Normative Instruction BCB No. 487 of July 5, 2024: Procedures for Authorization to Use the Full Methodology for Expected Loss Assessment and Provisioning for Credit Risk

Resolution No. 222

NORMATIVE INSTRUCTION BCB NO. 487, OF JULY 5, 2024

Provides for the procedures for requesting authorization to use the full methodology for assessing expected loss and for calculating and establishing the provision for expected losses associated with credit risk, granted to financial institutions and other institutions authorized to operate by the Central Bank of Brazil, classified in Segment 4 (S4), as mentioned in CMN Resolution No. 4,966 of November 25, 2021, and BCB Resolution No. 352 of November 23, 2023.

The Heads of the Strategic Management and Specialized Supervision Department (Degef), the Department of Supervision of Cooperatives and Non-Banking Institutions (Desuc), substitute, and the Banking Supervision Department (Desup), in the exercise of the authority granted to them by Article 23, item I, letter “a” of the Internal Regulations of the Central Bank of Brazil, annexed to BCB Resolution No. 340 of September 21, 2023, and considering the provisions of Article 67, item V, of CMN Resolution No. 4,966 of November 25, 2021, and Article 82 of BCB Resolution No. 352 of November 23, 2023,

RESOLVE:

CHAPTER I
OBJECT AND SCOPE OF APPLICATION

Article 1. This Normative Instruction establishes the procedures for requesting authorization to use the full methodology for assessing expected loss and for calculating and establishing the provision for expected losses associated with credit risk, granted to the institutions mentioned in Article 50, § 1, of CMN Resolution No. 4,966 of November 25, 2021, and Article 50, § 1, of BCB Resolution No. 352 of November 23, 2023.

Sole paragraph. The authorization referred to in the caput is conditioned on proof that the requesting institution maintains internal models and systems for measuring and classifying credit risk, internal controls, and risk management compatible with the nature of operations, the complexity of products, and exposure to credit risk, as provided in Article 50, § 2, of CMN Resolution No. 4,966 of 2021, and Article 50, § 2, of BCB Resolution No. 352 of 2023.

CHAPTER II
REQUEST

Article 2. The application of an institution mentioned in Article 1 must cover all entities of the requesting prudential conglomerate or, in the case of credit cooperatives, all credit cooperatives of the requesting cooperative system, as determined by Article 82, § 2, item II, of BCB Resolution No. 352 of 2023.

Article 3. The request for authorization referred to in Article 1 must be filed by:

I - the requesting institution, in the case of an institution not belonging to a prudential conglomerate and not part of a cooperative system;

II - the leading institution of the requesting prudential conglomerate, in the case of a prudential conglomerate;

III - the central credit cooperative, in the case of a two-tier cooperative system; or

IV - the confederation of central cooperatives, in the case of a three-tier cooperative system.

Sole paragraph. The request for authorization must be filed by the requesting institution with the Department of Supervision of Cooperatives and Non-Banking Institutions (Desuc) or the Banking Supervision Department (Desup), by delivering the qualification and candidacy portfolios referred to in Annexes I and II.

CHAPTER III
AUTHORIZATION

Section I - General Provisions

Article 4. The authorization process for using the full methodology consists of two stages: qualification and evaluation.

§ 1. In the first stage, qualification, information obtained in the supervision and monitoring processes established by the Central Bank of Brazil, in addition to those submitted in the qualification portfolio contained in Annex I, is considered.

§ 2. In the second stage, evaluation, the qualitative aspects of the candidacy portfolio and the requested documentation are analyzed, according to Annex II.

Article 5. The Central Bank of Brazil will only evaluate a new application from an institution whose authorization request was rejected 2 (two) years after the date of filing the last rejected application, as provided in Article 83, item I, of BCB Resolution No. 352 of 2023.

§ 1. If the Central Bank of Brazil exceptionally accepts the complementation or substitution of documents listed in Annexes I and II, the date of the application considered for the effect of the caput is the date on which the total documentation was completed.

§ 2. The absence or insufficiency of any documents listed in Annexes I and II that cannot be remedied in a timely manner results in the rejection of the application.

Article 6. The institution applying for the authorization process must prove that it estimates and uses, in credit risk management, expected losses associated with credit risk for at least 2 (two) years, in compliance with the requirements set forth in Chapter IV of CMN Resolution No. 4,966 of 2021, and Chapter III of Title II of BCB Resolution No. 352 of 2023.

Article 7. Failure to comply with the provisions of Articles 5 or 6 implies automatic rejection of the application.

Section II - Qualification Stage

Article 8. In the qualification stage, the Central Bank of Brazil may conclusively conclude the rejection of the application or its continuation to the evaluation stage referred to in Section III.

Article 9. In the qualification stage, the Central Bank of Brazil analyzes internal information, obtained in its supervision and monitoring processes, as well as those submitted in the qualification portfolio, considering:

I - the internal assessments of Desuc or Desup regarding the credit risk management processes of the applicant;

II - the existence of a disqualifying criterion, as per Article 83 of BCB Resolution No. 352 of 2023, which implies the rejection of the application; and

III - the completeness of the qualification portfolio, regarding the existence of:

a) methodology for assessing expected loss and calculating and establishing the provision for expected losses associated with credit risk, developed independently of the institution's business units, in accordance with Article 43, § 1, of CMN Resolution No. 4,557 of February 23, 2017, and Article 51, § 1, of BCB Resolution No. 265 of November 25, 2022;

b) independent validation process, as per Article 84, § 1, item I, of BCB Resolution No. 352 of 2023, at the time of filing the application;

c) monitoring and review process for the methodology for assessing expected loss and calculating and establishing the provision for expected losses associated with credit risk, according to Articles 6, item I, and 7, item IV, of CMN Resolution No. 4,557 of 2017, Articles 4, item I, and 5, item IV, of BCB Resolution No. 265 of 2022, Article 41 of CMN Resolution No. 4,996 of 2021, and Article 41 of BCB Resolution No. 352 of 2023;

d) policy identifying financial assets with recovery problems (problematic assets), as per Article 3 of CMN Resolution No. 4,966 of 2021, and Article 3 of BCB Resolution No. 352 of 2023;

e) policy identifying restructuring, as per Article 2, item XXI, of CMN Resolution No. 4,966 of 2021, and Article 2, item XXI, of BCB Resolution No. 352 of 2023;

f) process identifying situations where there will be exit from the condition of problematic asset with recovery problem (cure), as per Article 3, § 4, of CMN Resolution No. 4,966 of 2021, and Article 3, § 4, of BCB Resolution No. 352 of 2023;

g) policies for reallocating all operations of the same counterparty to the third stage, in all situations provided for in Article 37, § 5, of CMN Resolution No. 4,966 of 2021, and Article 37, § 5, of BCB Resolution No. 352 of 2023;

h) allocation in stages, as per Article 37 of CMN Resolution No. 4,966 of 2021, and Article 37 of BCB Resolution No. 352 of 2023;

i) criteria to define significant increase in credit risk, as provided in Article 37 of CMN Resolution No. 4,966 of 2021, and Article 37 of BCB Resolution No. 352 of 2023;

j) criteria to define homogeneous risk group, instrument value, and total exposure to a counterparty, considered in determining retail operations, if the institution opts for calculating credit risk and expected loss collectively, as provided in Article 42 of CMN Resolution No. 4,966 of 2021, and Article 42 of BCB Resolution No. 352 of 2023;

k) measurement of the probability of characterization as a problematic asset with recovery problem (PDap), over a 12 (twelve) month horizon, including for credit commitments and loans to be disbursed, except for the exceptions provided in Article 47, item I, of CMN Resolution No. 4,966 of 2021, and Article 47, item I, of BCB Resolution No. 352 of 2023;

l) measurement of the probability of characterization as a problematic asset with recovery problem (PDap), regarding the entire expected term of the financial instrument, as provided in Article 47, item II, of CMN Resolution No. 4,966 of 2021, and Article 47, item II, of BCB Resolution No. 352 of 2023;

m) measurement of recovery expectation, as provided in Article 40, item II, of CMN Resolution No. 4,966 of 2021, and Article 40, item II, of BCB Resolution No. 352 of 2023;

n) present value of future disbursements linked to financial guarantee contracts provided, the estimate of resource utilization from credit commitments, and loans to be disbursed, as provided in Article 45, items III, IV, and V, of CMN Resolution No. 4,966 of 2021, and Article 45, items III, IV, and V, of BCB Resolution No. 352 of 2023;

o) maintenance of internal models and systems for measuring and classifying credit risk and existence and maintenance of internal controls and risk management, as provided in Article 50, § 2, of CMN Resolution No. 4,966 of 2021, and Article 50, § 2, of BCB Resolution No. 352 of 2023;

p) information technology (IT) infrastructure, systems, and processes that ensure the integrity, security, and availability of stored, processed, or transmitted data and information systems used, in accordance with Article 33, item IV, letter “a”, of CMN Resolution No. 4,557 of 2017, and Article 35, item IV, letter “a”, of BCB Resolution No. 265 of 2022, even in the case of IT service outsourcing, as provided in Article 33, § 1, of CMN Resolution No. 4,557 of 2017, and Article 35, § 2, of BCB Resolution No. 265 of 2022;

q) historical data related to credit risk, including expected loss and its parameters, as provided in Article 68 of CMN Resolution No. 4,966 of 2021, and Article 92 of BCB Resolution No. 352 of 2023;

r) independent validation works and reports, as provided in Article 84, § 1, item I, of BCB Resolution No. 352 of 2023;

s) specific evaluation by internal audit, regarding Article 84, § 1, item II, of BCB Resolution No. 352 of 2023;

t) criteria for write-off of financial assets, as provided in Article 49, § 5, of CMN Resolution No. 4,966 of 2021, and Article 49, § 5, of BCB Resolution No. 352 of 2023;

u) understanding, by the unit responsible for credit risk management, of the limitations and uncertainties related to the methodologies used in the credit risk management structure, as provided in Article 43, § 2, item IV, of CMN Resolution No. 4,557 of 2017, and Article 51, § 2, item IV, of BCB Resolution No. 265 of 2022; and

v) understanding, by the board of directors, the risk committee, the Chief Risk Officer (CRO), and the institution's management, of the limitations and uncertainties related to credit risk assessment, models, even when developed by third parties, and methodologies used in the credit risk management structure, as provided in Article 51, item V, of CMN Resolution No. 4,557 of 2017, and Article 59, item IV, of BCB Resolution No. 265 of 2022.

§ 1. The analysis referred to in the caput must be based on the institution's internal regulations and formalized policies.

§ 2. The estimation of recovery expectation, referred to in Article 40, item II, of CMN Resolution No. 4,966 of 2021, and Article 40, item II, of BCB Resolution No. 352 of 2023, enables the estimation of LGDap (1 – “recovery expectation”), necessary for calculating expected loss.

§ 3. The present value, referred to in letter “n” of item III of the caput, relative to the contractual value of the linked instrument, corresponds to the credit conversion factor (FCC).

§ 4. In addition to the parameters directly related to expected loss referred to in letter “q” of item III of the caput, the existence of other relevant historical data for credit risk management may be considered.

Article 10. The qualification portfolio must be presented as established in Annex I.

Section III - Evaluation Stage

Article 11. In the evaluation stage, the Central Bank of Brazil will conclusively decide on the rejection or approval of the application.

Article 12. The Central Bank of Brazil will qualitatively analyze the documentation submitted in the candidacy portfolio, regarding:

I - adequacy and use of expected loss estimation models and their parameters (PDap, LGDap, and FCC);

II - independence of the unit responsible for credit risk management, developer of the expected loss estimation methodology, from the institution's business units;

III - independence and effectiveness of the validation area, relative to the area developing the expected loss estimation methodology;

IV - sufficiency and adequacy of internal audit works;

V - adequacy of monitoring the methodology for assessing expected loss and calculating and establishing the provision for expected losses associated with credit risk, including criteria for corrections and improvements to models based on monitoring results, in accordance with Articles 6, item I, and 7, item IV, of CMN Resolution No. 4,557 of 2017, Articles 4, item I, and 5, item IV, of BCB Resolution No. 265 of 2022, Article 41 of CMN Resolution No. 4,966 of 2021, and Article 41 of BCB Resolution No. 352 of 2023;

VI - adherence of the concept of financial asset with recovery problem to Article 3 of CMN Resolution No. 4,966 of 2021, and Article 3 of BCB Resolution No. 352 of 2023, included in expected loss assessment and calculation and establishment of provision for expected losses associated with credit risk;

VII - adherence and use of the restructuring concept, referred to in Article 2, item XXI, of CMN Resolution No. 4,966 of 2021, and Article 2, item XXI, of BCB Resolution No. 352 of 2023;

VIII - adequacy and use of the process to decharacterize the instrument as a problematic asset with recovery problem (cure), as per Article 3, § 4, of CMN Resolution No. 4,966 of 2021, and Article 3, § 4, of BCB Resolution No. 352 of 2023;

IX - adherence of policies for allocating financial instruments of the same counterparty to the third stage, relative to the provisions of Article 37, § 5, of CMN Resolution No. 4,966 of 2021, and Article 37, § 5, of BCB Resolution No. 352 of 2023;

X - adequacy and use of allocation in stages, referred to in Article 37 of CMN Resolution No. 4,966 of 2021, and Article 37 of BCB Resolution No. 352 of 2023;

XI - adequacy and use of the portfolio treatment concept, referred to in Article 42 of CMN Resolution No. 4,966 of 2021, and Article 42 of BCB Resolution No. 352 of 2023, if the institution opts for this type of treatment;

XII - adequacy of exposure scope in expected loss measurement and its parameters (PDap, LGDap, and FCC), including the entire broad portfolio subject to credit risk, as provided in Article 1, item II, of CMN Resolution No. 4,966 of 2021, and Article 1, item I, letter “b”, of BCB Resolution No. 352 of 2023.

XIII - adequacy of exposure in expected loss measurement and its parameters (PDap, LGDap, and FCC) in all entities comprising the prudential conglomerate or, in the case of credit cooperatives, all credit cooperatives of the cooperative system classified in Segment 4 (S4);

XIV - adequacy of applying prospective scenarios in PDap, in accordance with Article 40, item I, letter “b”, of CMN Resolution No. 4,966 of 2021, and Article 40, item I, letter “b”, of BCB Resolution No. 352 of 2023;

XV - adequacy of the discount rate used in calculating LGDap, as per Article 40, § 4, of CMN Resolution No. 4,966 of 2021, and Article 40, § 4, of BCB Resolution No. 352 of 2023;

XVI - adequacy of applying prospective scenarios in LGDap, as per Article 40, item II, letter “e”, of CMN Resolution No. 4,966 of 2021, and Article 40, item II, letter “e”, of BCB Resolution No. 352 of 2023;

XVII - adequacy of management and mapping of internal models and systems for measuring and classifying credit risk, internal controls, and risk management, as provided in Article 50, §§ 1 and 2, of CMN Resolution No. 4,966 of 2021, and Article 50, §§ 1 and 2, of BCB Resolution No. 352 of 2023;

XVIII - adequacy of maintaining sources and historical data related to credit risk, in accordance with Article 68 of CMN Resolution No. 4,966 of 2021, and Article 92 of BCB Resolution No. 352 of 2023; and

XIX - adequacy of IT infrastructure, systems, and processes to ensure the integrity, security, and availability of stored, processed, or transmitted data and information systems used, in accordance with Article 33, item IV, letter “a”, of CMN Resolution No. 4,557 of 2014, and Article 35, item IV, letter “a”, of BCB Resolution No. 265 of 2022, even in the case of IT service outsourcing, as provided in Article 33, § 1, of CMN Resolution No. 4,557 of 2017, and Article 35, § 2, of BCB Resolution No. 265 of 2022.

§ 1. The analysis referred to in the caput must be based on internal regulations, formalized policies, and reports provided by the institution.

§ 2. The internal regulations, policies, and reports referred to in § 1 must be sufficient to demonstrate the institution's adequacy to the evaluated requirements.

§ 3. The expected loss estimation models (and their parameters), referred to in item I of the caput, must be used in all credit risk management, including, but not limited to:

I - provision establishment;

II - pricing;

III - limit definition; and

IV - risk appetite.

§ 4. The models related to expected loss calculation referred to in item I of the caput include, among others, models for:

I - PDap measurement;

II - LGDap measurement;

III - FCC measurement; and

IV - expected loss calculation.

§ 5. The prospective scenarios in PDap, referred to in item XIV of the caput, correspond to the current economic situation and reasonable and justifiable predictions of possible changes, as per Article 40, item I, letter “b”, of CMN Resolution No. 4,966 of 2021, and Article 40, item I, letter “b”, of BCB Resolution No. 352 of 2023.

§ 6. The prospective scenarios in LGDap, referred to in item XVI of the caput, correspond to the current economic situation and reasonable and justifiable predictions of possible changes, as per Article 40, item II, letter “e”, of CMN Resolution No. 4,966 of 2021, and Article 40, item II, letter “e”, of BCB Resolution No. 352 of 2023.

§ 7. The historical data referred to in item XVIII of the caput include data on:

I - guarantees and collateral;

II - recovery costs;

III - PDap;

IV - LGDap;

V - FCC; and

VI - other data necessary for estimating expected loss and its parameters.

§ 8. The Central Bank of Brazil may request additional documents it considers necessary for the adequate evaluation of the request.

Article 13. The candidacy portfolio must be presented as established in Annex II.

CHAPTER IV
FINAL PROVISION

Article 14. This Normative Instruction enters into force on January 1, 2025.

ARISTIDES ANDRADE
CAVALCANTE NETO JOSÉ REYNALDO DE ALMEIDA FURLANI Head of Degef Head of Desuc, substitute

BELLINE SANTANA
Head of Desup

ANNEX I TO NORMATIV INSTRUCTION BCB NO. 487,
OF JULY 5, 2024

QUALIFICATION PORTFOLIO

Article 1. The Qualification Portfolio necessary for the institution's application must consist of:

I - summary, containing:

a) index;

II - general data of the requesting institution, containing:

a) name and signature of the Chief Risk Officer (CRO), as per Article 44 of CMN Resolution No. 4,557 of 2017, and Article 52 of BCB Resolution No. 265 of 2022;

b) name and signature of the administrators, the director responsible for accounting, and a legally qualified accountant, as per Article 15 of CMN Resolution No. 4,818 of May 29, 2020, and Article 15 of BCB Resolution No. 2 of August 12, 2020;

c) department (or area) responsible for preparing the Qualification Portfolio referred to in this annex and contact data;

III - Completed Qualification Questionnaire (may be answered via an electronic platform to be made available by the Central Bank of Brazil); and

IV - copies of internal regulations, policies, and other documents, approved by the governance of the requesting prudential conglomerate or cooperative system, that enable proof of what was answered by the applicant in the Qualification Questionnaire.

Sole paragraph. The applicant must mark “Yes” or “No” to all items listed in the Qualification Questionnaire.

QUALIFICATION QUESTIONNAIRE
Item:	Part I - Regarding the restrictions set forth in Article 83 of Resolution BCB No. 352, of 2023, the institution declares the non-existence of:	YES	NO
a	A similar authorization request denied less than 2 (two) years from this request.
b	Previously granted authorization cancelled less than 2 (two) years ago.
c	Administrative sanctioning process instituted less than 5 (five) years ago related to credit risk management.
d	Commitment term open or closed less than 2 (two) years ago related to credit risk management.
e	Appearance term open or closed less than 2 (two) years ago related to credit risk management.
f	Disqualification from minimum requirements for Reference Equity (PR), Tier 1 or Core Capital less than 3 (three) years ago.
Item:	Part II - Additionally, the institution declares:	YES	NO
a	Existence of a methodology for assessing expected loss and calculating and establishing provisions for expected losses associated with credit risk, developed independently from the institution's business units, in accordance with Article 43, § 1 of CMN Resolution No. 4.557, of 2017 and Article 51, § 1 of BCB Resolution No. 265, of 2022.
b	Existence of an independent validation process, as provided for in Article 84, § 1, item I of BCB Resolution No. 352, of 2023, at the time of filing the application.
c	Existence of a monitoring and review process for the methodology for assessing expected loss and calculating and establishing provisions for expected losses associated with credit risk, in accordance with Articles 6, item I and 7, item IV of CMN Resolution No. 4.557, of 2017, Articles 4, item I and 5, item IV of BCB Resolution No. 265, of 2022, Article 41 of CMN Resolution No. 4.996, of 2021, and Article 41 of BCB Resolution No. 352, of 2023.
d	Existence of a policy that identifies financial assets with impaired credit recovery (problematic assets) as provided for in Article 3 of CMN Resolution No. 4.966, of 2021, and Article 3 of BCB Resolution No. 352, of 2023.
e	Existence of a policy that identifies restructuring as provided for in Article 2, item XXI of CMN Resolution No. 4.966, of 2021, and Article 2, item XXI of BCB Resolution No. 352, of 2023.
f	Existence of a policy that identifies situations where there will be exit from the condition of problematic asset with impaired credit recovery (cure) as provided for in Article 3, § 4 of CMN Resolution No. 4.966, of 2021, and Article 3, § 4 of BCB Resolution No. 352, of 2023.
g	Existence of policies for reallocating all operations of the same counterparty to Stage 3 in all situations provided for in Article 37, § 5 of CMN Resolution No. 4.966, of 2021, and Article 37, § 5 of BCB Resolution No. 352, of 2023.
h	Existence of allocation to stages as provided for in Article 37 of CMN Resolution No. 4.966, of 2021, and Article 37 of BCB Resolution No. 352, of 2023.
i	Existence of criteria to define significant increase in risk, as provided for in Article 37 of CMN Resolution No. 4.966, of 2021, and Article 37 of BCB Resolution No. 352, of 2023.
j	Existence of criteria to define homogeneous risk group, instrument value and total exposure to a counterparty considered in the determination of retail operations, if the institution opts for the collective calculation of credit risk and expected loss, as provided for in Article 42 of CMN Resolution No. 4.966, of 2021, and Article 42 of BCB Resolution No. 352, of 2023 (mark only if applicable).
k	Existence of a methodology for measuring the probability of characterization as a problematic asset with impaired credit recovery (PDap), over a 12 (twelve) month horizon, including credit commitments and loans to be disbursed, except for the exceptions provided for in Article 47, item I of CMN Resolution No. 4.966, of 2021, and Article 47, item I of BCB Resolution No. 352, of 2023.
l	Existence of a methodology for estimating the probability of characterization as a problematic asset with impaired credit recovery (PDap), covering the entire expected term of the financial instrument as provided for in Article 47, item II of CMN Resolution No. 4.966, of 2021, and Article 47, item II of BCB Resolution No. 352, of 2023.
m	Existence of a methodology for measuring recovery expectation as provided for in Article 40, item II of CMN Resolution No. 4.966, of 2021, and Article 40, item II of BCB Resolution No. 352, of 2023.
n	Existence of a methodology for measuring the present value of future disbursements linked to contracts for financial guarantees provided, the estimate of utilization of resources from credit commitments and loans to be disbursed, as provided for in Article 45, items III, IV and V of CMN Resolution No. 4.966, of 2021, and Article 45, items III, IV and V of BCB Resolution No. 352, of 2023.
o	Existence of maintenance of internal models and systems for measuring and classifying credit risk, and existence and maintenance of internal controls and risk management as provided for in Article 50, § 2 of CMN Resolution No. 4.966, of 2021, and Article 50, § 2 of BCB Resolution No. 352, of 2023.
p	Existence of IT infrastructure, systems and processes that ensure the integrity, security and availability of stored, processed or transmitted data and of the information systems used, in accordance with Article 33, item IV, letter “a” of CMN Resolution No. 4.557, of 2014, and Article 35, item IV, letter “a” of BCB Resolution No. 265, of 2022, even in the case of outsourcing of IT services as provided for in Article 33, § 1 of CMN Resolution No. 4.557, of 2017 and Article 35, § 2 of BCB Resolution No. 265, of 2022.
q	Existence of historical data related to credit risk, including those on expected loss and its parameters, as provided for in Article 68 of CMN Resolution No. 4.966, of 2021, and Article 92 of BCB Resolution No. 352, of 2023.
r	Existence of independent validation works and reports as provided for in Article 84, § 1, item I of BCB Resolution No. 352, of 2023.
s	Existence of internal audit assessment regarding the matter provided for in Article 84, § 1, item II of BCB Resolution No. 352, of 2023.
t	Existence of criteria for write-off of financial assets, as provided for in Article 49, § 5 of CMN Resolution No. 4.966, of 2021, and Article 49, § 5 of BCB Resolution No. 352, of 2023.
u	Existence of understanding, by the unit responsible for credit risk management, of the limitations and uncertainties related to the methodologies used in the credit risk management structure, as provided for in Article 43, § 2, item IV of CMN Resolution No. 4.557, of 2017, and Article 51, § 2, item IV of BCB Resolution No. 265, of 2022.
v	Existence of understanding, by the board of directors, the risk committee, the CRO and the management of the institution, of the limitations and uncertainties related to credit risk assessment, models, even when developed by third parties, and methodologies used in the credit risk management structure, as provided for in Article 51, item V of CMN Resolution No. 4.557, of 2017, and Article 59, item IV of BCB Resolution No. 265, of 2022.
x	That it has used for at least 2 (two) years, a method of estimating expected loss for the purpose of establishing provisions for expected losses associated with credit risk, based on internal models, in compliance with the requirements set forth in Chapter IV of CMN Resolution No. 4.966, of 2021, and Chapter III of Title II of BCB Resolution No. 352, of 2023.

ANNEX II TO INSTRUCTION NORMATIVE BCB NO. 487,
OF JULY 5, 2024

APPLICATION BOOKLET

Article 1 The Application Booklet must contain the following information:

I - summary, containing:

a) index;

II - institution data, containing:

a) name of the applying institution;

b) name and signature of the director for risk management (CRO), as provided for in Article 44 of CMN Resolution No. 4.557, of 2017, and Article 52 of BCB Resolution No. 265, of 2022;

c) name and signature of the administrators, the director responsible for accounting and the legally qualified accountant, as provided for in Article 15 of CMN Resolution No. 4.818, of 2020, and Article 15 of BCB Resolution No. 2, of 2020; and

d) department or area responsible for preparing the Application Booklet and contact data;

III - regarding those responsible for the methodology for assessing expected loss and calculating and establishing provisions for expected losses associated with credit risk:

a) structure and organizational chart of the area;

b) number of employees;

c) technical qualification of the team employees; and

d) independence from the institution's business units;

IV - regarding those responsible for validating the methodology for assessing expected loss referred to in item III of this article:

a) structure and organizational chart of the area;

b) number of employees;

c) technical qualification of the team employees; and

d) independence from the area responsible for developing the methodology;

V - inventory of models used, at the highest granularity in which they are calculated, relating, at minimum:

a) the values of the risk parameters PDap and LGDap;

b) the value of FCC and associated contingent exposures, if any; and

c) the gross accounting exposure on the application date;

VI - documentation of development of models in use, containing, for each risk parameter (PDap, LGDap and FCC) at least:

a) the methodology used;

b) list of selected explanatory variables (and respective sources of information to be used);

c) detail of data capture processes;

d) detail of data reconciliation processes;

e) detail of parameter calculation processes;

f) detail of sampling techniques used;

g) detail of homogeneous risk groups used and their respective selection criteria;

h) information on performance indices used to verify sample predictive fit (in-sample);

i) history of problematic asset with impaired credit recovery rates of the PDap requested in letter a) of this item;

j) history of observed LGDap, and recovery rates, for the LGDap requested in letter a) of item V of this article;

k) monitoring reports of models in use;

l) validation reports of models in use; and

m) most recent internal audit works;

VII - documentation, approved by the governance of the prudential conglomerate or cooperative system applying, which relates the criteria used in the definition of the following concepts and processes:

a) identification and marking of problematic asset with impaired credit recovery;

b) identification of restructurings;

c) decharacterization of the asset as problematic with impaired credit recovery (cure);

d) connected counterparty;

e) allocation to stages;

f) allocation of financial instruments of the same counterparty to Stage 3, for the situations provided for in Article 37, § 5 of CMN Resolution No. 4.966, of 2021, and Article 37, § 5 of BCB Resolution No. 352, of 2023; and

g) treatment by portfolios, if used;

VIII - documentation, internal regulations and policies approved by the governance of the prudential conglomerate or cooperative system that allow verifying the sufficiency of IT infrastructure, systems and processes to ensure the integrity, security and availability of stored, processed or transmitted data and of the information systems used based on Article 33, item IV, letter “a” of CMN Resolution No. 4.557, of 2017 and Article 35, item IV, letter “a” of BCB Resolution No. 265, of 2022, including, for example:

a) the inventory of databases used and their respective database management systems (DBMS);

b) the information flow and method of integration between systems and solutions;

c) the data reconciliation process and report;

d) the traceability process of original operations up to their write-off, including renegotiations, preserving the history of classification in stages;

e) the process for managing systems and solutions mapped for measurement;

f) the IT validation report;

g) logical security - access control;

h) homologation of internal and/or external solutions;

i) production deployment of PDap/LGDap/FCC parameters for expected loss calculation;

j) systems and solutions not under IT management; and

k) internal audit reports regarding the items listed above.

§ 1 If those responsible for the methodology referred to in item III of this article are external to the prudential conglomerate or cooperative system applying, the external entity must be unequivocally identified and the respective information requested in letters “b” to “d” of said item must be presented.

§ 2 If those responsible for validation referred to in item IV of this article are external to the prudential conglomerate or cooperative system applying, the external entity must be unequivocally identified and the respective information requested in letters “b” to “d” of said item must be presented.

NOTE

This Note supports the proposal for the issuance of an instruction normative that establishes criteria and procedures for requesting authorization for the use of the full methodology for assessing expected loss and for calculating and establishing provisions for expected losses associated with credit risk, granted to institutions mentioned in Article 50, § 1 of CMN Resolution No. 4.966, of November 25, 2021, and in Article 50, § 1 of BCB Resolution No. 352, of November 23, 2023.

2. Indeed, CMN Resolution No. 4.966, of November 25, 2021, and BCB Resolution No. 352, of November 23, 2023, establish as the general rule that institutions in segments S4 and S5 use a simplified methodology for calculating provisions for expected losses associated with credit risk. Notwithstanding, these same regulations provide for the option for institutions and cooperative systems classified in S4, with prior authorization from the Central Bank of Brazil and observing the criteria established by BCB Resolution No. 352, of 2023, in its Articles 82 to 84, to use the full model, that is, to calculate expected loss and establish provisions according to their internal estimates.

3. Given that the provisions of this Instruction Normative are considered low impact, serving only as a means to clarify the procedure for exercising the option contained in CMN Resolution No. 4.966, of 2021, and BCB Resolution No. 352, of 2023, without causing, therefore, an increase in costs, budgetary or financial expenses for the economic agents using them, nor impacting the public policy executed, in accordance with Article 4, item III of Decree No. 10.411, of June 30, 2020, we understand that this instruction normative is exempt from the preparation of a regulatory impact analysis as provided for in Article 5 of Law No. 13.874, of September 20, 2019.

ARISTIDES ANDRADE
CAVALCANTE NETO JOSÉ REYNALDO DE ALMEIDA FURLANI Head of Degef Head of Desuc, substitute

BELLINE SANTANA
Head of Desup