COVID-19 Rewrites Bacen’s Regulatory Rules

Recent Impact on Bacen’s Regulatory Rules for Financial Institutions

By: Marlene Dos Santos, Subject Matter Expert Brazil

CMN and Bacen have been taking a series of proactive measures, which are part of actions taken to increase liquidity in the National Financial System and to help companies and individuals, and to mitigate the effects of the pandemic on the economy.

Below are listed these resolutions, circulars and circulars released to date, and their impacts on the regulatory environment of Financial Institutions.

Resolution 4783:

Expansion of Banks’ Reference Equity.

Institutions must permanently maintain amounts of PR level I and Principal Capital in amounts higher than the minimum requirements established, to cover all types of risks:

Extra Required Capital – ACP – Additional Principal Capital – corresponds to liquidity mattresses (buffers) composed of the sum of 3 installments:

  • ACP_Sistêmico 🡪 is equivalent to 2% of the total RWA. Created only for institutions considered relevant in the Banking System (S1).
  • ACP_Contaciclico 🡪 is equivalent to 2.5% of the total RWA – Mattress created to balance the economic cycle in times of financial stability to be consumed in a phase of credit contraction.
  • ACP_Conservação 🡪 is equivalent to 2.5% of the total RWA – Extra portion created to absorb losses and guarantee the continuity of operations; in times of recession.

Resolution 4783 reduces the ACP_Conservação from 2.5% to 1.25% from 01/04/2020 for a period of one year, that is, it increases the capital slack (difference between the effective capital and the minimum required) by releasing banks’ capital for lending.

After a period of one year, ACP Conservação will be gradually reestablished until 03/31/2022 to the current level of 2.5%.

These changes impact DLO in the calculation parameters of the Reference Equity. A “schedule” must be configured in the tool to automatically change the percentages of the capital calculation, according to the periods established by the BC:

AxiomSL | Bacen’s Regulatory Rules

Resolution 4782:

This resolution facilitates the renegotiation of credit operations that are carried out in the next 6 months, with defaulting debtors with good financial capacity.

It established, for an indefinite period, temporary criteria for characterizing the restructuring of credit operations for the purpose of credit risk management, that is, the bank may fail to consider debtors whose financial capacity has been impacted due to the crisis as a problematic asset.

This measure facilitates the renegotiation of credit operations by companies and individuals that have good financial capacity and will allow these debtors to adjust their cash flows, reducing the temporary effects resulting from the crisis.

In the event of renegotiation, banks are exempted from increasing the allowance for loan losses.

In terms of regulatory reports, both in the SCR – Credit Risk Center, and in the calculation report of the allowance for doubtful accounts made based on Resolution 2682.

These amounts are calculated based on days of delay, which implies the need to create a specific category to classify these customers and establish rules for different treatment in the allocation of cash flow by maturity, rating adjustments, and calculation of provision for losses.

It is also expected to have an impact on the calculation of credit risk in DLO, in the application of risk and mitigation factors in the calculation of RWA.

Circular 3993:

Circular 3993 reduced the rate of compulsory deposits on time deposits from 25% to 17%.

Compulsory deposits are resources that banks keep at Bacen, and their reduction should inject more money into the economy, because it frees banks from cash, injects resources into the economy and increases the liquidity of the National Financial System.

The measure is temporary from 03/30/2020 and should return to the rate of 25% on 12/14/2020, in case the economy improves.

In terms of regulatory reporting, it is necessary to change the calculation percentages, temporarily and return to the original level on the scheduled date.

As the tool is parameterized, we can make this configuration, to adjust the % automatically.

Resolution 4785:

Circular 3993 reduced the rate of compulsory deposits on time deposits from 25% to 17%.

Compulsory deposits are resources that banks keep at Bacen, and their reduction should inject more money into the economy, because it frees banks from cash, injects resources into the economy and increases the liquidity of the National Financial System.

The measure is temporary from 03/30/2020 and should return to the rate of 25% on 12/14/2020, in case the economy improves.

In terms of regulatory reporting, it is necessary to change the calculation percentages, temporarily and return to the original level on the scheduled date.

As the tool is parameterized, we can make this configuration, to adjust the % automatically.

Resolution 4786:

Bacen released a temporary line of loans to Financial Institutions guaranteed by debentures acquired between 03/23 and 04/30 2020.

LTEL – Special Temporary Liquidity Line is intended to provide liquidity to the secondary corporate debt market.

This instrument of loan lines backed by private debt securities has been used by the main Central Banks in the world (according to information from InfoMoney).

The term of this line is 125 days and can be renewed for another 125 days, at the current cost of the rediscount line. The BC will accept the Debentures at face value, adjusted by the interest curve of the securities. Compulsory term resources and savings also come as a guarantee for this line.

The impacts are basically in the Liquidity reports.

Summary:

  • All these measures that impact liquidity in the system, will have to be reviewed and updated in the reports of LCR, Mod II, NSFR. An example of this is the introduction of the LTEL collateralized line, the new NDPGE funding with FGC insurance and changes in the reserve requirement that brings a new configuration of cash outflows.
  • BC should standardize, if necessary, the sending of additional reports as a reserve requirement, changes to the FGC.
  • Credit: Impacts on the allocation of cash flows and calculation of the allowance for loan losses.
  • DLO: impact on the Capital Limit composition report, on the calculation of the counterparty credit risk and repo operation.

For more information on how to deal with these new regulatory measures, contact us here.


Related links:



We use cookies in order to give you the best possible experience on our website. By continuing to use this site, you agree to our use of cookies.
Accept