Mark-To-Market in Brazil

Aug 1, 2002

The Central Bank of Brazil recently changed the rules for how financial institutions report securities held as propietary assets or managed fiduciary funds. The change, while positive, has some immediate consequences for bank financial statements.

In the second quarter of this year, the Brazilian Central Bank imposed on financial institutions stricter rules for reporting securities held as proprietary assets or as managed fiduciary funds. Such securities are primarily federal government bonds, many with maturities running to 2006. Mark-to-market reporting became the rule, which upon implementation caused extraordinary portfolio losses to banks and investors. The size of the impact for banks will become visible when mid-year, audited financial statements are published in August. We expect the impact to be negligible at most institutions.

The principle of mark-to-market is a positive step to modernize the Brazilian banking system. But the Central Bank's timing could not have been worse. General elections will occur in October and a new government will take office January 1, 2003. All four presidential candidates agree that the size of local currency government debt is a source of concern and needs special attention....

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