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Risk Management Report Pillar 3

1st Quarter 2014

RISK MANAGEMENT REPORT PILLAR 3

BANCO DO BRASIL S.A.

1st Quarter of 2014

Risk Management Report – Pillar 3 – 1Q14

Banco do Brasil S.A. 2

Summary

1. INTRODUCTION ..................................................................................................... 6

2. GOVERNANCE ....................................................................................................... 7

2.1 Types of Risks ................................................................................................... 7

2.2 Corporate Risk Governance .............................................................................. 9

2.3 Risk Management Process ............................................................................. 11

2.4 Reports............................................................................................................ 11

3. REGULATION ....................................................................................................... 12

3.1 Basel II ............................................................................................................ 12

3.2 Basel III ........................................................................................................... 16

3.3 Basel II in Banco do Brasil .............................................................................. 17

4. FINANCIAL CONGLOMERATE ........................................................................... 19

5. RISK MANAGEMENT ........................................................................................... 20

5.1 Credit Risk ....................................................................................................... 20

5.2 Market and Liquidity Risks .............................................................................. 37

5.3 Operational Risk .............................................................................................. 55

5.4 Non-financial Companies ................................................................................ 59

6. CAPITAL ............................................................................................................... 60

6.1 Capital Management ....................................................................................... 60



List of Tables Table 1. Timetable for Basel III Implementation in Brazil ...................................................... 16

Table 2. Credit risk exposure by Risk Weighted ................................................................... 26

Table 3. Average credit risk exposure in each quarter ......................................................... 26

Table 4. Credit risk exposure by geographic region and foreign market ............................... 27

Table 5. Credit risk exposure of the financial conglomerate by economic sector .................. 28

Table 6. Credit risk exposure of the economic-financial consolidated group by sector ......... 29

Table 7. Amount of transactions in arrears ........................................................................... 29

Table 8. Concentration levels of the ten biggest clients in relation to the total of loans ......... 30

Table 9. Flow of transactions written-off ............................................................................... 30

Table 10. Stock of allowances for doubtful accounts ............................................................ 30

Table 11. Loss operations assigned, with substantial transfer of risks and benefits ............. 31

Table 12. Value of the exposures derived from acquiring FIDC and CRI .............................. 32

Table 13.Notional value of contracts to be liquidated in clearing house liquidation systems, in

which clearing houses acts as central counterparty ............................................................. 33

Table 14. Notional value of contracts subject to counterparty credit risk in which clearing

houses do not act as central counterparty ............................................................................ 34

Table 15. Notional value of contracts where clearing houses did not act as central

counterparty, and that have no collaterals ............................................................................ 34


counterparty, and that have collaterals ................................................................................ 34

Table 17. Positive gross value of contracts subject to counterparty credit risks, disregarding

the positive values from compensation agreements, as set forth in CMN Resolution 3,263/05

............................................................................................................................................ 35

Table 18.The value of collaterals that cumulatively meet the requirements of paragraph VI,

Art.8, of Bacen Circular 3,477/09 ......................................................................................... 35

Table 19.Notional value of credit derivatives ........................................................................ 36

Table 20. Mitigated value of exposure, weighted by the respective risk factor ..................... 37

Table21. Derivative financial instruments in the country and abroad, by market risk factor,

with and without central counterpart – 1Q13 ........................................................................ 39

Table 22. Derivative financial instruments in the country and abroad, by market risk factor,








Table 26. Total value of the Negotiable Portfolio by relevant market risk factor, divided into

positions bought and positions sold – 1Q13 ......................................................................... 48

Table27. Total value of the Negotiable Portfolio by relevant market risk factor, divided into










Table 31.Phases of the operational risk management process ............................................ 55

Table 32. Operational losses monitoring by loss events category. ....................................... 58

Table 33. Referential Equity ................................................................................................. 62

Table 34. Capital and Profit Reserves .................................................................................. 63

Table 35. Accumulated Other Comprehensive Income ........................................................ 64

Table 36. Non-Controlling Interest ....................................................................................... 64

Table 37. Regulatory Adjustments ...................................................................................... 65

Table 38. Perpetual Bonds .................................................................................................. 65

Table 39. Subordinated Debt Eligible as Capital .................................................................. 66

Table 40. Financial Instruments Excluded from Tier II of RE ................................................ 67

Table 41. RE historical series – Financial Conglomerate ..................................................... 68

Table 42. RE historical series – Consolidated Economic and Financial ............................... 69

Table 43. Minimum Reference Equity Required of the Financial Conglomerate ................... 71

Table 44. Minimum Reference Equity Required of the Consolidated Economic - Financial .. 72

Table 45. The Total Capital Ratio and RE margin - Financial Conglomerate. ....................... 73

Table 46. The Total Capital Ratio and RE margin - Consolidated Economic and Financial .. 73



List of Figures Figure 1. Governance Structure ............................................................................................. 9

Figure 2. Risk Management Structure and Process ............................................................. 10

Figure 3.Basel II Pillars ........................................................................................................ 12

Figure 4. Capital allocation Models ...................................................................................... 13

Figure 5. Pillar III Structure .................................................................................................. 15

Figure 6.Creditrisk management .......................................................................................... 20

Figure 7. Credit risk management structure ......................................................................... 23

Figure 8. Market risk management structure ........................................................................ 43

Figure 9. Departaments and responsibilities involved with the market risk ........................... 45

Figure 10. Management Process ......................................................................................... 47

Figure 11. Liquidity Risk Management ................................................................................. 51

Figure 12.Departaments and responsibilities involved with the liquidity risk ......................... 53



1. Introduction

The purpose of this report is to inform the public about Banco do Brasil's structures, processes and risk management policies. Banking system sustainability is indissolubly linked with risk-management policies and mechanisms. The methods of identifying, assessing, controlling, mitigating and monitoring risk safeguard financial institutions in adverse situations and provide support for positive, recurring earnings over time. BB considers essential risk and capital management to the process of decision-making, providing greater stability, better capital allocation and optimization of risk-return ratio. As relevant as the increase in business volume should be the consistency of the company's risk governance and efficiency of management processes. The institutions that will overcome this challenge will be those that manage to transcend mere compliance with regulatory requirements and consider the risk, in an agile and precise way, in each decision-making. Brazil’s participation in the Basel Committee on Banking Supervision encourages broader, timelier adoption of international prudential standards. These new frontiers of the regulatory environment require Brazilian financial institutions to become more agile and adaptable. In these aspects the bank is mature and conscious of its commitment to its clients, shareholders, investors, and society. Banco do Brasil remains continuously aligned with best management practices, among them, the risk management architecture with multidimensional scope whose specificities are described in this report. Changes to the global financial environment, such as market integration through globalization, the emergence of new transactions and products, increasing technological sophistication, and new regulations, have made financial activities and processes - and their risks - ever more complex. Additionally, the lessons learned from financial disasters in the 90’s and most recently at 2008, have helped show the essential need for risk management in the banking industry. These factors have influenced regulatory agencies and financial institutions to invest in risk management, seeking to strengthen the financial health of banks and to prevent detrimental effects on the financial system. In concert with this outlook, BB has invested in the continual improvement of its risk-management process and practices, in line with international market benchmarks and the New Basel Accord, known as Basel II, and by the fine-tuning provided by Basel III.



2. Governance

2.1 Types of Risks

The main risks to which BB is exposed in its business are:

Market Risk: possibility of losses from fluctuations of the market value of positions held by the institution. It includes the risks of transactions subject to fluctuations of exchange rates, interest rates, share prices, and commodity prices. Liquidity Risk: possibility of imbalances between tradable assets and liabilities payable - "mismatches" between payments and receipts - which can affect the institution’s payment ability, taking into account the different currencies and settlement terms of its rights and obligations. Credit Risk: possibility of losses associated with non-fulfillment by a borrower or a counterparty of their respective financial obligations according to negotiated terms, the devaluation of a loan agreement due to a drop in the borrower’s risk rating, a decline in gains or earnings, benefits granted in renegotiation, and recovery costs. Among other things, credit risk is defined as including:

· Counterparty Credit Risk: Possibility of a given counterparty not fulfilling its

obligations related to settlement of transactions that involve trading

financial assets, including those related to the settlement of financial

derivatives;

· Country Risk: Possibility of losses associated with non-fulfillment of

financial obligations according to negotiated terms by a borrower or

counterparty located outside of the country, resulting from actions taken by

the government of the country where the borrower or counterparty is

located;

· Transfer risk, Possibility of difficulties occurred during currency conversion

of funds received;

· Commitment Risk: Possibility of having to make disbursements to honor

guarantees, bonds, co-obligations, credit commitments, or other

transactions of a similar nature;

· Intervener Risk: Possibility of losses associated with non-fulfillment of

financial obligations under the terms agreed by the mediator of loans;

· Concentration Risk: Possibility of credit losses arising from significant

exposure to counterparty, a risk factor or groups of counterparties related

by common characteristics.

Operational Risk: possibility of losses due to failures, deficiencies, or improper internal processes, people and systems or external events. This includes the possibility of losses arising from legal risk.



Legal Risk: possibility of losses associated with improper or deficient contracts signed by the institution, as well as sanctions resulting from noncompliance with legal provisions and compensation for damages to third parties resulting from activities engaged in by the institution. Strategic Risk: possibility of loss arising from adverse changes in the business environment, or use of inappropriate assumptions in decision making. Compromises:

.

· Systemic Risk: possibility of losses due to the financial difficulties of one or

more institutions that cause substantial damage to others, or a disruption of

normal operations of the national financial system.

· Situational Risk: arises from the possibility of losses caused by changes to

political, cultural, social, economic, regulatory or financial conditions in

Brazil and other countries.

· Corporate Risk: possibility of loss arising from the use of inappropriate

assumptions in making strategic decisions or failure of the organization in a

timely and proactively adjust its corporate strategy in relation to the current

and future situation, national and international.

Reputation Risk: possibility of negative perception about the institution on the part of customers, counterparties, shareholders, investors, government agencies, community or supervisors that can adversely affect the sustainability of the business. Compromises:

· Business and Relationships: Possibility of reputational damage associated

with the strategies, products, services, business transactions and external

relationships.

· Controls and compliance: Possibility of reputational damage associated

with the ineffectiveness of the controls and the legal and regulatory non-

compliance.

Social and Environmental Risk: possibility of losses arising directly or indirectly from:

· Adverse environmental and social impacts resulting from administrative and

business practices of BB, or stakeholders; and.

· Adverse impacts to the Bank’s operations resulting from conjectural aspects

related to social and environmental unsustainability of the modes of production

and the existing consumption patterns.

Compromises:

· Administrative practices - possibility of losses arising from environmental impacts

generated by the administrative activities of the institution;

· Financial Support - possibility of losses arising from environmental impacts

related to the characteristics of the products and services or activities supported

financially by the institution, as well as identified in assets posted as collateral or

in lieu of payment.



· Equity - possibility of losses arising from environmental impacts generated by

investments or shares in companies with absence or inefficiency of policies and

environmental management and / or high level exposure.

· Environmental Scenario - possibility of losses arising from changes brought about

in the political, cultural, economic or financial conditions related to environmental

issues.

Actuarial Risk: Possibility of discrepancy between the actuarial assumptions used in the calculation of contributions, benefits and technical provisions and the data effectively carried out.

2.2 Corporate Risk Governance

The risk-governance model adopted by BB involves a committee and subcommittee structure, with the participation of many units at the bank, addressing the following issues:

a) separation of duties: business versus risk; b) specific structure for risk management; c) defined management process; d) decisions at several hierarchical levels; e) clear rules and authority structure; and f) Reference to best management practices.

Figure 1, below, represents the governance structure of the Bank’s risk management

Figure 1. Governance Structure

All decisions related to risk management are made jointly and in accordance with BB’s guidelines and rules. Banco do Brasil’s risk governance is centralized in the Global Risk Committee (CRG), composed by members of the Executive Board of Directors, consisting of a steering committee, whose main purpose is to establish strategies for risk



management, appropriate overall risk-exposure limits to capital allocation in light of risks. Seeking to give flexibility the management process, several subcommittees were set up to address Credit Risk (SRC), Market and Liquidity Risk (SRML), and Operational Risk (SRO); they make decisions and/or instruct the GRC, and have delegated decision-making power. The Risk Management Board (DIRIS), which reports to the Office of the Vice President for Internal Controls and Risk Management, is responsible for managing credit, market, liquidity and operational risks providing synergy among processes and specialization and contributing to better capital allocation. Figure 2 demonstrates the decision-making flow of topics related to risk management:

Figure 2. Risk Management Structure and Process

Decisions are reported to intervening units through documents that objectively express the position taken by executive management, guaranteeing application throughout the bank. The Bank established concepts and management activities for strategy, reputational and environmental risks in compliance with the requeriments of CMN Resolution 3.988/11 and Circular Bacen 3.547/11. Additionally, assigned responsibility for managing these risks to the Risk Management Unit, in conjunction with the Strategy and Organization Unit, in the case of strategy and reputation risks, and in conjunction with the Sustainable Development Unit, in the case of environmental risk. The Board of Directors (CA), in conjunction with the Global Risk Committee (CRG) and Operational Risk Subcommittee has been defined as the governance structure for resolving matters related to these risks.



The interest rate risk of the banking book follows the established governance for market risk and the concentration risk and the counterparty credit risk follow the established governance for credit risk. 2.3 Risk Management Process The risk-management process involves a continuous flow of information, abiding by the following phases:

a) planning: data gathering and analysis phase and preparation of proposals; b) decision: Proposals are assessed and deliberate collegiate way, in appropriate

levels and communicated to areas concerned; c) execution: the intervening units implement the decisions made; and d) Monitoring: checking on the implementation of the resolutions and report to

subcommittees and CRG. 2.4 Reports

Risk-management reports support decision-making processes about risk in the subcommittees, the Global Risk Committee, the Executive Board of Directors, and the Board of Directors. The reports produced periodically have managerial information (qualitative and quantitative) and subsidize the dissemination of information to the market, as the Management Report and the Performance Analysis Report.



3. Regulation

3.1 Basel II

In June 2004, the Committee published a document, commonly known as Basel II, with the following objectives:

a) promote financial stability; b) strengthen the capital structure of institutions; c) favor the adoption of best risk-management practices; and d) Encourage greater transparency and market discipline.

Basel II proposes a more comprehensive approach in terms of strengthening banking supervision and stimulating greater transparency in disclosing information to the market, based on three major premises:

a) Pillar I - capital requirement for the coverage of credit, market and operational risks; b) Pillar II - risks and capital supervision; and c) Pillar III - information transparency and market discipline.

Figure 3 represents the pillars of Basel II.

Figure 3.Basel II Pillars

Pillar I defines the treatment to be given to determine capital requirements in light of risks incurred in the activities engaged in by financial institutions. In relation to the 1988 Accord, Basel II introduces a capital requirement for operational risk and refines the discussion of credit risk, as shown in Figure 4.



Figure 4. Capital allocation Models

Basel II encourages the adoption of proprietary models to measure risks (credit, market, and operational), with differing degrees of complexity, subject to regulatory approval, which seeks to bring closer capital allocation and risk profile of the business. Pillar II reaffirms and strengthens the role of internal and external oversight of risks and capital of the institutions. Pillar III stimulates market discipline through transparency of information on risk management practices. Pillar I

Minimum Capital Requirements Under Pillar I, there are various alternatives to measure capital requirements depending on its size, complexity, and technical capacity of the financial institution, in order to measure risk, even considering the use of internal models (Advanced). The main changes compared to Basel I are:

a) the sophistication of credit risk measurement methods; and b) The addition of capital requirement for operational risk coverage.

Even though the internal models to calculate capital allocation require a greater degree of complexity, sophistication and investment, they enable a greater degree of accuracy in the evaluation of the capital required to support the risks incurred.



Pillar II Risk and Capital Supervisory Process The Basel Committee established four essential principles of risk and capital supervisory review which highlight the need for banks to evaluate capital adequacy in relation to risks assumed and for supervisors to review their strategies and procedures in light of these assessments. The principles of Pillar II are:

1) First Principle: banks must have a process to assess their capital adequacy in relation to their risk profile and have a strategy to maintain adequate levels of capital to cover risks;

2) Second Principle: supervisors should evaluate the banks’ strategies, the estimates of capital, and the ability of banks to monitor and to guarantee their compliance with minimum capital requirements;

3) Third Principle: supervisors expect, and may require, banks to operate above the minimum capital requirements; and

4) Fourth Principle: supervisors may intervene in advance and require banks to take prompt actions if their capital level falls below the minimum level. According to Pillar II, executive management is responsible for both the risk-exposure strategy and compatible levels of capital.

The main features that reflect a rigorous process to assess capital adequacy should involve:

a) supervision of the bank’s senior management; b) solid assessment of capital needs to tolerate business risks; c) comprehensive assessment of risks; d) monitoring and reporting; and e) Review of internal controls.

Pillar II emphasizes need of the bank to have an adequate volume of capital to tolerate all risks involved in the business. Besides the capital, the regulator also uses to address the risk issue, internal controls and risk management processes that should be sufficient and adequate.

Pillar III Transparency By encouraging information disclosure,Basel II seeks to potentialize market players’ power of evaluation and action. The purpose for creating this third pillar is to complement minimum capital requirements (Pillar I) and the supervisory review process (Pillar II). This means that with the development of rules that encourage and require more open information about banks’ risk profiles and capitalization levels, market players should feel encouraged to exercise discipline in this market. Pillar III covers the reference for the disclosure of qualitative information of internal ratings systems structure and process to manage and recognize the risk mitigation.



To guarantee compliance with transparency, Basel II requires supervisors to have a greater number of persuasive instruments, ranging from dialogue with the bank’s management to financial fines, depending on the disclosure deficiency in question. This represents the set of information-disclosure requirements which will allow market players to evaluate the essential information in the institution’s structure, capital measurements, risk exposure, risk-management processes, and capital adequacy. Pillar III is based on four categories/divisions:

a) scope of application - represents the relationship between recommendations and the bank’s structure;

b) capital - demonstrates the bank’s ability to absorb eventual losses; c) risk exposure - evidence forms and the risk assessment itself; and d) Capital adequacy - enables the judgment of capital adequacy in light of risks

incurred. Figure 5 represents the structure of Pillar III.

Figure 5. Pillar III Structure

The purpose for creating this third pillar is to complement minimum capital requirements (Pillar I) and the supervisory review process (Pillar II). This means that with the development of rules that encourage and require more open information about banks’ risk profiles and capitalization levels, market players should feel encouraged to exercise discipline in this market. Pillar III covers the reference for the disclosure of qualitative information of internal ratings systems structure and process to manage and recognize the risk mitigation.



To guarantee compliance with transparency, Basel II requires supervisors to have a greater number of persuasive instruments, ranging from dialogue with the bank’s management to financial fines, depending on the disclosure deficiency in question. By encouraging information disclosure, Basel II seeks to potencialize market players’ power of evaluation and action. 3.2 Basel III On 1March 2013, the Central Bank of Brazil (Bacen) published the Basel III rules related to the definition of capital and capital requirements. Stand out, among the measures included in the Brazilian regulatory:

a) definition of new methodology for calculating regulatory capital, which

increases the capacity to absorb losses and continues to be divided into Tiers

I and II, being Tier I composed of the Core Capital and Aditional Tier I Capital;

b) definition of new methodology for calculating the capital requirement

maintenance, adopting minimum requirements for Referential Equity, Tier I

and Core Capital, and the introduction of the Additional Core Capital;

c) greater transparency regarding the composition of capital;

d) expansion of the risks’ scope captured by the capital structure, and

The proposals related to the Leverage Ratio,to be applied as a complementary measure to the minimum capital requirements, are under discussion in the Basel Committee and will be implemented at a future time.

The regulations published by the Banco Central are aligned with the procedures of the regulators from developed countries, and can be consulted on the website of that body.

It has established a schedule of gradual implementation of the capital requirement that extends from October 2013 to January 2019 for which the transition is made gradually and institutions can adapt over time. The timetable for implementing the Basel III recommendations in Brazil is shown in Table 1.

Table 1. Timetable for Basel III Implementation in Brazil

Supplementary shaped, in 10/31/2013 Banco Central do Brasil issued new resolutions and circulars aimed at adjusting the Basel III regulation in Brazil. These standards enhance and detail specific points of existing regulations.

out/13 jan/14 jan/15 jan/16 jan/17 jan/18 jan/19

A) Main Capital Requirement 4,50% 4,50% 4,50% 4,50% 4,50% 4,50% 4,50%

B) Additional Main Capital (superior limit) - - - 1,25% 2,50% 3,75% 5,00%

C) Requirements A + B 4,50% 4,50% 4,50% 5,75% 7,00% 8,25% 9,50%

D) Minimum Capital Level I 5,50% 5,50% 6,00% 6,00% 6,00% 6,00% 6,00%

E) Requirements D + B 5,50% 5,50% 6,00% 7,25% 8,50% 9,75% 11,00%

F) Minimum PR 11,00% 11,00% 11,00% 9,88% 9,25% 8,63% 8,00%

G) Requirements F + B 11,00% 11,00% 11,00% 11,13% 11,75% 12,38% 13,00%

IndicatorRelation between Minimum capital required and RWA



3.3 Basel II in Banco do Brasil

In order to continue the evolutionary process in risk management and business practices, the Bank has decided to strategically adopt internal models for market risk, credit and operational, aiming to be able to use the advanced approaches. Implementation of Basel II at BB is under conduction by the Risk Management Office (DIRIS), which is in charge of coordination and preparation for meeting the requirements of Basel II. Market Risk Within the framework of Banco do Brasil, its wholly-owned subsidiaries and Subsidiaries of the financial conglomerate, is adopted a market risk management structure that aims to identify, assess, monitor and control the exposures of their own positions. BB has global and specific limits structure and Stress Testing Program of Capital Requirement for Market Risk, both in line with the BACEN Circular 3.478/09. Credit Risk Regarding credit risk, BB uses proprietary methodologies to rate client’s risks. Developed according to best market practices and concepts introduced by the Basel Accord, these models (credit score and behavior score) consider both aspects, as registration and historical use of banking products and customer credit with the Bank and the market. The Banco Central Circular 3.648/13, as of 03.04.2013, established minimum requirements for the use of internal ratings based on Basel II approach for credit risk. At the Bank, implementation of the approach is driven by strategic project with the responsibility to build databases, develop models of risk parameters and validation processes, ensuring integration with the management and documentation. The Bank is carrying out the construction of models of risk parameters (probability of default, exposure at the time of default, loss given default and effective maturity) and review of risk mitigators provided in the New Capital Accord. In order to support the process of managing credit risk, BB has also made significant investments in solutions for information technology (TI), and the new tools have already been installed. Operational Risk The management of operational risk in the Banco do Brasil is based on best market practices and in compliance with regulatory norms (Brazil Central Bank and supervisory entities in countries where BB has dependencies installed). The operational risk management is divided into five stages: identification, assessment, control, mitigation and monitoring. The Bank has a specific structure for advisory services to managers of products and services in the identification and mitigation of operational risks. It provides methodology that allows managers to identify operational risks associated with the



processes under their responsibility, including the identification of the occurrence of faults or inadequacies, evaluate the possibility of losses, identification of risk factors, identification of operational risks and their classification. The Bank uses an instrument called Operational Risk Report, with the goal is identifying potential operational risks related to the processes. This report must be filled by the various departments of the Bank. Send to the managers a instrument called Risk Recommendation (RTR) when identified vulnerable or disability which may generate operational risks and Extrapolation Record for the specific limits and key risk indicators extrapolated. A new strategy was created, it called “YES - I want to help”, which constitutes tooling available to the branch network and customer service to enable timely solution to customer demands. Is another initiative to prevent customer dissatisfaction and aims to avoid lawsuits and build consumer relationship lasting and sustainable. These measures have, as a main goal, reducing and preventing events that may generate operating losses, besides strengthening the structure of Bank's operational risk.



4. Financial Conglomerate

The risk management in Banco do Brasil's financial conglomerate covers comprehensively the risks underlying the activities of Banco do Brasil. Management activities are carried out by specific and specialized structures, as goals, policies, strategies, processes and systems described in each of these risks. The Bank adopts mechanisms to ensure the capital adequacy to cover other risks incurred. In line with Pillar II of Basel II, and in accordance with CMN Resolution 3.988/11 and Banco Central Circular 3.547/11, Banco do Brasil initiated process seeking to implement methodologies of management and evaluation of capital requirements for other relevant risks incurred in their activities.



5. Risk Management

5.1 Credit Risk Management Objectives Exposures subject to credit risk form a big part of Banco do Brasil’s assets. Therefore, the risk management of these exposures is fundamental for the bank to achieve its objectives. Banco do Brasil’s credit risk is managed according to best market practices and follows the banking supervision and regulatory rules. It seeks to identify, assess, control, and mitigate the risk exposures, monitor the management process, contribute to maintain the bank’s health and solvency, and ensure the interests of the shareholders. Credit risk management in the financial conglomerate involves credit policy, risk appetite and tolerance, strategies, processes, procedures and credit risk management systems, as the figure below:

Figure 6.Creditrisk management

Note: CA = Board of Directors; CRG = Global Risk Committee; SRC = Credit Risk Subcommittee; DICRE = Credit Board; DIRAO = Asset Restructuring Board; DIRIS = Risk Management Board.

In accordance with CMN Decision 3.721/09, the Board of Directors (CA) approved the credit risk management structure of Banco do Brasil, composed by Global Risk Committee (CRG), Credit Risk Subcommittee (SRC), Credit Board (DICRE), Operational Asset Restructuring Board (DIRAO), and Risk Management Board (DIRIS).



This credit risk management structure is compatible with the nature of transactions, the complexity of products and services, and in proportion to the size of the credit-risk exposure incurred by Banco do Brasil. Given that the Diris is the unit at the bank in charge of overall risk management and does not have any ties to the management of third-party resources administration or to performing transactions subject to credit risk, the CA stated the Director of Risk Management as the person in charge of BB’s credit risk management with respect to the Bacen. Credit Policy Banco do Brasil’s credit policy contains strategic guidelines to direct credit-risk management actions in the financial conglomerate. It is approved by the Board of Directors and reviewed every year. It applies to all businesses that involve credit risk and is available to all employees. It is expected that the Subsidiaries, Affiliates and Investments companies define their paths from these guidelines, taking into account the specific needs and legal and regulatory issues to which they are subject. The credit policy is divided into four blocks: General Aspects, Assuming Credit Risk, Collections and Credit Recovery, and Credit Risk Management. Each block contains a compreensive set of statements wich encompass all stages of credit-risk management at Banco do Brasil. Listed below are some topics addressed in Banco do Brasil’s credit policy:

a) concept of credit risk; g) conditions for assuming risk;

b) separation of duties; h) guidelines for collections and credit recovery;

c) joint decisions; i) Capital planning d) risk appetite; j) allowance and capital levels; and e) risk limits; k) stress tests. f) client rating;

Management Strategies Aligned to the objectives of credit risk management, the Board of Directors (CA) establishes the credit policy and the risk appetite of Banco do Brasil and approves management strategies, which are defined by the Global Risk Committee (CRG) and operationalized by the Credit Risk Subcommittee (SRC). The CRG also sets global limits and approves the capital allocation. The permanent voting members in CRG are the President, the Vice-President of Financial Management and Investor Relations, the Vice President of Wholesale, International Business and Private Bank, the Vice President of Retail, Distribution and Operations, the Vice President of Internal Controls and Risk Management and the Vice President of Human Resources Management and Sustainable Development. The other vice presidents are non-permanent voting members.



The SRC was created to give more agility to decisions about credit risk management. It is a structure subordinated to CRG, which has delegated decision-making authority to deliberate on certain issues, equipping the CRG on other issues.. Credit-risk management strategies guide actions at the operational level, comprising:

a) approving credit risk management models; b) setting goals for timely payment, recovery, maximum loss, and quality of the

loan portfolio; c) setting risk and concentration limits; and d) keeping appropriate levels of allowances and capital;

Management Processes

According to Banco do Brasil’s credit risk management structure, the Credit (DICRE), Operational Asset Restructuring (DIRAO) and Risk Management (DIRIS) units are responsible for implementing strategic decisions approved by the CA, CRG and SRC, keeping exposure at the risk levels set by the executive management. DICRE focuses on clients and operations, whose main products are: registration, marketing studies and information on economic sectors, methodologies (risk, risk components, and credit limits), risk analysis (clients, operations, projects, economic sectors, countries, and projects), validation and monitoring of risk methodology and credit-risk components, study of investment and leasing transactions, economic/financial evaluation and diagnosis of businesses/corporate groups, monitoring the credit portfolio, and producing inputs for pricing credit risk. The DIRAO operates in collecting, and recovering problem credits, whose main products are: models to rate clients under collections and recovery, collection and recovery strategies, recovery quality indicators, management of collections and recovery channels, rescheduling debt, restructuring transactions, setting negotiating floors and methodologies for dealing with problem credits or defaults. The DIRIS focuses on managing the credit risk of aggregate positions, whose main products are: policies, risk limits, credit risk models, information on credit risk, indicators of credit portfolio quality, capital allocation as a function of risk, management of the credit portfolio’s risk, controlling of credit risk exposure and stress testing.



Figure 7 summarizes the responsibilities of the units

Figure 7. Credit risk management structure

The processes and procedures of the credit risk management structure are validated and performed by two internal units at different points in time, a fact that ensures the adequate separation of duties and the independence of work. The Internal Control Board (DICOI) is responsible for validating the financial conglomerate’s risk determination and measurement models and the bank’s internal control system. Internal Audit (AUDIT) periodically evaluates credit risk management processes to verify whether they are consistent with the strategic guidelines, credit policy, and regulatory and internal rules. Communication and Information Processes Disclosure of credit risk information is a continual and ongoing process whose premises considered when selecting and disclosing information include: best practices, banking laws, user needs, the bank’s interests, confidentiality, and the relevance of the information. The communication and information on credit risk management is provided to internal and external clients, according to the following processes:



Communication process for internal clients The operational units of the credit risk management structure communicate permanently to upper management about risk exposure in order to monitor management actions and decision-making by the Senior Management. The communication process involves several reports on credit risk management, which are produced periodically and are the result of analyses conducted by professionals from the units. They demonstrate the credit risk of all exposure or in certain portfolios, such as:

a) presentation of the Bank’s credit portfolio X National Financial System; b) Comparative BB credit portfolio x main competitors; c) Credit Risk Panel; and d) Stress test for credit risk;

Communication process for external clients The operational units of the credit risk management structure produce information for external users and send it to the Investor Relations Unit (URI) that, as a practice of transparency, discloses this information to the market, as a transparent governance practice, allowing investors and interested parties to monitor risk-management actions and the evolution of credit risk, and to prove the Bank’s capital adequacy to cover all risks assumed. Information for external users is provided on a publicly accessible location, easily found on the bank’s website. The following documents are published in the following documents:

a) Management Discussion and Analyses; b) Explanatory Notes to Financial Statements; and c) Annual Report.

Measurement Systems Credit risk is measured in many ways: by default, arrears, portfolio quality, and allowance for doubtful accounts, concentration, expected losses, and regulatory requirements, among others. The quantity and nature of our operations, the diversity and complexity of our products and services, and the volume exposed to credit risk require systematic measurement of credit risk at Banco do Brasil. The bank has enough databases and corporate-system infrastructure to ensure comprehensive measurement of credit risk. Some of these risk measures are highlighted. Concentration The bank has developed and implemented a system to measure and monitor credit risk concentration in businesses. The model is based on the Herfindahl Index. It evaluates concentration based on borrower’s credit risk, and it considers the interrelationship among the various economic sectors that comprise the businesses credit portfolio.



Expected Loss

The bank has also developed specific methodologies and proprietary systems to calculate risk components that are used to determine Expected Loss. Expected Loss is used in numerous processes and procedures, such as: pricing products and services, verifying allowance levels, and calculating Risk-Adjusted Return on Capital (Rar). In addition, an analysis of historical evolution Expected Loss provides important information about the behavior of credit risk.

Regulatory Requirements The Bank measures the Regulatory Capital requirement for credit risk through Regulatory Simplified Standardized Approach, whose procedures for calculating the potion of risk-weighted assets (RWA) regarding exposure to credit risk (RWACPAD) were released by the BACEN through Circular 3.644/13. These procedures were implemented in a proprietary system that determines the capital requirements quickly and securely, allowing timely verification of the bank’s solvency under the regulator’s rules. The Bank uses Regulatory Capital information to assess the efficiency of capital allocation and planning. Mitigation Policy

Banco do Brasil adopts a conservative attitude toward credit risk. In conducting any business subject to credit risk, the bank’s general rule is to tie it to a mechanism that l provides partial or complete hedging of risk incurred. In managing credit risk on the aggregate level, to keep exposure within the risk levels established by the High Staff, the Bank has the prerogative to transfer or to share credit risk. The use of credit risk mitigating instruments is stated in the Credit Policy, present in strategic decisions, and formalized in credit rules, reaching all levels of the organization and covering all stages of credit risk management. Credit rules provide clear, comprehensive guidelines for the operational units. Among other aspects, the rules address ratings, requirements, choices, assessments, formalization, control, and reinforcement of guarantees, ensuring the adequacy and sufficiency of the mitigator throughout the transaction’s cycle.

Processes for Monitoring the Effectiveness of Mitigators Monitoring the effectiveness of mitigators is part of the bank’s credit risk management processes. We quote, as an example, monitoring exposures subject to credit risk, the risk ratings off loans, capital management, and collections and recovery of credits. The processes of monitoring credit risk exposure and rating loans risks produce important information for verifying the effectiveness of mitigating instruments. The low default ratio in certain segments of the credit portfolio and the lowest level of allowances in certain transactions may mean that the existence of guarantees tied to exposure reducing credit risk and capital requirements for its coverage. The process of collecting and recovering credits generates information that enables the bank to verify which mitigators were the most important for receiving credits of



default loans and for recovering problem credits, allowing the review of the criteria for choosing guarantees, allowances, and capital allocation. Exposure to Credit Risk Exposure by Risk-Weighted Factor (FPR) and Average Exposure for the Quarter Below is the evolution of credit-risk exposure, observed the definitions in BACEN Circular 3.644/13, segmented by risk-weighted factor, along with the average exposure for the quarters. Table 2. Credit risk exposure by Risk Weighted

Table 3. Average credit risk exposure in each quarter



Exposure by geographic region The table below shows the credit risk exposure, separated by geographic regions and foreign market. Table 4. Credit risk exposure by geographic region and foreign market



Exposure by economic sector Below is the evolution of total credit risk exposure, separated by economic sector. Table 5. Credit risk exposure of the financial conglomerate by economic sector



Table 6. Credit risk exposure of the economic-financial consolidated group by sector

Credit risk exposure by arrears period The table below shows the portfolio, by arrears period. Table 7. Amount of transactions in arrears



Exposure by borrower Below are the concentration levels of the ten biggest clients in relation to the total of loans.

Table 8. Concentration levels of the ten biggest clients in relation to the total of loans

Transactions written-off The table below shows the flow of transactions written off, by quarter Table 9. Flow of transactions written-off

Allowance for Doubtful Accounts Below is the stock of allowances for doubtful accounts.

Table 10. Stock of allowances for doubtful accounts

Sale or Transfer of Financial Assets It is BB’s policy to assign credits from non-performing retail loans, recorded in losses and for which the bank has full risk, after all collection procedures defined in the collections and credit-recovery process have been exhausted, and the selected transactions have reached the savings point, that is, the cost-benefit ratio does not justify keeping the transactions under collections at a commercial bank. Credit assignment is also used punctually to dispose of specific credits, when such an operation is considered a viable alternative for its recovery, even if partial.



Below we show the flow of operations ceded with substantial transfer of risks and benefits. Table 11. Loss operations assigned, with substantial transfer of risks and benefits

BB has no exposure in the following categories:

a) exposures assigned with no substantial transfer or retention of risks and benefits;

b) exposures assigned with substantial retention of risks and benefits; and c) Exposures assigned in the quarter with substantial retention of risks and

benefits, which were written off as losses. Securities (TVM) operations derived from securitization processes The securities acquired by BB are classified in the following categories:

a) category I - securities for trading - securities acquired with the intent of actively and frequently trading them must be registered here;

b) category II - securities available for sale - securities that do not fall under categories I or III must be registered here; and

c) Category III - securities held to maturity – securities, except non-redeemable shares, which the institution has the intent and financial capacity to keep in its portfolio until maturity must be registered here.

Following are the exposures due to TVM operations derived from securitization

processes.

a) types of securities: i. Receivables Investment Funds (FIDC) = resource pool that allots most of its

net assets to be applied in receivables. These are the rights and securities representing rights arising from operations carried out in the financial, commercial, industrial and real-estate, mortgage, financial leasing, and service-provision sectors, as well as other financial assets and investment modes admitted under the terms of CVM Instructions Nos. 356/2001 and 444/2006; and

ii. Real Estate Receivables Certificates (CRI) = these are fixed-income securities backed by real estate credits – counter installments flows of payments to purchase real estate properties or rent - issued by securitization companies.



Table 12. Value of the exposures derived from acquiring FIDC and CRI

b) type of credit backing the issue: i. FIDC = vehicles financing, company cash flow receivables, debentures,

promissory notes, bank credit certificates, bank credit bill certificates, real estate credit certificates, real estate letters of credit, export and other credit rights credit bills; and

ii. CRI = real estate loans.

c) type of security: i. FIDC and CRI = senior quota.

Exposure to counterparty credit risks Banco do Brasil admits assuming counterparty credit risks with clients who have been previously analyzed by the risk calculation methodology, with a credit limit applicable to their profile established, subject to the existence of a sufficient operational margin to cover such operations. In this way, the counterparty credit risk exposures fall in line with other exposures in l the customer’s loans on the credit limit assigned to it. In the event of a default, these types of operations affect the client’s credit risk according to the estimated value of the counterparty credit risk exposure--applicable credit risk mitigators being taken into consideration, such as the adjacent asset issuer risk, the volatility of the asset, the collateral given (haircut), and the rules for additional collateral margin calls, according to the characteristics of the operation performed. In operations conducted via Clearing Houses (Clearings), there is a risk transfer, where the value of the operations is reflected in the credit limit of the Clearing House. The approval of operations dependends, at least, on the collateral required by the credit limit order, and on those defined as mandatory by the credit line, being that the level of demand for collaterals varies according to the client’s credit risk. When collaterals constitution, preference is given:

a) to assets acquired, produced, or processed with the credit; b) to collaterals that offer self-liquidity to the operation; c) to goods that are easily commercialized and non-perishable; d) to goods of the same type, kind and category as the ones to be acquired or to

be hold with the credit; and e) To goods that will produce income to pay for the operation.



In order to link goods as collateral, it is assessed through a technical evaluation or through an opinion of value, whose period of validity is up to twelve months. In the case of personal collateral, the economic-financial situation of guarantors or sureties is analyzed, in addition to direct and indirect liabilities at the Bank, with debts to third parties being considered, especially those related to tax, social security, and labor debts. When accepting a good or right as collateral, the maximum value considered is obtained by applying a percentage on the value of said good or right, according to the type and kind of good. In the case of a trade bills and checks in custody, the maximum value is obtained by applying the percentage of the advance corresponding to the Annual Liquidity Ratio (ILA) of the client’s portfolio on the bound value as collateral. Goods received as collateral for loans must be backed until the operation is concluded, or, in the case of funds given as collateral, remain blocked until the operation is concluded. Collaterals linked to loans are registered on a corporate basis, which allows automated control of the linked goods and rights, and the generation of administrative information, such as the collateral sufficiency analysis, and the adequacy analysis. For operations subject to counterparty credit risk, Banco do Brasil follows the BACEN Circular 3,068/01, considering such risk as a parameter when adjusting the market value of such exposures, which affects the profit/loss of the period, or in separated account of the Stockholder’s Equity, subject to the exposure’s classification. Below is the notional value of contracts subject to counterparty credit risk to be liquidated in clearing house liquidation systems, in which clearing houses acts as central counterparty.

Table 13.Notional value of contracts to be liquidated in clearing house liquidation systems, in which clearing houses acts as central counterparty

Below is the notional value of contracts subject to counterparty credit risk in which clearing houses do not act as central counterparty.



Table 14. Notional value of contracts subject to counterparty credit risk in which clearing houses do not act as central counterparty

The following tables show the notional value of contracts where clearing houses did not act as central counterpart, segmented between those with and without collaterals. Table 15. Notional value of contracts where clearing houses did not act as central

counterparty, and that have no collaterals


counterparty, and that have collaterals

The following table shows the positive gross value of contracts subject to counterparty credit risk, including derivatives, outstanding operations, asset loans and repo transactions, disregarding the positive values from compensation agreements, as set forth in CMN Resolution 3,263/05.



Table 17. Positive gross value of contracts subject to counterparty credit risks, disregarding the positive values from compensation agreements, as set forth in CMN Resolution 3,263/05

Following is presented the value of collaterals that meet cumulatively the following requirements, as per paragraph VI, Art. 8, of BACEN Circular 3,477/09:

a) be kept or held in custody by the institution itself; b) whose exclusive purpose is to guarantee operations to which they are linked; c) are subject to movement, exclusively, by order from the depositary institution;

and d) Are immediately available to the depositary institution in the event default by the

debtor or need for its realization.

Table 18.The value of collaterals that cumulatively meet the requirements of paragraph VI, Art.8, of Bacen Circular 3,477/09

According to the classification of types of collaterals adopted by BACEN, we have identified those that cumulatively meet the conditions established in BACEN Circular 3,477/09, being that for the purpose of collateral’s calculation it was considered the value committed as collateral to the linked operation. BB has no compensation and liquidation of obligations agreements, as defined in CMN Resolution 3,263/05. The table below shows the notional value of credit derivatives, segregated by type of operation.



Table 19.Notional value of credit derivatives

These assets do not compose Consolidated Economic and Financial for the reason that have been originated by Banco Votorantim S.A.

Mitigating instruments When accepting guarantees in loans, preference is given to guarantees which help the operation self-liquidate. In order to accept a guaranty, the maximum value considered is reached by applying a certain percentage on the value of said good or right. Below are presented the percentages used:

The credit rights guarantees represented by financial investments must be internalized at the Bank and are blocked by the institution. This block must remain until the operation is concluded. When the financial investment matures, the Bank may, at its discretion, use it to liquidate the balance of remaining installments, with no notice or notification to the assignor/borrower.

Asset Coverage (%)

Credit rights

Receipt for bank deposit 100%

Certificate of bank deposit (1) 100%

Savings deposits 100%

Fixed income investment funds 100%

Pledge Agreement – cash collateral (2)

100%

Standby letter of credit 100%

Others 80%

Guarantee Funds

Guarantee Fund for Generation of Employment and Income (Funproger) 100%

Guarantee Fund for Micro and Small Business (Fampe) 100%

Guarantee Fund for Operations (FGO) 100%

Guarantee Fund for Investments (FGI) 100%

Others 100%

Guarantee (3) 100%

Credit insurance 100%

Pledge Agreement – securities (4)

77%

Offshore funds – BB Fund (5) 77%

Livestock (6) 70%

Pledge Agreement - cash colateral (7) 70%

Others (8)

50% (1) Except the ones possessing swap agreement. (2) In the same currency of the operation. (3) Provided by a banking institution that has a credit limit at the Bank, with sufficient margin to support the co-obligation. (4) Contract of deposit / transfer of customer funds. (5) Exclusive or retail. (6) Except in Rural Product Notes transactions (CPR). (7) Celebrated in a different currency of the operations supported and which have no hedging mechanism. (8) According to certain characteristics, real state, vehicles, machinery and equipment can be received with the highest percentage of

guarantee.



Besides credit assignment or credit rights assignment clauses, the credit instrument--for linked mitigators--the credit instrument has a guarantee reinforcement clause to ensure, for the duration of the operation, the coverage percentage agreed on when it was contracted. The fund guarantees, such as the Guarantee Fund for Generation of Employment and Earnings (Funproger), Operations Guarantee Fund (FGO), Investments Guarantee Fund (FGI) and the (Endorsement for Micro and Small Enterprises Fund (Fampe) are used as collateral by Banco do Brasil, mitigating the risks of operations. Overall, the fund guarantees have the following characteristics:

a) maximum coverage percentage limits when using the fund to back operations, according to the type of operation: Investment or Working Capital;

b) target market, according to the billing or the client’s risk; c) whether or not a counter guarantee was given; d) maximum limits on the amount of resources that constitute the Fund’s Net

Worth (Leverage Ratio); and e) Limits for accrued losses, or, the Stop Loss Limits.

Guarantee fund managers keep up with whether an operation falls under the funds’ rules before granting them in guarantees, as well as manage guarantee operations and fund assets, freezing the use of these funds in guarantee operations, if necessary, before the amount of linked resources surpasses the leverage established for each fund. Considering the credit risk mitigating instruments defined in articles 36 to 39 of BACEN Circular 3.644/13, the following table shows the total mitigated value in terms of exposure, weighted by risk factor, and segmented by the mitigator type and FPR. Table 20. Mitigated value of exposure, weighted by the respective risk factor

5.2 Market and Liquidity Risks Management Objectives The objective of Banco do Brasil’s market and liquidity risk management process is to identify, assess, monitor, and control risks related to each individual institution, and to the financial conglomerate, as well as identify and accompany the risks associated with the rest of the companies who are part of the consolidated economic and financial.



Aligned with the best market practices, the Bank regularly uses procedures that enable managing the market and liquidity risks of its positions, taking internal and external economic scenarios under consideration in order to minimize possible effects on the net financials. Management Policies and Strategies

The Bank has established policies and strategies for managing market and liquidity risks, and to manage derivative financial instruments. These policies and strategies determine the Company’s operating directives in the risk management process. Additionally, the market and liquidity risks management process uses mechanisms set forth in regulatory systems which detail the operational procedures necessary to implement the organizational decisions concerning to the Company’s business and activities and to meet legal, as well as regulatory and oversight bodies’ requirements. Finally, records that in market and liquidity risks management, systems are used that guarantee that positions registered in negotiable and non-negotiable portfolios are measured, monitored, and controlled, as are operations aimed at meeting the hedge objectives established. With respect to hedging policies adopted for the management of market risks and liquidity, are defined objectives to be achieved with hedging operations on consolidated basis, guaranteed the effectiveness of each individual transaction, in accordance to the regulations of each jurisdiction. It’s also worth noting that negotiating with derivative financial instruments is subject to prior evaluation of the nature and scale of risks involved. The tables below represent the total exposure to derivative financial instruments by category of market risk factor, segmented into positions bought and sold in the following way:

I. derivative financial instrument transactions carried out with a central counterpart,

subdivided into those in Brazil and those abroad; and

II. Derivative financial instrument transactions carried out without a central

counterpart, subdivided into those in Brazil and those abroad.



Table21. Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart – 1Q13


with and without central counterpart – 2Q13


with and without central counterpart – 3Q13

Reference

valueCost value

Market

value

Reference

valueCost value

Market

value

Reference

valueCost value Market value

Long position 68.601.530 897.019 1.126.853 8.297.768 97.854 154.136 76.899.298 994.873 1.280.989

Interest rates Stock market 43.410.077 271.045 401.129 - - - 43.410.077 271.045 401.129

Counter 3.654.733 104.929 154.067 - - - 3.654.733 104.929 154.067

Exchange rates Stock market 10.990.524 294.974 279.638 759.078 4.192 51.826 11.749.602 299.166 331.464

Counter 9.279.680 204.719 272.327 7.538.690 93.662 102.310 16.818.370 298.381 374.637

Share price Stock market 1.250.875 20.366 18.958 - - - 1.250.875 20.366 18.958

Counter - - - - - - - - -

Commodities price Stock market 10.254 104 141 - - - 10.254 104 141

Counter 5.387 882 593 - - - 5.387 882 593

Short position 90.196.033 (2.293.565) (3.201.590) 8.394.550 (145.002) (261.803) 98.590.583 (2.438.567) (3.463.393)

Interest rates Stock market 63.351.371 (164.855) (204.679) 2.494.160 - - 65.845.531 (164.855) (204.679)

Counter 11.008.566 (1.612.114) (2.049.040) - - - 11.008.566 (1.612.114) (2.049.040)

Exchange rates Stock market 3.593.413 (3.013) (7.447) 1.815.078 (20.599) (130.437) 5.408.491 (23.612) (137.884)

Counter 10.314.350 (475.383) (913.239) 4.085.312 (124.403) (131.366) 14.399.662 (599.786) (1.044.605)

Share price Stock market 1.424.100 (26.589) (18.485) - - - 1.424.100 (26.589) (18.485)

Counter - - - - - - - - -

Commodities price Stock market 481.429 (8.098) (3.114) - - - 481.429 (8.098) (3.114)

Counter 22.804 (3.513) (5.586) - - - 22.804 (3.513) (5.586)

Net position (21.594.503) 3.190.584 4.328.443 (96.782) 242.856 415.939 (21.691.285) 3.433.440 4.744.382

1Q13-R$ thousand

Risk FactorNegotiation

location

Brazil Abroad Consolidated-BB

Reference

valueCost value

Market

value

Reference

valueCost value

Market

value

Reference


Long position 40.710.787 1.306.505 1.836.243 8.567.279 79.995 140.713 49.278.066 1.386.500 1.976.956


Counter 1.839.946 163.065 180.798 - - - 1.839.946 163.065 180.798

Exchange rates Stock market 10.725.885 419.384 530.328 2.320.516 2.778 56.786 13.046.401 422.162 587.114

Counter 10.671.009 460.983 833.731 6.246.763 77.217 83.927 16.917.772 538.200 917.658


Counter - - - - - - - - -

Commodities price Stock market 26.291 - - - - - 26.291 - -

Counter 48.026 2.347 3.736 - - - 48.026 2.347 3.736

Short position 67.662.378 (3.142.468) (3.840.631) 5.899.579 (156.143) (305.018) 73.561.957 (3.298.611) (4.145.649)

Interest rates Stock market 43.170.669 (283.433) (326.034) 977.275 - - 44.147.944 (283.433) (326.034)

Counter 7.303.352 (2.250.002) (2.161.622) - - - 7.303.352 (2.250.002) (2.161.622)


Counter 8.444.668 (484.338) (1.043.026) 2.730.448 (103.962) (115.004) 11.175.116 (588.300) (1.158.030)

Share price Stock market 1.407.210 (13.505) (48.253) - - - 1.407.210 (13.505) (48.253)

Counter - - - - - - - - -


Counter 7.832 (8.707) (10.556) - - - 7.832 (8.707) (10.556)

Net position (26.951.590) 4.448.972 5.676.874 2.667.700 236.138 445.731 (24.283.890) 4.685.110 6.122.605


location


2Q13-R$ thousand

Reference

valueCost value

Market

value

Reference

valueCost value

Market

value

Reference


Long position 41.897.113 1.337.561 1.505.745 7.542.230 89.423 94.804 49.439.343 1.426.984 1.600.549


Counter 3.665.307 252.918 296.199 - - - 3.665.307 252.918 296.199


Counter 10.742.344 484.083 682.469 3.120.166 25.283 24.306 13.862.510 509.366 706.775


Counter - - - - - - - - -

Commodities price Stock market 20.981 - 8 - - - 20.981 - 8

Counter 14.492 2.194 3.725 - - - 14.492 2.194 3.725

Short position 70.159.871 (3.950.922) (4.299.904) 8.312.832 (175.941) (272.124) 78.472.703 (4.126.863) (4.572.028)

Interest rates Stock market 44.331.348 (285.578) (403.863) 1.695.561 - - 46.026.909 (285.578) (403.863)

Counter 8.941.570 (2.928.713) (2.848.162) - - - 8.941.570 (2.928.713) (2.848.162)

Exchange rates Stock market 6.667.222 (142.567) (113.096) - - - 6.667.222 (142.567) (113.096)

Counter 9.112.380 (565.517) (918.553) 6.617.271 (175.941) (272.124) 15.729.651 (741.458) (1.190.677)

Share price Stock market 990.110 (20.716) (8.057) - - - 990.110 (20.716) (8.057)

Counter - - - - - - - - -


Counter 24.746 (5.848) (6.092) - - - 24.746 (5.848) (6.092)

Net position (28.262.758) 5.288.483 5.805.649 (770.602) 265.364 366.928 (29.033.360) 5.553.847 6.172.577


location


3Q13-R$ thousand



Table 24. Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart – 4Q13

Table 25. Derivative financial instruments in the country and abroad, by market risk factor, with and without central counterpart – 1Q14

Hedge Policies With respect to hedging policies adopted for market and liquidity risks management, are defined the objectives to be achieved with hedging operations on a consolidated basis, guaranteed the individual effectiveness of each transaction, subject to the regulations of each jurisdiction. Risk measuring systems and communication and information processes The market risk measuring process makes use of corporate systems and of the Riskwatch application, developed by the Canadian company Algorithmics, The infrastructure of information technology associated with this process is installed in environments located in Brasília (DF) and in Rio de Janeiro (RJ).

Reference

valueCost value

Market

value

Reference

valueCost value

Market

value

Reference


Long position 59.786.503 1.018.160 1.367.391 7.397.675 137.774 152.299 67.184.178 1.155.934 1.519.689


Counter 2.226.924 30.782 71.755 - - - 2.226.924 30.782 71.755


Counter 11.040.817 509.976 763.948 3.383.410 27.583 33.890 14.424.227 537.559 797.838

Share price Stock market 305.600 8.562 7.207 - - - 305.600 8.562 7.207

Counter - - - - - - - - -

Commodities price Stock market 9.931 - 16 - - - 9.931 - 16

Counter 8.735 940 2.091 - - - 8.735 940 2.091

Short position 70.981.724 (3.194.352) (3.390.112) 11.887.010 (189.954) (301.394) 82.868.734 (3.384.306) (3.691.506)

Interest rates Stock market 52.267.206 (2.436.946) (2.649.017) 1.999.704 - - 54.266.910 (2.436.946) (2.649.017)

Counter 2.468.124 (115.095) (136.218) - - - 2.468.124 (115.095) (136.218)


Counter 8.722.618 (470.883) (406.326) 7.046.452 (94.187) (100.582) 15.769.070 (565.070) (506.908)

Share price Stock market 16.700 (456) (154) - - - 16.700 (456) (154)

Counter - - - - - - - - -


Counter 15.685 (2.706) (4.284) - - - 15.685 (2.706) (4.284)

Net position (11.195.221) 4.212.512 4.757.503 (4.489.335) 327.728 453.693 (15.684.556) 4.540.240 5.211.195

4Q13-R$ thousand


location




The main objectives of the Riskwatch application are to: I. consolidate management information of the Bank, ascertaining and

providing information for market and liquidity risk management and for

assets and liabilities management; and

II. Provide market and liquidity risk measurements (products/cash flows by

currency and index), as well as assets and liabilities management.

Riskwatch functions that merit special emphasis are:

I. calculate market risk indicators, such as Value-at-Risk (parametric and

nonparametric), duration, yield, and;

II. elaborate cash flow reports, either consolidated or by product, marked to

market or nominal;

III. determine the portfolio sensitivity to the fluctuations in national and

international interest rates;

IV. calculate the theoretical result of portfolios after the application of historical

and stress scenarios; and

V. Elaborate reports on the mismatching of maturities, rates, indexes and

currencies.

In the Bank, proprietary positions are segregated in trading portfolio and no trading portfolio, Through a resolution issued by the GRC, a policy is stipulated for classification of transactions in the trading portfolio, This document defines that in the sphere of Banco do Brasil, its subsidiaries and controlled companies, operations with own positions carried out with the intention of trading or to hedge the trading portfolio, for which there is the intention of trading them prior to their contractual period, observing normal market conditions, and in cases where they are not nonnegotiable, are classified in the trading portfolio. Transactions with proprietary positions not classified in the trading portfolio are considered components of the non-trading portfolio, the proprietary positions held by companies that are not part of the Bank are not subject to classification in the trading portfolio. For the market risk management process, the Bank makes use of a structure of management groups and books, both for the domestic area and for the international area, with specific objectives and limits of exposure to risks. As regards the limits of exposure to market risks, the GRC establishes the following classification criteria: Global limits: applied to the trading and banking book portfolios, to the set of transactions subject to capital requirements and to the interest rate risk in the banking book portfolio (RBan) and approved by GRC, The main metrics used for management are Value-at-Risk, stress and financial volume.



Specific limits: applied to the management groups and books of the trading and banking book portfolios or to both portfolios, to the market risk factors of transactions subject to capital requirements and to the market risk factors sensitive to the interest rate risk in the banking book portfolio (risk factors of RBan) and approved by the SRML, The main metrics used for management are Value-at-Risk and stress. Operational limits: applied to transactions that make up the management groups and books, enabling the disclosure of the effective risk level of assumed exposures and aiming to ensure compliance with the strategies and the global and specific limits established, They are defined and approved by DIRIS presenting as main metrics the Value-at-Risk and operating bands of exposure to market risks. DIRIS reports daily to the managers of the groups and books of the trading and banking book portfolios, on the consumption of the specific and operational limits. It reports monthly to the strategic committees on the consumption of overall limits, through the market risk management report. In case limits exceeded, DIRIS, responsible for controlling and monitoring the portfolio, issues a document called the "Limit Exceeding Form". The managers of groups and books should submit their reasons for exceeding limits and specify the deadline for regularization. In turn, the hierarchical level with the authority to manage the case should issue an opinion on the manager's pronouncement. The team responsible for monitoring the limit is responsible for keeping track of the categorization actions. The communication of the Bank risks to Senior Management occurs at the monthly ordinary meetings of the strategic risk committees and subcommittees. Market Risk Management Structure

The CMN Resolution 3.464/07 states the implementation of the market risk management structure, compatible with the nature of operations, the complexity of products and the dimension of the institution's market risk exposure. The governance model adopted by BB is organized in risk committee and subcommittees structure, with participation of several areas of the institution. All decisions related to risk management are conjointly made and in accordance with the guidelines and internal rules. Risk Management Department (Diris), which reports to the Office of the Vice President for Internal Controls and Risk Management, is responsible for managing credit, market, liquidity and operational risks. This integration provides synergy among processes and specialization, contributing to better capital allocation.



The figure below shows the structure of BB's market risk management:

Figure 8. Market risk management structure

The main forums involved in market risk management are: Board of Directors (CA) Banco do Brasil S.A. Board of Directors defines general

business of the Bank and its subsidiaries. The Board has, in the manner provided by law and the Statute, strategic, guidance, elective and monitoring assignments, not covering operating and executive functions.

The composition and management term of the Council is defined by the Bank's bylaws. The Board of Directors shall decide on:

· Specific policies for market risk management; · Policy of the use of financial derivative instruments; and · Appetite and risk tolerance.

Management Process

Management Strategy

Market Risk Policy

Operacional Procedures

Management Systems

CA

CRG

SRML

DIRIS

DIFIN

DIRCO

Management Structure Strategic Level Operational Level

CGAP

SGAP

DININ

DIMEC

DICOI

AUDIT

DICOM



Global Risk Committee (CRG): Purposes:

· establish strategy for market risk management; · set overall limits for market risk exposure; and · Approve capital allocation due to market risk.

Market and Liquidity Risk Subcommittee (SRML): Purposes:

· decide on models for market risk management, observing the strategies

adopted in the Global Risk Committee - CRG;

· define specific limits for market risk exposure;

· analyze and propose to CRG global limits for market risk exposure;

· analyze and propose to CRG capital allocation to cover market risk;

· evaluate the results of backtesting and adopt, when necessary, corrective

measures in the models for market risk management; and

· Monitor and evaluate the measures implemented by the Subcommittee.

Asset-Liability and Liquidity Management Committee (CGAP) Purposes:

· establish the Bank's strategy regarding assets, liabilities and liquidity

management;

· set guidelines for Treasury operation, subject to overall limits set by Global

Risk Committee (GRC); and

· Follow recommendations and guidelines decided by the Committee.

Asset-Liability and Liquidity Management Subcommittee (SGAP) Purposes:

· propose guidelines for Treasury operation to CGAP, subject to overall limits

set by the Global Risk Committee (CRG);

· evaluate Treasury’s performance, showing its results to the conglomerate and

informing the CGAP;

· define opportunity curve models;

· evaluate backtesting results and adopt, when necessary, corrective measures

in the models of asset-liability management; and

· Monitor and evaluate the measures implemented by the Subcommittee.

Main Directorship involved with the process of market risk management is Risk Management Department (Diris), Financial Department (Difin), Controlling Department (DIRCO), International Business & Affairs Department (Dinin), Commercial Department (Dicom), Capital Markets and Investments Department (Dimec), Internal Controls Department (Dicoi) Internal Audit Unit (Audit).



Responsibilities of each area in the process are described below:

Figure 9. Departaments and responsibilities involved with the market risk

Market Risk Management Process Banco do Brasil uses statistical and simulation methods to analyze the market risk of its exposures. Among the metrics used in the application of these methods, we highlight the following:

· sensitivities; · Value at Risk (VaR); and, · Stress.

Sensitivity metrics simulate the effects in the value of exposures resulting from variations in the level of market risk factors. VaR is a metric used to estimate the potential loss under routine market conditions, dimensioned daily in monetary values, under a set confidence interval and time frame. The risk factors used in VaR metrics to measure the market risk of exposures are classified into the following categories:

· interest rates; · exchange rates; · share prices; and, · Commodity prices.

The VaR metrics performance is monthly evaluated by a backtesting process.



Finally, BB uses stress metrics resulting from simulations on the behavior of its exposures subject to market risks under extreme conditions, such as financial crises and economic shocks. The objective of stress tests is to calculate the impact of events which are plausible, but very unlikely to occur, on regulatory requirements. Stress tests include exposure simulations, retrospective--based on historical series of shocks to market risk factors--and prospective--based on projections of economic and financial scenarios. For more information on the sensitivities, VaR, and stress metrics, visit our website at bb.com.br/relacoescominvestidores, at the Análise do Desempenho (Performance Analysis) link, chapter 8: Gestão dos Riscos – Risco de Mercado (Risk Management - Market Risk). The models used to measure market risk and backtesting models are subject to validation process by Dicoi, segregated of areas responsible for the development and for the use of the models. In turn, the independent validation process of models is subjected to independent evaluation, conducted by Internal Auditing. Therefore, it is seen that Banco do Brasil uses three layers of control over its market risk measurement models, which are the following:

· 1st Layer: development and use of models; · 2nd Layer: validation of models; and, · 3rd Layer: evaluation of model validation.

The process of market risk management involves continuous flow of information, according phases in chapter process risk management. The next figure illustrates the process of market risk management.



Figure 10. Management Process

Negotiable Portfolios The Bank’s market risk management processes own positions are divided into Negotiable Portfolios and Non-negotiable Portfolios. Through a resolution issued by the Global Risk Committee (CRG), a policy for classification of operations in the negotiable portfolio is stipulated. This document defines that, for the Financial Conglomerate, Negotiable Portfolios cover all operations in own positions carried out with the intent to negotiate, or intended to hedge the negotiable portfolio for which there is intended for negotiation before their contractual deadline, given normal market conditions, and which are not non-negotiable.

Risk Policies Definition

Settlement approval and communicatin of the policies, limitsm methodologies and

patterns for risk measuring

PreparationDecision

Making

ExecutionMonitoring

Pre

Data capture, analysis and

preparation of the

recommendation

Monitoring the impact

of decision taken

implementation

Decision

Making

Decision on the strategy

Execution through

decision

Board DIRIS Market and Liquidity Risk:

Treasury Operations



For measuring the VaR of the Negotiable Portfolio, Banco do Brasil adopts the Historical Simulation technique, and the following parameters: a) Total VaR: (VaR + Stressed VaR) x Multiplier, where:

a.1) VaR: the potential expected loss considering a series of 252 daily shocks (business days), a confidence level of 99% and a holding period of 10 business days (Central Bank of Brazil, Circular 3,568); a.2) Stressed VaR: the potential expected loss considering a series of daily shocks under stress scenarios within 12 months periods starting at January 2nd, 2004, a confidence level of 99% and a holding period of 10 business days (Central Bank of Brazil, Circular 3,568); and a.3) Multiplier: M, as defined by Central Bank of Brazil, Circular 3,568.

The following tables show the total value of the Negotiable Portfolio by relevant market risk factor, for the base dates of 12/31/2011 to 12/31/2012, divided into positions bought and positions sold. Table 26. Total value of the Negotiable Portfolio by relevant market risk factor, divided into

positions bought and positions sold – 1Q13

Table27. Total value of the Negotiable Portfolio by relevant market risk factor, divided into positions bought and positions sold – 2Q13

1Q13– R$ thousand

Purchased Sold

Prefixed 9.822.969 5.502.305 4.320.664

CDI/TMS/FACP 2.897.949 245.214 2.652.735

Price index 282.683 - 282.683

Foreign currency /gold 1.853.325 317.235 1.536.090

Shares 4.386 125 4.261

Total 14.861.312 6.064.879 8.796.433

Note: Patagônia Bank included

Risk Factor BB Exposure

Difference

2Q13– R$ thousand

Purchased Sold

Prefixed 10.272.420 9.242.668 1.029.752

CDI/TMS/FACP 2.955.208 31.295 2.923.913

Price index 39.211 - 39.211


Shares 2.356 - 2.356

Total 14.703.707 9.413.149 5.290.558



Difference



Table 28. Total value of the Negotiable Portfolio by relevant market risk factor, divided into positions bought and positions sold – 3Q13



Non-negotiable Portfolios The Financial Conglomerate’s own operations positions not classified under the Negotiable Portfolio are considered components of the Non-negotiable Portfolio. Note too that the own positions held by the companies that are not a part of the Financial Conglomerate cannot be classified under the Negotiable Portfolio. For measuring the VaR of the Non-negotiable Portfolio, Banco do Brasil adopts the Historical Simulation technique, and the following parameters:

· 99% one-tailed confidence interval; · 1,260 retrospective scenarios of daily shock factors; and, · Holding period of 21 business days.

3Q13– R$ thousand

Purchased Sold

Prefixed 11.220.880 11.323.415 (102.536)

CDI/TMS/FACP 2.893.101 482.046 2.411.055

Price index 29.799 - 29.799

Foreign currency /gold 1.481.440 568.032 913.409

Shares 3.176 - 3.176

Total 15.628.396 12.373.493 3.254.903



Difference

4Q13– R$ thousand

Purchased Sold

Prefixed 13.371.180 10.646.356 2.724.824

CDI/TMS/FACP 2.769.935 - 2.769.935

Price index 61.147 - 61.147


Shares - - -

Total 17.439.589 10.879.130 6.560.459



Difference



Among other aspects, it’s emphasized that the Historical Simulation VaR technique: · includes all operations which are sensitive to variations in interest rates, and uses

widely accepted risk-measurement techniques and financial concepts; · considers data on fees, deadlines, prices, optionality, and other suitably specified

information; · requires that suitable premises be defined to transform positions into cash flow; · measures sensitivity to changes in the temporal structure of interest rates, between

the different rate frameworks and in the premises; · is integrated into daily risk management practices; · allows the simulation of extreme market conditions (stress tests); and, · Allows an estimation of the Referential Equity (PR) that is compatible with the risks,

as determined in Article 3 of CMN Resolution 3.490/07.

Banco do Brasil adopts statistical and econometric methods, as referenced in literature, to analyze temporal series, more specifically, methods known as ARIMA (Autoregressive, Integrated, and Moving Average) for treatment of products with no set maturity. In line with the Historical Simulation methodology adopted by Banco do Brasil to calculate the Value-at-Risk (VaR) metrics, the models for products with no set maturity assume the hypothesis that the retrospective behavior of the variations observed in the balances is relevant to forecasting the future behavior of cash flow from redemptions (random variable of interest) of the balances of funding products referenced. Therefore, such methods assume the possibility of future balance (financial amount of partial redemptions) fluctuations with a scope similar to that observed in the historical series. The criteria for identifying operations that may be classified in Non-negotiable Portfolio follow the definitions and objectives defined in the resolution issued by the Global Risk Committee. It’s also worth noting that the definitions, criteria, and procedures established must be reviewed annually. The Negotiable and Non-negotiable Portfolios are divided into Groups and Books, always observing the internal norms (technical notes and resolutions) approved by the Liquidity and Market Risks Subcommittee (SRML) and by the Global Risk Committee (CRG), which establish the objectives, makeup, financial limits, and market and liquidity risk limits for each Group or Book. The main types of limits used for market risk management are:

· Value-at-Risk – VaR; and,

· Stress.

In order to provide suitable conditions for assessing the capacity for loss absorption and identifying future risk reduction measures, global limits are defined as a percentage of Referential Equity (PR). The VaR and Stressed VaR metrics are used to demonstrate the level of market risk generated by exposures, and the respective effect in terms of capital required to cover said risk, for the VaR limits of the Negotiable Portfolio.



Liquidity Risk Management Structure Liquidity management structure of do Banco do Brasil S.A. is composed by Risk Management Department (Diris), Finance Department (Difin), Controlling Department (Dirco), International Business & Affairs Department (Dinin), Internal Controls Department (Dicoi) and Internal Audit Unit (Audit) is responsible for operationalizing the strategic decisions adopted by the Board of Directors of the Bank, CRG and SRML, keeping exposures at risk levels established by senior management. Diris is responsible for the management of liquidity risk and to disseminate the culture of liquidity risk in the Bank. The figures below shows Banco do Brasil S.A. liquidity risk management structure:

Figure 11. Liquidity Risk Management

The main forums involved in the management of liquidity risk are: Board of Directors (CA) Banco do Brasil S.A. Board of Directors defines general business of the Bank and its subsidiaries.

Management Process

Management Strategy

Liquidity Risk Policy

Operacional Procedures

Management Systems

CA

CRG

SRML

DIRIS

DIFIN

DIRCO

Estrutura de Gerenciamento Nível Estratégico Nível Operacional

CGAP

SGAP

DININ

DICOI

AUDIT



The Board has, in the manner provided by law and the Statute, strategic, guidance, elective and monitoring assignments, not covering operating and executive functions. The composition and management term of the Council is defined by the Bank's bylaws. The Board of Directors shall decide on:

· Specific policies for the management of liquidity risk; and · Apetites and risk tolerance.

Global Risk Committee (CRG): Purposes:

· establish strategy for market risk management; · set the overall limits of risk exposure; · decide on the minimum reserve and liquidity contingency plans for liquidity;

and · Approve the allocation of capital on a risk basis.

Market and Liquidity Risk Subcommittee (SRML): Purposes:

· decides on models for managing liquidity risk, observing the strategies adopted in the Global Risk Committee - CRG;

· propose to the CRG minimum reservation and limits overall liquidity risk; · propose to the CRG contingency plans for liquidity; and · Evaluate the results of backtesting and adopt, where necessary, corrective

measures in the management models of liquidity risk.

Asset-Liability and Liquidity Management Committee (CGAP) Purposes:

· establish the Bank's strategy regarding assets, liabilities and liquidity management;

· set guidelines for Treasury operation, subject to overall limits set by Global Risk Committee (GRC);

· set the guidelines for liquidity management conglomerate; and · Follow the recommendations and guidelines decided by the Committee.

Asset-Liability and Liquidity Management Subcommittee (SGAP) Purposes:

· analyze the impact of different variables on the financial management of assets and liabilities and liquidity;

· propose to the Committee of Management of Assets and Liabilities and Liquidity (CGAP) the Bank's strategy with regard to the management of assets and liabilities and liquidity;

· propose guidelines for Treasury operation to CGAP, subject to overall limits set by the Global Risk Committee (CRG);

· evaluate Treasury’s performance, showing its results to the conglomerate and informing the CGAP;

· define opportunity curve models; · evaluate backtesting results and adopt, when necessary, corrective measures

in the models of asset-liability management; and



· Monitor and evaluate the measures implemented by the subcommittee.

Liquidity risk management held by the Bank in Diris applies to the following managerial visions:

· Banco do Brasil’s National Currency Liquidity; · Banco do Brasil’s Foreign Currency Liquidity; and · Liquidity of each Liquidity Center and Banco do Brasil’s abroad.

The responsibilities of departments in the liquidity risk management are described below:

Figure 12.Departaments and responsibilities involved with the liquidity risk

Liquidity Risk Management Process

Banco do Brasil maintains liquidity levels suitable to the Institution’s commitments in Brazil and abroad, as a the result of its broad and diversified base of depositors, the quality of its assets, the capillarity of its network of external offices and of its access to international capital markets. The strict liquidity risk control is in line with the Liquidity and Market Risks Policy established for the Conglomerate, meeting the requirements of national banking oversight, as well as of the other countries in which the Bank operates. The process of managing liquidity risk involves continuous flow of information, following the steps listed in the section of the risk management process. Banco do Brasil’s liquidity risk management segregates the liquidity in Reais from the liquidity in Foreign Currencies. For this, the following instruments are used:

· Liquidity Forecasts; · Stress test; · Liquidity Risk Limits; and, · Liquidity Risk Limits.



The liquidity risk management instruments are regularly monitored and reported to the institutions’ Strategic Committees. The Liquidity Forecasts allow a prospective assessment of the effect of the mismatch between funding’s and investments, in order to identify situations that could compromise the liquidity of the Institution, taking into account both budgetary planning and market conditions. Periodically, Short-term Liquidity Forecasts are assessed under alternative and stress scenarios. If the result of any of these liquidity projection scenarios remain below the adopted liquidity level limit, then the previously established Contingency Measures Potential is put into effect, in order to recover the Institutions’ liquidity. Furthermore, Banco do Brasil uses the following metrics:

· Liquidity Reserve (RL);

· Liquidity Cushion; and

· Free Resources Statement (DRL).

Liquidity Reserve is the metric used in short-term liquidity risk management. It is the minimum level of high liquidity assets the Bank must maintain, compatible with the risk exposure arising from the nature of its operations and market conditions. The Liquidity Reserves methodology is used as a parameter to identify a liquidity contingency and to activate the Liquidity Contingency Plan, being monitored daily. The Liquidity Cushion limit aims to monitor the daily liquidity under stressed conditions, while the Liquidity Reserve limit monitors the going - concern daily liquidity and the liquidity forecast. The Availability of Free Resources (DRL) indicator, used in planning and in the execution of its annual budget, is intended to ensure a balance between funding and resources invested, with a focus on Commercial Divisions and provide liquidity financing. The DRL limit used to guide the execution and planning of the budget, according to the funding and investment goals, is defined annually by the Global Risk Committee (CRG), and its monitoring occurs on a monthly basis. The Liquidity Contingency Plan, in turn, establishes a set of procedures and responsibilities to be adopted in liquidity contingency situations. In the event of a liquidity contingency, one or more contingency measures may be adopted in order to safeguard the institution’s ability to pay. The liquidity contingency measures are assessed monthly. The decision making-process about liquidity risk in Bank of Brazil is presented in figure 10. "Management Process".



5.3 Operational Risk Management Objectives The operational risk management at BB aims to identify, assess, mitigate, control and monitor the exposure to operational risks inherent to the Bank’s processes, business, products and services. Aiming to improve the dynamics of its performance, in keeping up front to best market practices and in accordance with the regulatory rules, Banco do Brasil promoted changes in the structure of operational risk management. Now is composed by the Risk Management Unit (DIRIS) and the Security Management Unit (DIGES), being the Director of Risk Management, by appointment of the Board of Directors, responsible towards Banco Central do Brasil for operational risk management. The Internal Controls Unit (DICOI) is responsible for the 2nd layer of control that includes, among other activities, control and compliance assessment and validation of risk management models. The Board of Directors remains responsible for the information disclosed. Internal Audit is responsible for verifying operational risk management and its structure. It should be noted that the operational risk analysis process is assessed by external audit, and its results are submitted to the Executive Board, Fiscal Council and Board of Directors. In order to fulfill strategies and policies set up for and meeting the regulatory requirements, activities relating to phases of management, are summarized in the following table:

Table 31.Phases of the operational risk management process

Management Phase Summary of Activities

Identification

Consists of identify and classify the operational risk events w hich ones the Bank is exposed,

indicating incidence areas, causes and potencials f inance impacts associated to organization´s

processes, products and services.

Assessment

It is the quantif ication of the operational risk exposure w ith the objective of assess the impact in the

Bank business. Consist of the qualitative assess of the identif ied risks, analysing their probability to

hapen and their impact, determining the risk tolerance level.

Control

Consists of register the behaviour of operational risks, limits, indicators and operational loss events,

besides the implementation of mechanisms, ensuring that the limits and operational risk indicators

remain w ithin the desired levels.

Mitigation

Consists of create and implement mechanisms to modify the risk, w ith the objective to reduce the

operational losses by removing the cause of the risk, changing the probability of occurrence or

changing the risk events consequences.

Monitoring

The objective is identify the deficiences of the operational risk management process, informing the

w eaknesses detected to the Board of Directors. It is the feedback phase of the operational risk

management process, w here it is possible to detect w eaknesses in the previous phases.



Operational Risk Policy The Operational Risk Policy reviewed and approved annually by the Board of Directors (CA) contains guidance for the Bank’s units, intended to ensure the effectiveness of the operational risk management model and it is expected that the Subsidiaries, Affiliates and investments Companies define their directions based on these guidelines, taking into account the specific needs, legal and regulatory issues to which they are subject. This Policy, which adheres to the recommendations in Basel II and the requirements of CMN Resolution 3.380/06, permeates the activities regarding to operational risk management in order to identify, assess, mitigate, control and monitor operational risks, inherent to the products, services, activities, processes and systems within the scope of Banco do Brasil. Management Processes and Strategies The Banco do Brasil aims to manage its operational risks conservatively, segregating the functions of risk management, in compliance to the standards and guidelines for supervision and bank regulation. The Bank`s current Strategic Plan, approved by the Board of Directors (CA), inserts the Financial Perspective the strategic objective of reducing operational losses. Strategic management takes place at the Global Risk Committee (CRG), composed of the Chairman and Vice Chairmen, whose purpose is to propose policies and decide about the risk guidelines. In particular, the operational risk tolerance limit is referenced by the consumption of capital for operational risk (Popr) on the Referential Equity (PR). Nevertheless, the Bank keeps the Global Limit Operational Losses, which is based on the maximum amount of losses for one year period. In order to speed up the management process, operational issues related to operational risk are deliberate in SRO, which aims monitor operational risk through specific limits of operational losses and key risk indicators. It also is among the assignments of the SRO, the measures proposition / adoption to keep the risk parameters (exposure, limits etc.) within the pre-defined tolerance approved by CRG. Technical issues related to operational risk management are discussed, prior to SRO and CRG, at Technical Forum of Operational Risk Management, with participation of Diris, Dicoi, Diges and other strategic Units. It also assess the risks of greater relevance, the instruments used for identification of operational risks and controls associated with these and aims to promote integration activities related to operational risk. Communication and Notification Processes Monthly, are presented in CRG and SRO the position of global limit, specific limits and Key Risk Indicators (KRI). The behavior of operational losses (losses and provisions for contingent claims), mitigation actions, as well as the main operational risks are detailed.



Are also communication objects to managers, the monthly operational losses position, position of judicial issues, the KRI behavior and the specific limit position of their respective areas. The reports are designed to allow the manager to identify operational risks and their main causes in order to propose mitigation actions. The Risk Management Unit participates in some of the Bank's strategic forums where are discussed topics related to operational risk. This dynamic promotes the sharing information about projects and actions willing the operational risk’s identification and mitigation. Concerning to the spread of Operational Risk Culture Management operational working meetings are held with the unities in order to disseminate concepts, tools, major operational risks and losses identified as well as the results of implemented actions. Additionally, courses and certifications were reviewed in order to promote and disseminate the best practices in risk management. Measurement Systems Bank uses a model based on the Alternative Standardized Approach (ASA) to calculate capital for operational risk. The capital portion value for Operational Risk corresponds to the Referential Equity (PR) consumption with capital for operational risk. This metric monitoring is defined by strategic committees - CRG and SRO. Beyond the capital monitoring, BB has set operational losses global limit and specific limits that correspond to the unfolding of internal area global limit, segmented by network and product managers or by losses type’s managers. Are also monitored global and specific limit for external branches. Operating losses of BB are distributed by loss events categories, as described in Table 32. Operational losses managers receive a monthly report containing information about losses for analysis and proposition of mitigation actions. Operational Risk Mitigation

The units that manage processes, products, and services must create and implement action plans and instruments to mitigate operational risk, based on the causes noted in the operational risk identification phase and on the decisions made by the CRG and/or SRO. The Diris and Diges advising the manager about making action plans to mitigate operational risks. The action plans are registered in a specific tool that allows the monitoring of measures and its reporting to CRG and SRO. Processes and Strategies to Monitor the Effectiveness of Mitigators The monitoring of operating losses is conducted monthly by calculating the amounts of losses observed in comparison to the global limit of operational losses, reporting to Operational Risk Subcommittee (SRO) and the Global Risk Committee (CRG). In cases of extrapolation limit, DIRIS triggers the area manager for proposing mitigation actions.



In order to make this monitoring even more effective, the following specific limits were adopted: :

· Labor Issues;

· Business Failures;

· External Fraud and Theft;

· Document Frauds;

· Internal Fraud;

· System Failures; and

· Losses limits to overseas branches.

If any of the above Specific Limits are exceeded, an RTR - a Technical Risk Recommendation -is issued to the responsible area in order to explain the reasons, as well as mitigating actions to reestablish the values under the limits. The following table shows the monitoring of BB’s operational losses performed in each risk event category, expressed in percentages. Banco do Brasil considers the constitutions and reversal of provisions – notably for contingent liabilities, in total calculated operational losses for the categories of Labor Issues, Business and Process Failures. Table 32. Operational losses monitoring by loss events category.



5.4 Non-financial Companies

The risk management model adopted by Banco do Brasil to non-financial companies that integrate the Economic Financial Consolidated foresees the identification, assessment, control, monitoring and mitigation of credit, market, operational and liquidity risks in non-financial companies controlled as well as the identification and monitoring of the risks of the uncontrolled companies.

In addition, the Bank measures the regulatory capital requirement for the credit, market and operational risks of non-financial companies, ensuring the sufficiency of capital to cover these risks in the scope of the Consolidated Economic and Financial.



6. Capital

6.1 Capital Management

On June 30, 2011, in line with Pillar II of Basel, Bacen issued the Resolution CMN 3.988/11, which established the need to implement a capital management framework for financial institutions. Pursuant to the Resolution, Banco do Brasil defined as part of this structure, the Department of Accounting and the Units of Risk Management, Controlling and Finance. Also in line with the Resolution, in January, 2012, BB’s Board of Directors indicated the director of the Controlling Unit as responsible to Capital Management with the Bacen.

The areas defined in the capital management structure respond jointly or individually by:

· identification of relevant risks; · assessment of the capital required to support them; · projection of risk and capital indicators; · calculation of the Referential Equity (PR); · elaboration of the capital plan and contingency plan and; · evaluating capital sources and its restoration. · ICAAP, Stress Tests, and Managerial Report, and · Capital Management Policy.

For Capital Management, BB calculates the Core Capital Ratio (ICP), Tier 1 Capital Ratio, Capital Adequacy Ratio (IB). The Prudential Capital Adequacy Ratio (IBP) that represents the Bank's directive to keep the IB two points above the minimum regulatory in order to sustain the risk of interest rate transactions not included in the trading book (plot RBAN) and serve as a prudential margin to face the other risks not considered in Pilar I.

The Resolution CMN 3.988/11 yet established the need for Internal Capital Adequacy Assessment Process (ICAAP), which the Risk Management Unit is responsible for. At BB, the Unit of Internal Controls, independent area of capital management structure, is responsible for the validation of the ICAAP. Already Internal Audit annually evaluates the process of capital management.

BB constituted a technical forum for capital management, so-called Forum de Capital, which has members from the Units of capital management structure. The Forum meets monthly, and has as main activities the preparation of the capital structure projections, the analysis of the main variations and trends of the Institution’s IB, and the impacts of changes in the regulatory and business environment.

Banco do Brasil also periodically prepares managerial reports on capital adequacy for intervening areas and strategic committees, such as Subcommittee of Risks (Operational, Market and Liquidity and Credit), the Global Risk Committee, the Executive Board and the Board of Directors.



Referential Equity (RE) On 10.01.2013 the Conselho Monetário Nacional (CMN) approved changes in the rules for defining and determining the RE of financial institutions by CMN Resolution No. 4,192/2013, included in the regulatory scope of Basel III. In accordance with CMN Resolution No. 4,192/2013, for the purpose of verifying compliance with the operational limits of financial institutions, the RE is composed of the sum of Tier I and Tier II, and Tier I is now composed of the Core Capital (net of regulatory adjustments) and additional Tier I capital. The regulatory adjustments are deductions from the Core Capital of heritage elements that can compromise its quality due to their low liquidity, difficulty to evaluate or reliance on future profits to be realized. The following items relating to regulatory adjustments started to be deducted from the Referential Equity from January 2014:

i. Goodwill;

ii. Intangible assets constituded from October 1, 2013;

iii. actuarial assets related to defined benefit pension funds net of deferred tax

liabilities;

iv. Non-controlling interest;

v. investments, directly or indirectly, greater than 10% of the capital of

unconsolidated entities similar to financial institutions, and insurance

companies, reinsurance companies, capitalization companies and open

pension entities (superior investments);

vi. Tax credits resulting from temporary differences that rely on the generation of

future taxable profits or revenues for its realization;

vii. Tax credits resulting from tax loss of excess depreciation;

viii. Tax credits resulting from tax losses and negative basis of social contribution

on net income.

According to CMN Resolution No. 4,192/2013, these deductions will be gradually implemented, 20% per year, from 2014 to 2018, with the exception of deferred assets and funding instruments issued by institutions authorized to operate by Banco Central do Brasil (Bacen) which are already being fully implemented since October 2013. For the additional Tier I capital and Tier II, are also deducted the amounts of assets represented by the following funding instruments issued by financial institution: shares, quotas, quota shares, hybrid capital and debt instruments and subordinated debt, all of them deducted of the related portion of RE to which the funding instrument is eligible. The consolidation scope used as the basis for establishing the operating limits was also amended, considering the Consolidated Financial Report from 10.01.2013 until 12.31.2014 (considering the information relating to Banco Votorantim by the Equity Method - MEP as determined by Bacen), and the Prudential Conglomerate, defined in CMN Resolution No. 4,280/2013, from 01.01.2015.



All quotes to the Referential Equity - RE, prior to 10.01.2013, refer to the Basel II methodology and were determined according to the criteria established by CMN Resolution No. 3,444/2007. Table 33. Referential Equity

(1) Methodology adopted from October 1, 2013, in accordance to CMN Resolution No. 4,192/2013. (2) Methodology adopted until September 30, 2013, in accordance to CMN Resolution No. 3,444/2007. (3) According to CMN Resolution No. 3,444/2007, Hybrid Instruments authorized by Bacen to compose Tier I of the RE are limited to 15% of the total of Tier I, including the value of the Hybrid Instruments itself. The values of the Hybrid Instruments that may exceed that limit are added to Tier II of the RE. (4) The Instruments authorized by Bacen to compose the Referential Equity according to CMN Resolution No. 3,444/2007 and do not fulfill the requirements established by CMN Resolution No. 4,192/2013 suffer the decrease of 10% per year from 2013 to 2022, on the values that composed the RE on December 31, 2012. (5) According to CMN Resolution No. 4,192/2013, balances of the FCO are eligible to compose the RE. (6) On March 31, 2014, it was considered the balance of subordinated debt instruments that composed the RE in December 31, 2012, applying on it the decay of 20%, as determined by CMN Resolution No. 4,192/2013. (7) The Subordinated Debt Instruments allowed to select Level II of RE, are limited to 50% of Tier I, according to CMN Resolution No. 3,444/2007. The value that exceeds this limit should be excluded from Tier II RE.



Tier I Core Capital Capital The capital, entirely subscribed and paid-in, in the amount of R$ 54,000,000 thousand (R$ 54.000.000 thousand as of December 31, 2013 and R$ 48.400.000 mil as of March 31, 2013) of Banco do Brasil is divided into 2,865,417,020 book-entry common shares without par value. The Federal Government is the largest shareholder, holding control of the majority of our voting shares. The increase of the capital in the period from March 31, 2013 to March 31, 2014, in the amount of R$ 5,600,000 thousand, resulted from the use of Statutory Reserve to Operating Margin, approved by the Special Meeting of Shareholders held on 12.19.2013 and authorized by Bacen in February 13, 2014. The Bank may, even without amending its by-laws, if approved by the Meeting of Shareholders, and in the conditions established therein, increase its capital up to the limit of R$ 110,000,000 thousand, by issuing common shares, granting shareholders preference for subscribing the capital increase proportionally to the number of held shares. Revaluation Reserves The revaluation reserves, totaling R$ 4,544 thousand (R$ 4,564 thousand as of December 31, 2013 and R$ 4,623 thousand as of March 31, 2013), refer to revaluations of assets made by the associated/subsidiary companies. In the first quarter of 2014, there was a reserve realization in the amount of R$ 20 thousand (R$ 22 thousand in the first quarter of 2013), due to depreciation, transferred to Retained Earnings (Accumulated Losses). In accordance with CMN Resolution No. 3,565/2008, the remaining amount will be kept until the date of its effective realization.. Capital and Profit Reserves Table 34. Capital and Profit Reserves

(1) Includes the elimination of unrealized results arising from transactions with subsidiary in the amount of R$ 430,692 thousand

The Statutory reserve for operating margin aims to guarantee an operating margin consistent with the development of the Bank’s operations and consists of up to 100%



of net income, after the legal destinations, including dividends, limited to 80% of the capital. Statutory reserve for dividend equalization provides funds for the payment of dividends, consisting of the portion of up to 50% of the net income, after legal distributions, including dividends, up to 20% of the capital. Accumulated Other Comprehensive Income

Table 35. Accumulated Other Comprehensive Income

Non-Controlling Interest

Table 36. Non-Controlling Interest

Treasury shares

On July 13, 2012, the Board of Directors approved the repurchase program of up to 50 million shares within 180 days from that date, aiming to the acquisition of shares to hold in treasury for subsequent sale or withdrawal without capital reduction, aiming to generating value for shareholders. This program was in effect until January 8, 2013, and 20,200,000 shares were acquired, in the amount of R$ 461,247 thousand, related to the repurchase program. Minimum, average and maximum cost per share are respectively R$ 18.28, R$ 22.83 e R$ 26.78.

On June 13, 2013, the Board of Directors approved the repurchase program of up to 50 million shares, within 365 days from that date, aiming to the acquisition of shares to hold in treasury for subsequent sale or withdrawal without capital reduction, aiming to generating value for shareholders. Until March 31, 2014, 41,398,400 shares were acquired in the amount of R$ 974,640 thousand, related to the repurchase program, 353,474 shares of which were used for the program of share-based payment (Program 2013). Minimum, average and maximum cost per share are respectively R$ 18.84, R$ 23.54 and R$ 28.67.



On March 31, 2014, the Bank had 61,699,534 treasury shares, amounting to R$ 1,439,065 thousand, of which 61,244,926 shares resulting from repurchase programs, 454,576 shares resulting from variable remuneration program and 32 remaining shares of mergers.

Regulatory Adjustments (methodology adopted form October 2013) The regulatory adjustments made in March 31, 2014 are those related to the article 5, sections I to XV of CMN Resolution No. 4,192/2013: Table 37. Regulatory Adjustments

Additional Tier I Capital Hybrid Capital and Debt Instruments Hybrid Capital and Debt Instruments that meet the CMN Resolution No 4,192/2013 requirements can make up Tier I, so long as they are authorized by Bacen. Table 38. Perpetual Bonds

The amount of R$ 20,568,496 thousand of Perpetual Bonds, R$ 17,050,964 thousand makes up the RE on March 31, 2014, being the amount of R$ 8,201,200 thousand in accordance with CMN Resolution No. 4,192/2013.

The amount of R$ 8,849,764 thousand which makes up the RE on March 31, 2014 does not meet the requirements of CMN Resolution No. 4,192/2013, so that it should meet the requirements specified in the article 28 of this Resolution, and its balance is limited on the value that composed the RE in December 2012, applying on it the decay of 10% per year in the period 2013-2022.



Tier II Subordinated debt Eligible as Capital Subordinated Debt Instruments that meet the CMN Resolution No. 4,192/2013 requirements can make up Tier II, so long as they are authorized by Bacen. Table 39. Subordinated Debt Eligible as Capital

The amount of R$ 31,741,950 thousand of the amount of R$ 32,195,307 thousand of Subordinated Debt Eligible as Capital, makes up the RE on March 31, 2014, being R$ 19,103,867 thousand related to the resources of the Fundo Constitucional do Centro Oeste – FCO.



The remaining subordinated debt instruments that make up RE of Banco do Brasil do not meet the requirements of CMN Resolution No. 4,192/2013, thereby, they comply with the described in article 29 of that Resolution which demands the use of the lower value between:

- Balance of subordinated debts that made up the RE on December 31, 2012 applying on it the limit of 10% per year from 2013 to 2022 (R$ 12,638,083 thousand); or

- Current balance of subordinated debt on March 31, 2014, applying on it the decay by the time lapse due to maturity date (R$ 13,091,440 thousand).

Thus, for the RE of March 31, 2014, it was considered the value that composed the RE on December 31, 2012, applying on it the decay of 20%, as determined in Articles 28 and 29 of Resolution CMN No. 4,192/2013..

Deductions from Tier II of RE According to CMN Resolution No. 4,192/13, the balance of funding instruments issued by an institution authorized to operate by Bacen (Subordinated Debt) is deducted from Tier II of RE. Table 40. Financial Instruments Excluded from Tier II of RE



Table 41. RE historical series – Financial Conglomerate

(1) Methodology adopted from October 1, 2013, in accordance to CMN Resolution No. 4,192/2013. (2) Methodology adopted until September 30, 2013, in accordance to CMN Resolution No. 3,444/2007. (3) According to CMN Resolution No. 3,444/2007, Hybrid Instruments authorized by Bacen to compose Tier I of the RE are limited to 15% of the total of Tier I, including the value of the Hybrid Instruments itself. The values of the Hybrid Instruments that may exceed that limit are added to Tier II of the RE. (4) The Instruments authorized by Bacen to compose the Referential Equity according to CMN Resolution No. 3,444/2007 and do not fulfill the requirements established by CMN Resolution No. 4,192/2013 suffer the decrease of 10% per year from 2013 to 2022, on the values that composed the RE on December 31, 2012. (5) According to CMN Resolution No. 4,192/2013, balances of the FCO are eligible to compose the RE. (6) On March 31, 2014, it was considered the balance of subordinated debt instruments that composed the RE in December 31, 2012, applying on it the decay of 20%, as determined by CMN Resolution No. 4,192/2013. (7) The Subordinated Debt Instruments allowed to select Level II of RE, are limited to 50% of Tier I, according to CMN Resolution No. 3,444/2007. The value that exceeds this limit should be excluded from Tier II RE.



Table 42. RE historical series – Consolidated Economic and Financial

(1) According to CMN Resolution n.º 3,444/2007, Hybrid Capital and Debt Instruments authorized by Bacen to compose Tier I of the RE are limited to 15% (fifteen percent) of the total of Tier I, including the value of the Hybrid Capital and Debt Instruments itself. The values of the Hybrid Capital and Debt Instruments that may exceed that limit are added to Tier II of the RE. (2) The Subordinated Debt Instruments allowed to compose Tier II of the RE, are limited to 50% of the total of Tier I, according to Resolution CMN n.º 3,444/2007. The amount that exceeds this limit should be excluded from Tier II of the RE.

Minimum Reference Equity Required (MRER) The Minimum Reference Equity Required (MRER) is the equity required (capital volume required) of institutions, financial conglomerates, and other institutions authorized to operate by Bacen, to face the risks to which they are exposed in light of the risks to which they are exposed due to the activities they are involved in, and it is definied by CMN Resolution 4.193/13. The MRER, which relaced the Required Referential Equity (PRE) from 10.01.2013, corresponds to the application of the factor "F" to the amount of RWA, with:

· 11% of RWA, from 10.01.2013 to 12.31.2015;

· 9.875% from RWA 01.01.2016 to 12.31.2016,

· 9.25% of RWA from 01.01.2017 to 31.12.2017;

· 8.625% of RWA from 01.01.2018 to 31.12.2018; and

· 8% of the RWA from 01.01.2019.

In determining the amount of risk-weighted assets, we consider the sum of the following portions:

· I - RWACPAD concerning credit risk exposures subject to the calculation of capital

requirements under the standardized approach;



· II - RWAMPAD concerning market risk exposures subject to the calculation of capital

requirements under the standardized approach, and,

· III - RWAOPAD on the calculation of the capital requirement for operational risk under

the standardized approach.

In 01.10.2013 took effect in Brazil the legislative set that implemented the recommendations of the Basel Committee on Banking Supervision regarding the capital structure of financial institutions, known as Basel III. The new rules adopted address the following issues:

· I - new methodology for calculating regulatory capital, which continues to be

divided into Tier I and II, the Tier I consists of the Core Capital (net of

Regulatory Adjustments) and Additional Tier I Capital;

· II - new methodology for calculating the capital requirement maintenance,

adopting minimum requirements for Referential Equity, Tier I and Core Capital,

and the introduction of the Additional Core Capital.

The consolidation scope used as the basis for establishing the operating limits was also amended, considering the Consolidated Financial Report of 10.01.2013 until 12.31.2014, and the Prudential Conglomerate, defined in CMN Resolution n.º 4.280/2013, from 01.01.2015. All quotes to the Required Referential Equity (RRE), prior to 10.01.2013 dates, refer to the Basel II methodology and were determined according to the criteria established by CMN Resolution 3.490/2007. The tables below show the PRE of the Financial Conglomerate and the Consolidated Economic and Financial, by type of risk.



Table 43. Minimum Reference Equity Required of the Financial Conglomerate



Table 44. Minimum Reference Equity Required of the Consolidated Economic - Financial

Capital Adequacy Ratio In compliance with the recommendations of the Basel Committee on Banking Supervision, BACEN established operational limits to be observed by financial institutions, among which the Total Capital Ratio (IB), the Core Capital Ratio (ICP) and the Tier 1 Capital Ratio stand out. The Capital Adequacy Ratio was determined according to the criteria established by CMN Resolutions n. º 4.192/2013 and n. º 4.193/2013, which refer to the calculation of the Referential Equity (RE) and Minimum Reference Equity Require (MRER) in relation to Risk Weighted Assets (RWA ), respectively. BACEN has determined that financial institutions must permanently maintain, permanently a PR value higher than the PRE value, as per CMN Resolution 3,490/07. Besides this, it also establishes that institutions must maintain sufficient PR to cover the interest rate risk of operations not included in the negotiable portfolio ( portion), named capital sufficiency margin between PR and PRE, which is calculated using the formula below:



Table 45. The Total Capital Ratio and RE margin - Financial Conglomerate.

Table 46. The Total Capital Ratio and RE margin - Consolidated Economic and Financial

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