We announced the details of this exercise on Wednesday last week.15 It aims to increase transparency, to identify the necessary corrective actions and to build confidence in the banking system. 13  See Sakakibara, E., 2000, Nihon to Sekai ga Furueta Hi, Chuo Koron Shinsha. 14  “G20 Principles for Cooperation between the IMF and Regional Financing Arrangements as endorsed by G20 Finance Ministers and Central Bank Governors”, 15 October 2011. 15  The comprehensive assessment entails three broad elements. First, a supervisory risk assessment to review key risks including liquidity and funding. Second, a balance sheet assessment to enhance transparency in banks’ balance sheets and their asset quality, collateral valuation and provisions, and so on. And third, a stress test to examine banks’ resilience to adverse scenarios. See European Central Bank (2013). “ECB starts comprehensive assessment in advance of supervisory role”, 23 October. 4  BIS central bankers’ speeches  With such steps, and provided that sources of capital are clearly identified, including public backstops when private sources have been exhausted, I firmly believe we can put the banking system on a sounder footing and enable it to support the economy’s recovery. The second response is to reduce financial fragmentation. Despite having a single market for capital in Europe, liquidity is not fully fungible between and even within cross-border banks. This means that liquidity usage is not optimised – surpluses in some countries are not used to fund deficits in others.
The real effective exchange rate has also oscillated substantially, reacting to shifts in fundamentals such as the terms of trade, risk aversion and underlying capital flows. Compared with a long-term average of 100, the real effective exchange rate (measured in terms of BRL) has moved within 58, on October 2002, when the BRL was particularly weak, to 125 in August 2008, when it was stronger than the mediumterm norm. Regarding the balance of payments, the current account balance has averaged -1.0% of GDP, compared with a long-term average (since 1970) of -2.1%. Net FDI inflows have also performed relatively well, with an average of 3.0% of GDP, compared with 1.5% since 1970. Thanks to the improvement in the balance of payments the Central Bank has been able to accumulate sizeable foreign exchange reserves, which stand at about $ billion currently. The process of reserve accumulation did not impinge on the functioning of the floating exchange rate regime, as the Central Bank strove to buy foreign currency always through publicly announced auctions at the going market price. At inception of the floating exchange rate regime, the foreign sovereign credit rating was B+ (according to S&P) and Brazil had an active stand-by program with the IMF. Brazil is now investment grade, the sovereign credit rating stands at BBB- and the Central Bank has a currency swap agreement, as yet not drawn, with the US Federal Reserve. Of course, a floating exchange rate regime is a pre-condition for inflation targeting.