Report No. PIC5452
Project Name                     Brazil-Central Bank Modernization ...
Technical Assistance Loan
Region                           Latin America and the Caribbean
Sector                           Public Sector Management/
Private Sector Development
Project ID                       BRPE48357
Borrower                         Federative Republic of Brazil
Implementing Agency              Central Bank of Brazil
Date this PID Prepared           July 21, 1997
Projected Board Date             September/October 1997
1.      Country Background.      Brazil underwent a major change in
economic regime with the introduction of the Real Plan in mid-1994.
The Plan introduced an exchange rate anchor with flexibility to
move within a band, deindexed the economy, and implemented tight
credit and monetary policies. Brazil has clearly embraced a new
vision of development -- embodying reforms for stable and
sustainable growth with poverty reduction and improving equity --
which is being strongly translated into its policy agenda by an
administration that has achieved some of the best economic results
in a generation. Much economic and social progress has been
achieved, including an increase in the growth rate from virtual
stagnation through 1992 to an average of about four percent during
1993 -1996, a reduction in annual inflation from 2,668 percent in
1994 to about 10 percent in 1996, a strong balance of payments, and
a reduction in both relative and absolute poverty indices during
the same period. However, fiscal adjustment has been more difficult
than originally anticipated.
2.      Sector Background.       As a consequence of the sharp fall of
inflation following the introduction of the Real Plan, bank
revenues have shifted dramatically. Whereas in 1994, Brazil's banks
earned about half of their revenues by reinvesting their non-
interest earning deposits in high-yielding financial instruments,
this percentage had dropped sharply to a few percentage points by
the fourth quarter of 1995. Numerous private and public banks,
burdened by high cost structures, non-performing loans and few
earnings alternatives, could not adjust and failed. Among the
private banks, the major failures included Banco Economico and
Banco Nacional. The restructured assets and liabilities of both of
these institutions were merged into other banks. In 1996,
Bamerindus, the fifth largest bank in the country, also encountered
problems and its acquisition by a major international bank was
completed in early 1997. Among the major public banks, both the
state banks in Rio de Janeiro and Sao Paulo were intervened by the
Central Bank. The state bank of Rio was subsequently privatized in
mid-1997. The state bank of Sao Paulo is currently being
restructured and is expected to be privatized in 1998. Banco do
Brasil, the country's largest bank which has also suffered from



structural deficiencies, has been recapitalized (about US$8
billion) and is now engaged in a major restructuring effort.
3.      Project Objectives.      The macroeconomic and financial
sector difficulties have exposed some need to improve the
institutional capacity of the Central Bank, particularly of its
banking supervision function. The Central Bank has thus embarked on
a long-term modernization effort to both help it anticipate/prevent
major bank failures and to allow it to manage failures more expertly.
4.      The Project's development objective is to complement the
Central Bank's long-term effort by supporting a first-phase action
plan with the goal of strengthening banking supervision, and by
assisting in the identification of international best practices.
The primary vehicle, to achieve better banking supervision, is the
increased professionalization of its banking supervision staff via
training in enhanced supervision and enforcement tools, upgrading
of the information flow to the Central Bank and utilization of
advanced information technology equipment.
5.      Other Project components include laying the groundwork (legal
and financial feasibility studies) for the possible creation of an
entity, separate from the Central Bank, to manage the disposal of
failed banking assets. The surge of bank failures added
significantly to the Central Bank's inventory of assets of failed
banks, and has burdened its capacity to manage timely asset
liquidation and disposal.
6.      The Project will also assist in the evaluation of the
financial sector structure and consider changes in public policies
and instruments to foster a growing and profitable private banking
system. Finally, the Project will allow the Central Bank to
continue to expand its training programs rapidly in a few key areas
outside banking supervision.
7.      Project Components and Financing. To achieve its objectives,
the Project has been designed around broad and indicative project
components such as training, upgrading of data bases, improvement
of the quality of information flows from banks, information
technology equipment, selected studies and high level advisory
services to delineate the future directions of the financial sector
as well as banking supervision. The Bank is proposing to provide a
US$20 million loan to finance all project components other than the
Central Bank's Project Coordination. Total project cost are
estimated at US$22 million.
8.      Institutional and Implementation Arrangements.
Implementation Period: Three years, with the objective of
disbursing most of the Bank loan during the first two years. This
is to respond to the Central Bank's need for urgency.
Executing agencies: The Central Bank of Brazil would be the sole
executing agency for all Project components.
Project coordination. The Central Bank has established a Project
Coordinating Unit (PCU) headed by a manager with a rank of at least
Head of Department, or equivalent. This Unit would be staffed with
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appropriate accounting, procurement and administrative personnel.
The PCU would be supported by a Central Bank coordinating committee
which would draw participants from all areas benefiting from this
Project.
9.      Project Sustainability. All project expenditures will be
designed in such a manner that their outputs can be productively
applied. For instance, staff trained abroad would be required to
pass on such training upon their return.
10.     Lessons learned and reflected in the project design. The
principal lesson is that TA loans are only successful when their
goals are fully shared by borrowers. The Central Bank of Brazil has
demonstrated such full sharing.
Other lessons applied include:
-- limiting scope of work to a few defined areas (human resources,
information & information technology);
-- developing Terms of Reference for key project components as part
of loan preparation;
-- focusing on the core of Central Bank operations - Bank
Supervision - and not trying to influence all aspects of the
institution's mandate;
-- having a clear need for the proposed technical assistance agenda
(high staff turn-over and retirements increase need for
training; changes in macroeconomic environment and banking
industry structure require new supervisory tools; recent bank
failures and costs of bail-outs for government have created a
sense of urgency in the Central Bank to better foresee future
bank failures, etc.).
11.     Poverty Category and Environmental Aspects. Not applicable.
12.     Program Objective Category. Economic Management (EM)
Contact Point:           Public Information Center
The World Bank
1818 H Street N.W.
Washington, D.C. 20433
Telephone No.:   (202) 458-5454
Fax No.:   (202) 522-1500
Note: This is information on an evolving project. Certain
components may not necessarily be included in the final project.
Processed by the Public Information Center week ending August 1, 1997.
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