Abstract

This chapter examines the contributions that the original Basel Accord took and that Basel II might make toward changing the banking regulation framework in Brazil. It will be argued that risk weighted capital requirements imposed by the Original Accord, which took effect in 1994, meant not just an important change, but almost the creation of a bank regulation framework in Brazil. It will be argued that the adoption of Basel II may increase not only the concentration level, which is already very high, but also the participation of the foreign capital in Brazilian banking system.

Introduction

Financial markets are submitted to more well-developed regulatory and supervisory mechanisms than those found in other sectors of the economy, a fact that is explainable due to the features that are inherent to the nature of the transactions conducted within these markets. Among such features, one may point out those which would explain the sensitivity of financial institutions, and specially banks, to crises, and the possibility that contagious movements will irradiate from such institutions, causing a systemic risk. Bank institutions, jointly with the Monetary Authority, are members of the monetary system, they receive and create cash deposits, fully liquid instruments. They operate by leverage, i.e., their assets and liabilities are higher than their capital and, generally speaking, they act as term changers: the terms of the liability transactions are shorter than the terms of the asset transactions.