the definition and disclosure of aspects of national discretion, the definition of eligibility criteria for irb, and, finally, the release of an “ advanced regulation notice ” - open to public / industry comments, and a country quantitative impact study considering revised aspects of national discretion.