Others

Operational Risk

1. Operational Risk

Banco Luso Brasileiro believes that the continuous improvement of its processes and procedures and risk management lead to greater activity security in internal areas, optimize costs and resources and help apply the Bank’s planning and directives.

Brazilian Central Bank concept – Resolution 3380/2006: The possibility of the occurrence of losses resulting from the failure, deficiency or inadequacy of internal processes, people and systems, or external events.

2. Methodology

Risk management and mitigation.

The Bank developed all its own operational risk management structure, having prepared risk matrices using the Treadway Commission’s COSO (Committee of Sponsoring Organizations) methodology and classifications that use FEBRABAN terminology.

Legal

In view of the size of the bank, a preventive advocacy criterion is used and all new business or contracts are previously reviewed by the Bank’s Legal Department.

3. The operational risk management structure comprises (a):

Executive officers;
Operational Risk Committee;
Internal Controls / Compliance;
Internal Audit;
Operational Risk Policy;
Directed management information systems.

4. Policy

For Banco Luso Brasileiro, an Operational Risk Management Policy and the procedures arising from it must contain:

A classification of its operational risks;

The identification, measurement and recording of events that are classed as operational risks;

Directives for mitigating operational risk;

A methodology for allocating capital to support the operational risk;

Contingency and Business Continuity Plan.

Market Risk

1. Market Risk

Banco Luso Brasileiro considers that market risk control is a necessary condition for sustained growth and for supporting the mismatch of currencies and periods that originate from market requirements for assets and liabilities. It recently reassessed its risk structure, policy and procedures to gauge the systems being used. The Bank’s risk management is in line with regulatory requirements and market practices.

With the exception of investing its liquidity reserves, the Bank is not involved in any treasury or derivative operations, although they may be used if the market risks deriving from credit operations in the banking portfolio exceed the internal risk limits established for such. Brazilian Central Bank concept - Resolution 3464: The possibility of the occurrence of losses resulting from alterations in the market value of positions held by a financial institution includes the variation risk: foreign exchange, interest rates, share prices and the price of commodities.

2. Methodology

The Market Risk Committee is responsible for managing market risk and is completely independent of other areas in the bank.

3. The operational risk management structure comprises (a):

Executive officers;
The Credit Risk Committee;
Internal Controls / Compliance;
Risk Management: which is responsible for administering the database used in the market risk assessment and measurement models, and also for coordinating the information.

4. Policy

The Bank adopts the market risk policy established by the Board of Directors that, among other things, provides for:

The adoption of a market risk assessment model for negotiation operations (treasury) using the Value at Risk (VaR) system, calculated on the basis of the standard daily volatility published by the Central Bank and the adoption of the distribution of net positions (assets – liabilities) on the 1st, 21st, 42nd, 63rd,126th, 252nd, 504th, 756th, 1008th, 1260th and 1520th business day, and with 5 days to come out of the position and to be 99% certain, with regard to the credit operations portfolio (banking). In January 2011, the Bank started using its own model for its banking portfolio, which is also based on the VaR system.

It adopts maximum limits for market risk exposure, establishing the VaR as a percentage of the shareholders’ equity for its banking and treasury portfolios (negotiation and non-negotiation).

It also adopts stress and maximum loss limit criteria with regard to its shareholders’ equity for its banking and treasury portfolios.

At least once a year it reassesses its compliance with risk calculation rules, including for its IT operations.

Credit Risk

1. Credit Risk

Credit management and credit risk management, both fundamental bank activities, have very different outlooks and functions. The former, which is totally operational, deals with the day-to-day aspects of loans, from prospecting for them and approving them to paying them off. The latter aims to control portfolio risk, mitigates short and long-term risks and establishes rules.

Brazilian Central Bank concept - Resolution 3721.

There is the possibility of a borrower not complying with the financial obligations they have assumed under contract and the consequent associated economic loss, reduction in risk classification (worsening) and reduction in the market value of that particular asset.

2. Methodology

The Bank has developed and introduced credit management procedures and rules, comprising:

The Credit Committee;

A borrower classification model;

An operation risks classification model;

A procedure for handling and approving loan operations;

Monitoring contractual guarantees;

Monitoring debt collection;

Friendly debt collection;

Legally-enforced debt collection in order to comply with the Credit Policy established by the Board of Directors.

3. Credit risk management structure

Executive officers;
The Credit Risk Committee;
Credit risk policy;
SIG credit risk monitoring reports;
Credit risk management.

4. Policy

The Bank introduced its credit risk management policy, which was approved by the Board of Directors and that establishes, among other things:

The setting up of a Credit Risk Management Committee;

Definition of the target public;

The adoption of risk classification models;

The adoption of a risk mitigation matrix;

The adoption of the rules of functioning of the Credit Committees;

The portfolios to be developed and distribution of the assets between portfolios;

Risk concentration limits per borrower;

Risk concentration limits per economic sector;

Portfolio distribution limits per level of borrower;

Portfolio distribution limits per operation risk level;

The adoption of periodic monitoring reports: distribution of the portfolios by risk level and risk migration matrix.

Liquidity Risk

1. Liquidity Risk

Banco Luso has structured control systems that allow for the permanent monitoring of the positions assumed in all its operations.

Brazilian Central Bank concept - Resolution 4090:

The occurrence of any imbalance between negotiable assets and creditors’ equity, mismatches between payments and receipts that may affect the payment capacity of the IF, taking into consideration the different currencies and the periods established for liquidating their rights and obligations.

2. Methodology

The Bank developed its own model for managing the liquidity risk, based on:

The stochastic calculation of the minimum reserve, based on the daily past variation of the cash balance to meet the seven consecutive days’ contrary adversity criterion, with a 99 % certainty rate;

It calculates the minimum reserve and the contingency reserve for stress and keeps the amount in liquid investments linked to federal government bonds.

It has dealt with liquidity risk mitigation, with an emphasis on:

Establishing maximum concentration limits by due date in the month;

Minimizing freely redeemable investments;

Establishing a maximum individual risk level per borrower;

Minimizing the number of loans for significant amounts in the “guaranteed account” modality;

Keeping the GAP within comfortable limits.

3. Liquidity risk management structure

Board of Directors;
Executive officers;
The Liquidity Risk Committee;
Controllership;
Operations Desk;
Liquidity Risk Policy (Liquidity Contingency Plan);
External advice hired for this purpose.

4. Policy

The Liquidity Risk Management Policy of Banco Luso Brasileiro involves the following processes:

Monitoring risk evolution and proposing or certifying mitigation actions/adjustments within the limits;

Monitoring adherence to the policy and the established limits;

Monthly assessment of the VaR risk measures and losses in a stress situation;

Definition of the liquidity measures, having chosen the minimum stochastic cash and the cash for stress;

Definition of the risk measurement models, the degree of certainty and repetition time;

Every year the Board of Directors assesses and decides on any adjustments needed, or maintenance of the policies and strategies and the monitoring and

liquidity risk management reports, evaluating the overall liquidity picture given the institution’s results.