In this context, Unibanco has been working, since 2003, to improve the GVU (Unibanco Value Creation), a proprietary tool that quantifies return on risk-adjusted capital. The GVU allows for the allocation, to business units, of capital adjusted for the risk inherent to their activities, which results in an effective assessment of the risk-return ratio. This process contributes significantly to the management of risk and to the convergence of shareholders and staff objectives.

Further reinforcing the importance of the concept of risk-adjusted return, the alignment of Unibanco to the best international practices - the new Basel capital adequacy requirements, to be implemented by Brazil's Central Bank - will allow the utilization of internal models to gauge credit, market and operational risk for purposes of capital requirements by financial institutions in which internal models are proven to be efficient and robust.

Unibanco is in the process of developing and employing a new model of documentation, registration, storage and evaluation of risk factors defined by the Sarbanes-Oxley Law (effective in December 2005) and the Basel II requirements and their respective controls and operating loss assessment.

Credit Risk

Unibanco's credit risk management is conducted through the segmentation of client groups and portfolios with similar behavior. Loss minimization is pursued through customized risk classification systems in which supporting models are subject to systematic reviews. This way, the employment of limits and pre-approved lines of credit, as well as a rigid structure of committees and decision boundaries lends consistency to the process.

The Wholesale unit serves corporations with annual sales above R$150 million. For this group, risk assessments are conducted on a periodic and individual basis, through a proprietary rating system comprising 14 levels - AA1 to H. The ratings involve quantitative and qualitative criteria, such as financial status, managerial capacity, and financial history, relationship with the bank, industry-specific conditions and others.

The Retail unit comprises individual and business clients with annual sales under R$150 million. Risk management for individuals and business with annual sales up to R$5 million is assessed through a proprietary credit scoring model (credit and behavior scoring) compatible with the high volume of clients in this category. Business with annual revenues above R$5 million are evaluated through a system similar to the one used by the Wholesale banking.

Market and Liquidity Risks

The Financial Committee, formed by the board members and upper executives, meets monthly to evaluate market conditions and establish risk limits. Liquidity, market concentration and portfolio diversification risks, among others, are under continuous scrutiny by the market risk management department.

The management of market risks is conducted through the identification, assessment and control of risks associated with potentially adverse market swings, such as interest rates, exchange rates, bond spreads and commodity prices. For this purpose, Unibanco uses classic analytical and quantitative methods such as Value at Risk (VaR) and stress testing.

This practice results in the issue of daily reports to support the risk monitoring process. Market reports, Unibanco's portfolios positions and market strategy also help identify and correct occasional problems and preserve liquidity. Unibanco also conducts monthly analyses (optimistic and pessimistic scenarios and ad-hoc events) to evaluate the potential impact from changes in the economic environment.

Operational Risk

The efficient management of operational risks is recognized at Unibanco as crucial for the decision-making process, ensuring a consistent control environment.

The establishment and dissemination of clear, standardized protocols applicable to the group as a whole, in addition to structured flows for the assessment, validation, and monitoring of processes, products, services and systems, aim at identify and assess risk exposures of all natures in all activities. Among the benefits that derive from these analyses, it is possible to identify the risk management and control culture promotion, the reduction on possible losses and the improvement in processes formalization.

In line with the integrated risk management strategy, the internal controls evaluation process adopted by Unibanco is based on the SCI (Internal Controls System), accessible through the corporate intranet. The process has been promoting a significant increase in control points for monitored activities, allowing the identification and evaluation of potential risks and establishing plans of action for each case.