Central Bank Resolution No. 303 of March 16, 2023: Procedures for Calculating Risk-Weighted Assets for Credit Risk Exposures Under Internal Ratings-Based Approvals

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RESOLUTION BCB NO. 303, OF MARCH 16, 2023

Establishes the procedures for calculating the portion of risk-weighted assets (RWA) related to credit risk exposures subject to capital requirement calculations using internal credit risk classification systems (IRB approaches) authorized by the Central Bank of Brazil (RWACIRB), as addressed in CMN Resolution No. 4,958 of October 21, 2021, and BCB Resolution No. 200 of March 11, 2022.

The Collegiate Board of the Central Bank of Brazil, in a session held on March 15 and 16, 2023, based on the provisions of Articles 9, 10, item IX, and 11, item VII, of Law No. 4,595 of December 31, 1964, Article 3, paragraph 2, of CMN Resolution No. 4,958 of October 21, 2021, and Article 9, item II, of Law No. 12,865 of October 9, 2013, and considering Articles 3, item VIII, and 14 of Resolution No. 4,282 of November 4, 2013, and Article 3, paragraph 2, of BCB Resolution No. 200 of March 11, 2022,

R E S O L V E S:

TITLE I
PRELIMINARY PROVISIONS

SINGLE CHAPTER
OBJECT AND SCOPE OF APPLICATION

Art. 1. The use of internal credit risk classification systems (IRB approaches) for calculating the monthly value of the portion related to credit risk exposures subject to capital requirement calculations (RWACIRB), as addressed in CMN Resolution No. 4,958 of October 21, 2021, and BCB Resolution No. 200 of March 11, 2022, is permitted for financial institutions, payment institutions that are leaders of prudential conglomerates of Type 3, defined in BCB Resolution No. 197 of March 11, 2022, and other institutions authorized to operate by the Central Bank of Brazil classified in Segment 1 (S1) or Segment 2 (S2), as defined in Resolution No. 4,553 of January 30, 2017, and BCB Resolution No. 197 of 2022.

Art. 1. The use of internal credit risk classification systems (IRB approaches) for calculating the monthly value of the portion related to credit risk exposures subject to capital requirement calculations – RWACIRB, as addressed in CMN Resolution No. 4,958 of October 21, 2021, and BCB Resolution No. 200 of March 11, 2022, is permitted for institutions classified in Segment 1 – S1 or Segment 2 – S2, defined by Resolution No. 4,553 of January 30, 2017, and by BCB Resolution No. 436 of November 28, 2024. (Wording given, effective from 1/1/2025, by BCB Resolution No. 447 of 19/12/2024.)

Art. 2. The use of IRB approaches depends on prior authorization from the Central Bank of Brazil.

§ 1. The authorization referred to in the caput may be cancelled, at the discretion of the Central Bank of Brazil, if the minimum requirements established in this Resolution are no longer met or if the calculated values do not adequately reflect the credit risk of the exposures.

§ 2. Once the authorization referred to in the caput is granted:

I - the respective IRB approach must be mandatorily used for calculating the monthly value of the RWACIRB portion; and

II - the withdrawal of the use of the IRB approach depends on prior authorization from the Central Bank of Brazil.

Art. 3. The institution adopting an IRB approach must prove:

I - that the internal system used meets the minimum requirements established in this Resolution, and the Central Bank of Brazil must be informed in a timely manner if any of these requirements cease to be met; and

II - that models and information technology systems acquired from third parties and used in internal credit risk classification systems are adequate to its risk profile and meet the minimum requirements established in this Resolution.

Art. 4. IRB approaches are applicable to exposures defined in BCB Resolution No. 229 of May 12, 2022, provided they are characterized as operations subject to credit risk, including counterparty credit risk.

§ 1. The use of IRB approaches is prohibited for exposures:

I - related to collateral deposited in clearing systems or clearing and settlement service providers and not segregated from the depositary entity’s assets;

II - related to participation in guarantee funds for clearing systems or clearing and settlement service providers;

III - related to exposures resulting from operations to be settled in clearing systems or clearing and settlement service providers, in which an entity acts as a central counterparty;

IV - related to specialized financing, as per BCB Resolution No. 229 of 2022;

V - related to sovereign entities and their respective currencies;

VI - related to securitization processes, including through suretyship guarantees and credit derivatives;

VII - related to multilateral organizations and Multilateral Development Entities (MDE) for which the applicable Risk Weighting Factor (RWF) is 0% (zero percent), as per Article 27 of BCB Resolution No. 229 of 2022; and

VIII - related to equity participations.

§ 2. The exposures referred to in § 1 remain subject to the treatment established in BCB Resolution No. 229 of 2022.

§ 3. Exposures related to historical residual balances that are not relevant to the scope of application, as per Article 120, may continue to be subject to the treatment established in BCB Resolution No. 229 of 2022, upon request by the institution and authorization by the Central Bank of Brazil.

TITLE II
IRB APPROACHES

CHAPTER I
RISK PARAMETERS AND TYPES OF APPROACHES

Section I Risk Parameters

Art. 5. IRB approaches use the following risk parameters:

I - Probability of Default (PD), a percentage corresponding to the long-term expectation of default rates, as defined in Article 15, for a 1 (one) year time horizon, for counterparties of a certain level of credit risk or homogeneous risk group, as defined in Article 43, paragraph 1;

II - Exposure at Default (EAD), which corresponds to the value of the exposure, whether actual or contingent, vis-à-vis the counterparty at the moment the default event occurs, gross of provisions and possible partial write-offs;

III - Loss Given Default (LGD), which corresponds to the percentage, relative to the observed EAD parameter, of the economic loss resulting from default, considering all relevant factors, including discounts granted for credit recovery and all direct and indirect costs associated with collecting the obligation; and

IV - Effective Maturity (M), which corresponds to the remaining term of the operation weighted by cash flows related to each future period as presented in Article 81.

Section II Types of Approaches

Art. 6. IRB approaches comprise:

I - the basic IRB approach; and

II - the advanced IRB approach.

§ 1. The use of the basic IRB approach implies the internal estimation of the PD parameter value, the internal calculation of the M parameter value, and the use of values published by the Central Bank of Brazil for the other risk parameters, unless otherwise provided.

§ 2. The use of the advanced IRB approach implies the internal estimation of the PD, LGD, and EAD parameter values, and the internal calculation of the M parameter value, where applicable.

§ 3. The advanced IRB approach must be applied to exposures classified in the “retail” category.

§ 4. The application of the advanced IRB approach to exposures classified in the “corporate” category is permitted.

§ 5. When applied by IRB approaches, the term “long-term” does not refer to the term or maturity of individual operations considered, but to the stability, over time, of the underlying statistical distribution, observed from a justifiably broad and representative sample.

CHAPTER II
EXPOSURE CATEGORIES

Section I Specification of Categories

Art. 7. Exposures subject to the use of IRB approaches must be segmented into the following categories:

I - “financial institutions”, covering exposures to financial institutions and other institutions authorized to operate by the Central Bank of Brazil with which consolidated financial statements are not prepared, exposures to financial institutions headquartered abroad with which consolidated financial statements are not prepared, and MDEs not listed in Article 4, § 1, item VII;

II - “retail”, covering:

a) exposures to natural persons and legal entities considered retail for the purposes of Article 46 of BCB Resolution No. 229 of 2022, managed in a non-individualized manner through homogeneous risk groups; and

b) exposures related to loans and financing to natural persons with residential real estate collateral; and

III - “corporate”, covering exposures to natural and legal persons that do not fall into the categories described in items I and II.

Art. 8. The “retail” category is divided into the following subcategories:

I - “residential”, comprising loans and financing to natural persons with residential real estate collateral, regardless of the exposure value, limited to one residential unit per counterparty, always considering only the first unit acquired;

II - “qualified retail revolving credit”, comprising unsecured and revolving exposures with natural person counterparties, whose aggregate value, including drawn amounts, per counterparty is less than R$100,000.00 (one hundred thousand reais) and that exhibit low volatility in loss rates, when considering the values of the PD and LGD parameters, relative to the long-term average, especially in the low-value ranges for the PD parameter; and

III - “other retail exposures”, comprising exposures not classified in the subcategories described in items I and II.

Sole paragraph. The data used to determine the volatility of the loss rates mentioned in item II of the caput must be documented and made available for review by the Central Bank of Brazil.

Art. 9. The “corporate” category is divided into the following subcategories:

I - “exposures to natural persons not classified in the ‘retail’ category and to small and medium-sized enterprises (SME)”, comprising exposures to non-financial private legal entities as per Article 36 of BCB Resolution No. 229 of 2022, and exposures to natural persons not included in Article 8;

II - “income-generating real estate project” and its special subcategory “high volatility commercial real estate financing” (HVCRE); and

III - other corporate exposures not classified in the subcategories described in items I and II.

§ 1. The subcategory “income-generating real estate project” includes financing operations for the acquisition and construction of real estate with the following characteristics:

I - the cash flow generated by the property itself constitutes the primary source of payment for the financing;

II - the primary collateral of the operation consists of the financed real estate project itself; and

III - there is a strong positive correlation between the possibility of financing repayment and the expected recovery rate in case of default, both depending primarily on the cash flows generated by the financed units.

§ 2. Its special subcategory “HVCRE” includes financing operations for the acquisition or construction of commercial real estate with the following characteristics:

I - the historical loss rates of operations in the subcategory exhibit higher volatility than those observed in the “income-generating real estate project” subcategory, identified in § 1;

II - the primary source of funds for repayment at the time of financing approval consists of the cash flow, with a high degree of uncertainty, generated by the financed property itself and not by the entity sponsoring it;

III - the primary collateral of the operation consists of the financed real estate project itself; and

IV - the counterparty does not have resources to repay the financing without the cash flow generated by the real estate project.

§ 3. The classification of operations in the “income-generating real estate project” subcategory as “HVCRE” may be determined by the Central Bank of Brazil through public communication.

§ 4. For the purposes of the finding provided in § 2, item I, the use of expected loss rates is admitted in the case of non-existence or insufficiency of the data base.

§ 5. The individualized risk classification of a retail exposure during part of the risk management process does not exclude its classification as “retail”, nor the treatment applicable to this type of exposure.

§ 6. Among the forms of cash flow generation by the property are:

I - rent, leasing, or other operations with the same economic meaning;

II - the sale of production occurring on the property, in the case of rural real estate; and

III - the expectation of selling the property.

Art. 10. Exposures related to the acquisition of receivables originating from exposures classifiable in the “retail” and “corporate” categories must be highlighted for distinct treatment from other exposures in these categories, as provided in Articles 48 and 49.

Sole paragraph. The highlighting mentioned in the caput is optional, if the following requirements are met:

I - proof of the non-existence of downgrade risk, as defined in Article 55, § 1, or its total mitigation; and

II - existence of sufficient information for individualized analysis of receivable operations with the level of detail adequate to the characteristics of the “corporate” or “retail” categories.

Section II Use of IRB Approach for Exposure Categories

Art. 11. The use of an IRB approach for a specific exposure category in a business unit implies the use of the same approach for all exposures in the relevant category and respective subcategories of the unit, observing the deadlines established in the progressive implementation plan referred to in Article 120, § 2.

§ 1. Business unit is the structure used to manage portfolios with similar characteristics.

§ 2. The business unit is not necessarily linked to the legal structure of the financial conglomerate or to the registration in the National Registry of Legal Entities (CNPJ).

Section III Qualitative Requirements

Art. 12. The IRB approach adopted for a specific category must meet the following requirements:

I - measure credit risk consistently, considering the characteristics of the counterparty and the operation;

II - classify credit risk according to a consistent and verifiable methodology;

III - be integrated, together with the estimates of risk parameters, into the credit risk management structure, as addressed in Resolution No. 4,557 of February 23, 2017, and BCB Resolution No. 265 of November 25, 2022, and be used together with the limits defined by the institution to identify, measure, evaluate, monitor, report, control, and mitigate exposure to credit risk;

IV - support decisions and procedures resulting from adopted management policies and strategies;

V - employ technological infrastructure and controls compatible with the nature of operations, the complexity of products, and the dimension of the institution’s exposure to credit risk;

VI - submit internal estimates of risk parameters to an internal validation process; and

VII - evaluate new products and discontinued businesses conservatively.

Art. 13. The institution adopting an IRB approach must maintain a sufficient quantity of technically qualified professionals in its business, operational, lending, risk assessment and management, internal audit, information technology areas, as well as those involved in the development, validation, evaluation, updating, and use of internal credit risk classification systems.

Art. 14. The use of an IRB approach implies maintaining adequate and updated descriptive documentation on all relevant aspects of the systems used, covering at least:

I - adopted policies and strategies;

II - theoretical basis;

III - evaluation, measurement, and monitoring methodologies, including those used in statistical models, comprising theoretical basis, premises, data source, statistical tests for system validation, and the circumstances under which the methodologies do not work satisfactorily;

IV - treatment provided to new products, including characteristics, evaluation, measurement, and monitoring methodologies, and performance reports;

V - credit portfolio segmentation, classification criteria, responsibilities of involved professionals, frequency of classification review, and monitoring of the classification process;

VI - internal definitions of delay, default, loss, default, situations of exception to the classifications used internally, as well as all other definitions used to qualify clients and operations, demonstrating their consistency with regulatory definitions, where applicable;

VII - structure of the internal risk classification system;

VIII - internal controls;

IX - operational routines;

X - evaluation reports, including those from internal audit and validation processes;

XI - risk reports, including stress test reports;

XII - management reports that provide support for the decision-making process of the institution’s board of directors and board of trustees; and

XIII - detailed history of changes made to internal systems, including the validation process.

CHAPTER III
DEFAULT

Section I Qualitative Requirements

Art. 15. Default is defined as the occurrence of at least one of the following events:

I - for exposures classified in the “retail” category:

a) the institution considers that the counterparty will not honor its obligation in full without the institution resorting to actions such as the execution of provided guarantees or pledged collateral; or

b) the respective obligation has been overdue for more than 90 (ninety) days; and

II - for exposures classified in other categories:

a) the institution considers that the counterparty will not honor at least one obligation vis-à-vis the institution itself without the institution resorting to actions such as the execution of provided guarantees or pledged collateral; or

b) at least one obligation of the counterparty vis-à-vis the institution has been overdue for more than 90 (ninety) days.

§ 1. Indicators that a specific counterparty will not honor an obligation in full include:

I - the institution, on its own initiative and independently of regulatory requirement, ceases to accrue income related to the exposure;

II - the institution recognizes accounting-wise that the counterparty will not honor the obligation under the agreed conditions, without it being necessary to resort to guarantees or collateral;

III - the institution sells, transfers, or renegotiates with significant economic loss the credit rights related to the obligation, due to significant deterioration in the counterparty’s credit quality;

IV - the institution petitions for bankruptcy or takes similar action against the counterparty, based on the non-compliance with credit obligations under the agreed conditions;

V - the counterparty requests any type of judicial measure that limits, delays, or prevents the fulfillment of its obligations under the agreed conditions;

VI - the counterparty has suffered any type of judicial measure that limits, delays, or prevents the fulfillment of its obligations under the agreed conditions; and

VII - the counterparty breaches a contractual clause that allows the institution to accelerate the maturity of the obligation.

§ 2. Obligations related to secured accounts and similar exposures are considered overdue from the day the debtor balance exceeds the agreed limit.

§ 3. The methodology for counting the days an operation is overdue must be consistent over time and clearly documented.

§ 4. The criteria defined by the institution, both for marking and unmarking exposures as in default, must be consistent with the requirements of this Resolution and aligned with its credit risk management, including regarding Article 24, item II, of Resolution No. 4,557 of 2017, and Article 22, item II, of BCB Resolution No. 265 of 2022.

§ 5. The criteria for unmarking default must include, at minimum:

I - fixing the minimum payment percentage for which default can be unmarked;

II - fixing the period required for the exposure’s default to be unmarked after payment of the minimum value mentioned in item I; and

III - establishing processes that ensure default is not double-counted if payments cease to be made during the period determined in item II.

§ 6. The PD parameter value must be equal to 1 (one) for exposures that are within the period provided in item II of § 5.

§ 7. For credits issued or originated after the approval of the judicial recovery process, or the homologation of extrajudicial recovery, according to current legislation, such measure does not represent an indicator that the counterparty will not honor the obligation in full, as per § 1, provided it is consistently and verifiably proven that there is no other indicator that the respective obligation will not be honored in full without it being necessary to resort to actions such as the execution of provided guarantees or pledged collateral.

Section II Renegotiation Policy

Art. 16. The institution using an IRB approach must have a consistent and clearly documented policy over time for the renegotiation of operations and similar provisions, identifying at minimum:

I - those responsible for the policy and monitoring reports, and the bodies responsible for approving the renegotiation;

II - the original operation and its monitoring, including in case of renegotiation;

III - the means of disseminating respective information within the institution;

IV - the minimum effective maturity required for an operation to be renegotiated;

V - the criteria for recognizing when renegotiation should be considered a restructuring, as per Article 21, § 1, item II, of Resolution No. 4,557 of 2017, and Article 19, § 1, item II, of BCB Resolution No. 265 of 2022;

VI - the maximum number of renegotiations per operation;

VII - the analysis of the debtor’s payment capacity in a renegotiation; and

VIII - the analysis of the occurrence of losses in the present value of the operation, as well as changes in the values of risk parameters.

Sole paragraph. Credit granting processes must be consistent with the policy mentioned in the main text.

TITLE III
CREDIT RISK

CHAPTER I
CREDIT RISK CLASSIFICATION SYSTEMS

Art. 17. The use of more than one credit risk classification system for different exposures belonging to the same category is permitted.

§ 1º Credit risk classification systems comprise methods, processes, controls, data storage, and information technology systems, intended to:

I - measure credit risk, including the assignment of value to risk parameters;

II - clearly define the various risk levels into which financial operations are segmented; and

III - allow the classification of financial operations into risk levels.

§ 2º The definition mentioned in item II of § 1º for the categories "wholesale" and "financial institutions" must include a qualitative description of the risk levels and the typical profile of counterparties classified therein.

§ 3º The choice of classification system must be documented and based on the best ability to discriminate risk levels based on the characteristics of counterparties and operations.

Art. 18. The criteria for defining risk levels must:

I - be plausible and justifiable;

II - result in significant differentiation among the various credit risk levels in the categories and subcategories to which such classification applies; and

III - be consistent with credit granting policies and with policies for handling problematic assets.

§ 1º The classification of operations must use timely and relevant information according to consistent and verifiable criteria.

§ 2º The criteria and procedures for classification according to credit risk must be periodically reviewed to ensure they remain applicable to the portfolio composition, market conditions, and economic scenario.

§ 3º Clear and sufficiently detailed documentation must be maintained regarding the definition of credit risk levels, in order to allow verification and independent replication of classifications.

§ 4º Exposures must be classified conservatively if adequate and sufficient information is not available.

§ 5º Counterparties must be classified individually, unless cumulatively:

I - they are connected, in accordance with Resolution No. 4.557, of 2017, and BCB Resolution No. 265, of 2022; and

II - they receive uniform risk classification.

Art. 19. The classification of counterparties must reflect not only the 1 (one) year horizon used to estimate the value of the PD parameter, but also the possibility of deterioration in credit quality over horizons greater than 1 (one) year.

Sole paragraph. The classification referred to in the main text must consider the effect of the deterioration of economic conditions relative to the current situation and the occurrence of unexpected events, mainly on sectors most sensitive to fluctuations in these conditions.

Art. 20. Parametric risk quantification systems must:

I - be subject to continuous monitoring and periodic critical evaluations of results and their processes, in order to ensure the use of all relevant information; and

II - be complemented, when necessary, with qualitative adjustments intended to mitigate their limitations, following previously documented procedures.

§ 1º The models used, in particular the variables employed, must demonstrably possess high predictive capacity regarding the performance of counterparties and the operations to which the institution is exposed.

§ 2º The estimates produced by the models referred to in § 1º must not present significant bias.

§ 3º The institution must establish a process for verifying the accuracy, completeness, and adequacy of the data used for classifying exposures to the current risk profile.

§ 4º The performance and stability of the models must be monitored, in a manner that allows comparison between the estimated values for risk parameters and their respective realized values.

§ 5º The risk classification process, when composed of several evaluation instances, must maintain records and justifications of the entire history of classifications of the same exposure in all evaluation instances.

Art. 21. Idiosyncratic adjustments that override the risk quantification process established by the institution (overrides) must be monitored individually for performance analysis.

Sole paragraph. The idiosyncratic adjustment referred to in the main text must occur:

I - under circumstances and margins previously established; and

II - within the scope of a predefined escalation system whose history of occurrences must be documented.

Art. 22. The data used for model construction must demonstrably be representative of the universe of current counterparties and products.

Sole paragraph. If it is not possible to demonstrate the representativeness of the data, conservative adjustments must be made.

Art. 23. Changes in criteria, parameters, or procedures used for risk classification must be documented and made available for review by the Central Bank of Brazil.

Art. 24. A history of risk classification of counterparties and guarantors must be maintained, covering the initial risk classification, the classification date, the methodology, the main data used, and the person responsible for the classification, with sufficient detail and data to allow retroactive classification in case of model change.

Art. 25. The process of classifying counterparties and operations must be supported by an appropriate incentive structure, in order to isolate it from pressures by persons who may benefit from it and, in particular, to prevent persons involved in said process from obtaining gains arising from credit granting.

CHAPTER II
STRESS TESTING

Art. 26. The use of IRB approaches must include the performance of stress tests, which consider, at minimum:

I - the occurrence of isolated events or changes in economic or market conditions that affect the institution's ability to withstand the risks of the exposures mentioned in the main text of Art. 4º; and

II - simulations of specific scenarios of relatively mild deterioration of the credit market that affect specific aspects of the adopted IRB approach and allow the quantification of the impact of such deterioration on the risk classifications of exposures and on the estimate of the value of the RWACIRB component.

§ 1º For the performance of the stress tests mentioned in item II of the main text, the respective data must allow estimation of the migration of exposures between risk levels.

§ 2º The stress tests mentioned in item II of the main text must be applied with a minimum periodicity of semi-annually.

Art. 27. Sufficient solvency indices compatible with the results of the stress tests established in Art. 26 must be maintained.

CHAPTER III
GOVERNANCE

Section I Duties of the Board of Directors and the Board of Directors

Art. 28. It is the duty of the board of directors and the board of directors of the institution using the IRB approach:

I - to define the guidelines for internal control activities, the levels of authorization necessary for assuming different risk levels, as well as the information and periodic reports to be submitted for their consideration; and

II - to verify the adequacy of the results produced within the scope of the IRB approach to the institution's risk profile.

Art. 29. It is the duty of the board of directors of the institution using the IRB approach or of a specific committee designated by it:

I - to approve all essential and determinative aspects of credit risk classification and estimation processes;

II - to understand the general aspects of the adopted IRB approach and to comprehend the management reports associated with the systems used; and

III - to evaluate whether the information contained in the management reports used is sufficient to measure risks within the scope of the adopted IRB approach.

Sole paragraph. Compliance with item III of the main text does not imply certifying the correctness of the information contained in the management reports.

Art. 30. It is the duty of the board of directors of the institution using the IRB approach:

I - to possess adequate knowledge regarding the structure and operational process of the internal classification system, the adopted IRB approach, and the management reports associated with the systems used;

II - to monitor the process of using the IRB approach;

III - to approve the adoption of practices related to internal credit risk classification systems that present significant differences from the originally established procedures;

IV - to define the structure of risk limits assumed by the institution; and

V - to verify the adequacy of the results of the internal credit risk classification systems to the institution's risk profile.

Sole paragraph. The Chief Risk Officer (CRO), referred to in Art. 44 of Resolution No. 4.557, of 2017, and Art. 52 of BCB Resolution No. 265, of 2022, must inform the board of directors or the designated committee of any exception or modification in credit granting policies that may significantly affect the use or results of the adopted IRB approach.

Art. 31. The reports sent to the board of directors and the board of directors of the institution are the responsibility of the CRO, referred to in Art. 44 of Resolution No. 4.557, of 2017, and Art. 52 of BCB Resolution No. 265, of 2022, and must include information relating to:

I - risk profile of each classification level;

II - migration matrix between classification levels;

III - estimates of the risk parameters relevant for each classification level; and

IV - comparison between the estimated values for each risk parameter and the values effectively realized.

Sole paragraph. The frequency of the reports must allow for the timely adoption of corrective measures.

Section II Credit Risk Control Units

Art. 32. The structuring, implementation, and management of the adopted IRB approach constitute responsibilities of one or more credit risk control units, under the supervision of the CRO, referred to in Art. 44 of Resolution No. 4.557, of 2017, and Art. 52 of BCB Resolution No. 265, of 2022.

§ 1º The credit risk control units must have administrative independence and functional segregation from the area responsible for credit granting.

§ 2º The activities referred to in the main text may be performed by the risk management unit referred to in Art. 43 of Resolution No. 4.557, of 2017, and Art. 51 of BCB Resolution No. 265, of 2022.

§ 3º The regular assessments of the credit risk control unit, regarding the performance of the credit risk classification process, must be sufficiently documented, specifying the areas requiring improvement.

Art. 33. It is the function of the credit risk control unit:

I - to monitor the classification assigned to exposures over time;

II - to produce and analyze reports regarding the risk classification system, highlighting the following information:

a) historical default rates, ordered according to the risk classification at the time of default;

b) historical default rates, ordered according to the risk classification in the period of at least 12 (twelve) months before the default event;

c) analysis of migration rates between risk levels; and

d) analysis of the behavior of key criteria for risk classification;

III - to implement procedures for verifying the consistency of risk classifications among different business units and geographic areas;

IV - to review and document any change in the risk classification process, including the respective justifications;

V - to review classification criteria based on their predictive capacity regarding risk;

VI - to monitor actions adopted to improve identified deficiencies; and

VII - to monitor overrides.

CHAPTER IV
MONTHLY VALUE OF THE RWACIRB COMPONENT

Art. 34. The monthly value of the RWACIRB component must correspond to the result of the following formula:

I -

II - Ki = risk weighting factor for credit risk associated with counterparty or homogeneous risk group “i”;

III - EADi = value of the Exposure at Default parameter associated with exposure “i” relative to counterparty or homogeneous risk group “i”;

IV - F = factor defined in Art. 4º of CMN Resolution No. 4.958, of 2021, and in Arts. 4º and 11º of BCB Resolution No. 200, of 2022;

V - RWACPAD(Partial) = monthly value of the RWACPAD component calculated according to the provisions of BCB Resolution No. 229, of 2022, relating to exposures:

a) not subject to IRB approaches, as provided in § 2º of Art. 4º, and

b) not included in the scope of application, in accordance with Art. 120; and

VI - RWACPAD = monthly value of the RWACPAD component calculated according to the provisions of BCB Resolution No. 229, of 2022, relating to the same exposures for which the RWAinternal models component was calculated.

CHAPTER V
THE "WHOLESALE" AND "FINANCIAL INSTITUTIONS" CATEGORIES

Section IDistribution of Exposures by Risk Levels

Art. 35. For the categories "wholesale" and "financial institutions", the IRB approach employed must provide a balanced distribution of exposures across risk levels, without excessive concentration in any particular level, considering 2 (two) dimensions:

I - the counterparty default risk, determinant of the value of the PD parameter; and

II - operation-specific factors, determinant of the value of the LGD parameter.

§ 1º Significant concentration of exposures in a risk level must be justified by empirical evidence proving the reasonable homogeneity of the counterparties classified therein.

§ 2º Counterparties and operations must have their classification reviewed at least annually.

§ 3º The classification of counterparties and operations with higher risk must be reviewed more frequently.

§ 4º Procedures must be established to guarantee the continuous acquisition of new relevant information about their counterparties and the timely update of classifications.

Section IIDimension Related to Counterparty Default Risk

Art. 36. The dimension related to counterparty default risk must provide for the distribution of exposures into at least 8 (eight) risk levels, of which 7 (seven) levels must correspond to exposures for which default is not observed and 1 (one) level must correspond to exposures for which default is observed.

§ 1º Each level must be associated with a specific estimate of the PD parameter.

§ 2º In the case of counterparties whose assets are predominantly valued at market, as defined in Art. 4º, § 1º, of Resolution No. 4.277, of October 31, 2013, the specific estimate of the PD parameter must reflect the risks related to such assets in the face of adverse price fluctuations.

§ 3º Different exposures relating to the same counterparty must be classified in the same risk level, regardless of differences in the characteristics of the respective operations, except in the following cases:

I - country risk treatment, according to whether their exposures are denominated in local currency or foreign currency; and

II - treatment of exposures with suretyship guarantees that imply a change in risk classification.

§ 4º The Central Bank of Brazil may, at its discretion, determine the alteration of the number of risk levels considered in the IRB approach used.

Section IIIDimension Related to Operation-Specific Factors

Art. 37. The dimension related to operation-specific factors must consider exclusively the factors related to the operation that can influence the magnitude of potential losses.

Sole paragraph. In the case of using the basic IRB approach, the use of factors that jointly reflect characteristics of the operation and the counterparty is permitted.

Art. 38. The number of risk levels regarding the dimension related to operation-specific factors must be sufficient to prevent exposures with large differences in LGD parameter values from being grouped into the same level.

Sole paragraph. The criteria used for the segregation of levels must be supported by empirical evidence.

Art. 39. For exposures classified in the "wholesale" and "financial institutions" categories, the K factor, referred to in item II of Art. 34, must correspond to the result of the following formula:

I - N = cumulative normal distribution function;

II - N–1 = inverse of the cumulative normal distribution function;

III - PD = Probability of Default parameter;

IV - LGD = Loss Given Default parameter;

V - M = Effective Maturity parameter;

VI - b = adjustment coefficient for parameter M, calculated according to the following formula: b = (0,11852 – 0,05478 x ln(PD))2; and

VII - R = correlation factor.

§ 1º For the exposures mentioned in the main text, the correlation factor R must correspond to the result of the following formula:

I - i = 1, in the case of exposures to:

a) financial institutions classified in S1 or S2, as defined in Resolution No. 4.553, of 2017, and BCB Resolution No. 197, of 2022; and

b) institutions not authorized by the Central Bank of Brazil that perform activities capable of being conducted by a financial institution;

II - i = 0, in other cases; and

III - e = Napier's constant.

§ 2º For exposures to legal entities classified in the subcategory "exposures to natural persons not classified in the 'retail' category and to small and medium-sized enterprises (SME)", the correlation factor R must correspond to the result of the following formula:

I - S = annual gross revenue of the legal entity, in millions of reais, with the value of S equal to 15 (fifteen whole) for private legal entities with consolidated annual gross revenue less than R$15,000,000.00 (fifteen million reais); and

II - X = maximum annual gross revenue, in millions of reais, admitted for exposures classified in the "SME" subcategory.

§ 3º For exposures classified in the special "HVCRE" subcategory, the correlation factor R must correspond to the result of the following formula:

§ 4º The adoption of the advanced IRB approach for the special "HVCRE" subcategory implies the adoption of the same approach for the "revenue-generating real estate projects" subcategory.

§ 5º The value of the K factor for default exposures subject to the advanced IRB approach and classified in the "wholesale" category must correspond to the result of the following formula:

K = max (0,LGD – EL), where EL = percentage of expected loss, as per Art. 98.

§ 6º The value of the K factor must be equal to 0 (zero) for default exposures subject to the basic IRB approach classified in the "wholesale" and "financial institutions" categories.

Section IV Exposures Classified in the SME Subcategory and to Natural Persons

Art. 40. The Central Bank of Brazil may exceptionally waive the individualized treatment required for exposures classified in the "SME" subcategory and exposures to natural persons not classified in the "retail" category, allowing their inclusion in a homogeneous risk group as defined in § 1º of Art. 43, provided that the management of these exposures is done in a non-individualized manner.

Sole paragraph. In the case of the waiver mentioned in the main text, default is defined as the occurrence of at least one of the following events:

I - the institution considers that the counterparty will not honor its obligation in full without the institution resorting to actions such as the execution of provided guarantees or pledged collateral; or

II - the respective obligation is overdue for more than 90 (ninety) days.

Section V Data Storage

Art. 41. The complete history of PD parameter estimates and the observed default frequency for each risk level must be stored, as well as the complete history of migration of exposures between risk levels.

Art. 42. For the categories "wholesale" and "financial institutions", the use of the IRB approach implies the storage of the following information:

I - complete history of LGD and EAD parameter estimates associated with each operation;

II - main data used for the estimation of risk parameters;

III - identification of the person responsible or model used in the estimation process;

IV - realized values of the LGD and EAD parameters associated with each operation; and

V - loss and recovery values for each default exposure.

Sole paragraph. The minimum storage period for the data mentioned in items I, IV, and V is 5 (five) years.

CHAPTER VI
THE "RETAIL" CATEGORY

Section I Homogeneous Risk Group

Art. 43. For exposures classified in the "retail" category, exposure classification systems according to credit risk must allow the association of each exposure to a homogeneous risk group, identified based on the following criteria:

I - risk characteristics of the counterparty;

II - risk characteristics of the exposure, including the type of product and the existence of guarantees, among others; and

III - delays in operations associated with exposures.

§ 1º A "homogeneous risk group" is defined as the set of retail exposures with common characteristics for the purpose of evaluating and quantifying credit risk, identified based on the criteria established in the main text.

§ 2º The distribution of exposures classified in the "retail" category must provide significant risk differentiation and avoid concentrations in certain homogeneous risk groups.

§ 3º Significant concentrations in a homogeneous risk group must be justified by empirical evidence proving the reasonable homogeneity of the counterparties and operations classified therein.

§ 4º It must be ensured that the number of exposures classified in a certain homogeneous risk group is sufficient to allow adequate measurement and validation of their risk parameters.

Art. 44. For each homogeneous risk group, the values of the PD and LGD parameters must be estimated, admitting the circumstantial occurrence of identical estimates for different homogeneous risk groups.

Sole paragraph. External data and statistical models may be used as a complementary source of information, provided that a strong correlation with the institution's risk profile and segmentation of exposures is demonstrated.

Art. 45. The values and characteristics of losses and the frequency of defaults associated with homogeneous risk groups must be reviewed at least annually.

§ 1º Exposures must remain allocated to homogeneous risk groups with which they are compatible, and for this purpose, their classifications must be reviewed at least annually.

§ 2º The review process referred to in the caput may be carried out using statistically representative sampling.

Section II Calculation of the K Factor Value

Art. 46. For exposures classified in the "retail" category, the K factor value must correspond to the result of the following formula:

I - N = cumulative normal distribution function;

II - N–1 = inverse of the cumulative normal distribution function;

III - PD = Probability of Default parameter;

IV - LGD = Loss Given Default parameter; and

V - R = correlation factor.

§ 1º For exposures classified in the "residential" subcategory, the correlation factor R value is 0.15 (fifteen hundredths).

§ 2º For exposures classified in the "qualified retail revolving credit" subcategory, the correlation factor R value is 0.04 (four hundredths).

§ 3º For other retail exposures, the correlation factor R value must correspond to the result of the following formula:

§ 4º The K factor value for default exposures classified in the "retail" category must correspond to the result of the following formula:

K = max (0, LGD – EL) where EL = expected loss percentage, as per Art. 98.

Section III Data Storage

Art. 47. The use of the IRB approach for exposures classified in the "retail" category implies the storage of the following information:

I - data used in the allocation process to homogeneous risk groups, including data on the risk characteristics of the counterparty and the operation, as well as data on delays;

II - estimates of the PD and LGD parameter values associated with homogeneous risk groups;

III - realized values for the LGD and EAD parameters and observed default frequency; and

IV - identification of the homogeneous risk groups to which default exposures were allocated in the year prior to default.

Sole Paragraph. The minimum storage period for the data mentioned in items II and III is 5 (five) years.

TITLE IV
ACQUIRED FINANCIAL RECEIVABLES

CHAPTER I
GENERAL PROVISIONS

Art. 48. Acquired financial receivables must be segregated into retail financial receivables and wholesale financial receivables.

§ 1º The criteria for segregating retail financial receivables are the same as those for classifying exposures in the "retail" category.

§ 2º The criteria for segregating wholesale financial receivables are the same as those for classifying exposures in the "wholesale" category, including individualized treatment and analysis of the receivables' debtors.

Art. 49. The calculation of the RWACIRB component related to acquired financial receivables must be made by the sum:

I - the RWACIRB component related to the credit risk associated with portfolios of acquired financial receivables; and

II - the RWACIRB component related to the reduction risk associated with exposures to acquired financial receivables.

CHAPTER II
CREDIT RISK

Art. 50. The calculation of the RWACIRB component related to the credit risk associated with portfolios of acquired financial receivables referred to in Art. 49, item I, must follow the same treatment provided for the respective subcategory of the "retail" and "wholesale" categories in which these portfolios would be classified, had they originated from the acquiring institution itself.

§ 1º If the minimum requirements for classifying underlying assets in a specific subcategory of the "retail" and "wholesale" categories are not met, the treatment granted to acquired financial receivables must be the same as that granted to the following subcategories:

I - "other retail exposures", as defined in Art. 8, item III, for retail receivables; and

II - "other wholesale exposures", as defined in Art. 9, item III, for wholesale receivables.

§ 2º If the set of financial receivables includes receivables associated with more than one exposure subcategory, each exposure must receive the treatment of the subcategory in which it should be classified.

§ 3º If the set of financial receivables includes receivables associated with more than one exposure subcategory and it is not possible for the institution to associate each exposure with its category, the treatment granted must be that which results in the highest RWACIRB component value.

§ 4º For retail financial receivables, the use of external data sources is permitted, provided they are complementary to internal analyses.

§ 5º For retail financial receivables, the database used to estimate the values of the PD and LGD parameters must disregard the effects of credit risk mitigation techniques that are not individualized per receivable or that are associated with the set of receivables.

Art. 51. The use of the advanced IRB approach for wholesale financial receivables is conditioned on the authorization of the same approach for the "wholesale" category.

Art. 52. In calculating the RWACIRB component related to the credit risk associated with portfolios of wholesale financial receivables, if the purchasing bank uses the basic IRB approach and is unable to decompose the EL into its components in a consistent and verifiable manner:

I - the EAD parameter must be:

a) equal to the nominal value of the acquired receivables plus 40% (forty percent) of the contractual value of any granted but undrawn credit lines, minus the capital requirement associated with reduction risk, observing the provisions of Art. 55, § 3º, in the case where the portfolio of receivables includes revolving credit exposures; or

b) calculated according to Art. 78 and minus the capital requirement associated with reduction risk, observing the provisions of Art. 55, § 3º, in other cases; and

II - the PD and LGD parameters must be calculated in one of the following ways:

a) the LGD parameter must assume a value of 45% (forty-five percent) and the PD parameter must be equal to the value of the division between the EL and the LGD parameter, if the institution is able to demonstrate that it has priority over any other creditors regarding the financial flows of the portfolio of receivables; or

b) the LGD parameter must assume a value of 100% (one hundred percent) and the PD parameter must be equal to the estimated value for EL, in other cases.

Art. 53. In calculating the RWACIRB component related to the credit risk associated with portfolios of wholesale financial receivables, if the purchasing bank uses the advanced IRB approach and is unable to decompose the EL into its components in a consistent and verifiable manner:

I - the EAD parameter must be calculated according to Art. 52, item I;

II - the PD parameter must be calculated according to the provisions of Arts. 61 to 67; and

III - the LGD parameter must be equal to the value of the division between the EL and the PD parameter.

Art. 54. The value of the M parameter must correspond to the effective average remaining maturity of the portfolio, observing the limits mentioned in the caput of Art. 81, in the following cases:

I - for drawn financial receivables; and

II - for undrawn financial receivables, provided that the associated credit line contains safeguards that protect the purchasing bank against deterioration of future receivables, such as early amortization triggers.

Sole Paragraph. In the case of undrawn financial receivables that do not contain the safeguards mentioned in item II of the caput, the value of the M parameter must be equal to the longest maturity of the receivable present in the portfolio plus the term of the associated credit line, observing the limits mentioned in the caput of Art. 81.

CHAPTER III
REDUCTION RISK

Art. 55. In calculating the RWACIRB component related to the reduction risk associated with exposures to acquired financial receivables referred to in Art. 49, item II:

I - the estimated value for the EL associated with the reduction risk of the set of receivables must be estimated for a 1 (one) year horizon and expressed as a percentage of the total receivables, disregarding the effects of credit risk mitigation techniques used in conjunction with the receivables;

II - the value of the PD parameter associated with the reduction risk must be equal to the value for the EL associated with the reduction risk, considering the value of the LGD parameter associated with the reduction risk equal to 100% (one hundred percent); and

III - the receivables must meet the same quantitative requirements of the category or subcategory in which the underlying exposures are classified.

§ 1º Reduction risk is defined as the possibility of the occurrence of events that reduce the value of the receivables, including returns or discounts for defective or non-specification merchandise and other discounts occurring after the establishment of the receivables.

§ 2º For estimating the value of the EL associated with reduction risk, the priority use of external data sources is permitted.

§ 3º The risk parameter values established in item II of the caput and the formulas used for calculating the K factor applicable to the respective exposure subcategory must be used to obtain the K factor associated with reduction risk.

§ 4º The criteria established in the caput must be adopted for both retail and wholesale financial receivables.

§ 5º The value of the M parameter must be calculated according to the provisions of Art. 81.

§ 6º In the event of proof that the reduction risk is effectively monitored and controlled, the value of the M parameter must be equal to 1 (one) year.

§ 7º At the discretion of the Central Bank of Brazil and upon proof of the irrelevance of the reduction risk to which the institution is exposed, the calculation of this risk may be waived.

CHAPTER IV
SURETY GUARANTEES AND CREDIT DERIVATIVES

Art. 56. Surety guarantees and credit derivatives associated with receivables must receive the treatment established in Arts. 82 to 96.

§ 1º The surety guarantees referred to in the caput must observe the following additional procedures:

I - in the case where the guarantee covers both the credit risk and the reduction risk in full, the original risk weight used must be replaced by the guarantor's risk weight in the calculation of both risks;

II - in the case where the guarantee covers only the credit risk or the reduction risk in full, the risk weight of the exposure to the guarantor must only be used to calculate the RWACIRB component associated with exposures whose risks were mitigated, which will be added to the RWACIRB component associated with exposures whose risk was not mitigated; and

III - in the case where the guarantee partially covers the credit risk or the reduction risk, the uncovered portion must be subject to the treatment provided in Arts. 48 to 55.

§ 2º The application of the treatment for securitization titles, as established in Resolution BCB No. 229, of 2022, is permitted for exposures in the portfolio of receivables in the case where they are covered by a guarantee that, regardless of its nature and even through discounts, covers the first losses.

TITLE V
RISK PARAMETERS

CHAPTER I
ESTIMATES OF PD, LGD, AND EAD RISK PARAMETERS

Art. 57. Estimates of the values of the PD, LGD, and EAD parameters must meet the following requirements:

I - be based on historical data, empirical evidence, and complementary subjective aspects, if the latter are relevant;

II - consider all available quantitative and qualitative information, observing the relevance criterion;

III - incorporate relevant changes in credit granting criteria and processes or in recovery processes;

IV - reflect technical advances, changes in databases, and other relevant information;

V - use a database representative of the universe of its current counterparties and products, as well as its credit granting patterns;

VI - contemplate the economic, legal, and market conditions underlying the model, compatible with both the current scenario and predicted scenarios;

VII - use a sufficient number of exposures in the sample and a sufficient sample period to ensure adequate precision and robustness to the estimates; and

VIII - adopt models that produce satisfactory results in "out-of-sample" tests.

§ 1º In case of data restrictions, estimates must be made conservatively.

§ 2º Estimates of the values of the PD, LGD, and EAD parameters must be reviewed at least annually.

Art. 58. The institution must use internal data as the main source of information for estimating risk parameters.

Sole Paragraph. The use of external data and third-party statistical models as a complementary source of information is permitted, provided that good adherence to the institution's risk profile and exposure segmentation is demonstrated.

Art. 59. In the process of estimating risk parameters for the "retail" category, based on long-term observed losses, the following may be used alternatively:

I - the PD parameter to infer the value of the LGD parameter; and

II - the long-term observed loss rates given default to infer the value of the PD parameter.

Sole Paragraph. The use of the option provided in the caput does not alter the method of estimating the EAD parameter, which must be according to the definition of Art. 5, item II.

Art. 60. Risk parameters associated with risk levels must remain, over time, within expected and previously documented ranges, without presenting significant bias.

§ 1º For the purpose of verifying the provision of the caput, the following comparisons (goodness-of-fit tests) must be carried out at least annually:

I - realized default rates with PD parameter values associated with each risk level; and

II - observed values of the LGD and EAD parameters with their estimates for each risk level, in the case of using the advanced IRB approach.

§ 2º The comparisons provided for in § 1º must be adjusted to the characteristics of the models and the stage of the economic cycle and be adequately documented, including the methods and values of the risk parameters used.

§ 3º If the limits mentioned in the caput are not respected, an action plan must be established to correct the respective estimates.

§ 4º During the execution of the action plan mentioned, the estimates of the risk parameters must be adjusted to their respective realized values.

CHAPTER II
ESTIMATION OF THE PD RISK PARAMETER

Section I Values for the PD Parameter

Art. 61. The minimum value for the PD parameter is 0.05% (five hundredths of a percent).

Sole Paragraph. For the "qualified retail revolving credit" subcategory, the minimum value for the PD parameter is:

I - 0.10% (ten hundredths of a percent), when it is an exposure under the terms of Art. 47 of Resolution BCB No. 229, of 2022; and

II - 0.05% (five hundredths of a percent), in other cases.

Art. 62. For default exposures, the value for the counterparty's PD parameter is 100% (one hundred percent).

Art. 63. The PD parameter may be adjusted based on the existence of surety guarantees, according to the criteria provided in Arts. 82 to 96.

Section II Estimation Techniques

Art. 64. For the "wholesale" and "financial institutions" categories, the estimation of the PD parameter value must adopt a main technique among the following:

I - internal estimation;

II - external mapping; or

III - statistical method.

§ 1º The techniques mentioned in items II and III of the caput must be used as the main estimation technique only when adequate data for internal estimation are absent.

§ 2º The institution adopting the IRB approach must be able to combine the results of the techniques used, in order to perform comparisons, adjustments, and critical analyses, as well as make adjustments to the models due to limitations of these techniques or the available information and data.

§ 3º The techniques and information used must reflect long-term conditions throughout the process of estimating the value of the PD parameter.

§ 4º It is the responsibility of the institution adopting the IRB approach to prove that the techniques used are consistent and adequate to the characteristics of the counterparty, the risk associated with it, and the database.

Subsection I Internal Estimation

Art. 65. The internal estimation technique must be based on the use of estimates based on the internal default history for estimating the value of the PD parameter.

§ 1º The use of the internal estimation technique is conditioned on the demonstration that:

I - the databases are consistent with the definition of default adopted and with the profile of customers classified in the current portfolio; and

II - the estimates adequately reflect the financing granting policies and any differences between the classification system that generated the data and the current system used by the institution.

§ 2º In the case of limitations of available data and changes in financing granting policies or internal risk classification models, the estimation must be adjusted conservatively.

Subsection II External Mapping

Art. 66. In the external mapping technique, the analysis of information from an external credit rating agency must consider information typically related to the counterparty and disregard information typically related to the nature of the operation performed.

§ 1º The external mapping technique consists of associating internal credit risk classifications with the classification structure adopted by an external credit rating agency, comparing internal classifications to external classifications of this agency for the counterparty.

§ 2º Potential differences between internal definitions and methodologies and those adopted by the external credit rating agency used for the purposes of the provision of the caput must be analyzed and considered.

§ 3º The automatic use of the following is prohibited:

I - ordering of the risk levels used by an external credit rating agency; and

II - default probabilities or similar measures produced by an external credit rating agency as internal PD estimates.

§ 4º The mapping process must be duly documented, including internal credit risk classifications and their associations with external classifications.

Subsection III Statistical Method

Art. 67. The use of the statistical method technique is conditioned on meeting the requirements established in Art. 20.

Sole Paragraph. The statistical method technique consists of using the average of individual estimates of default rates, obtained through statistical models, for counterparties belonging to each risk level.

CHAPTER III
LGD RISK PARAMETER

Section I Basic IRB Approach

Art. 68. For exposures not covered by collateral, the LGD parameter used in the basic IRB approach must assume a value of 75% (seventy-five percent).

Sole Paragraph. The LGD parameter used in the basic IRB approach may assume a value of 45% (forty-five percent) for exposures not covered by collateral, provided it is proven to have a higher degree of priority than unsecured credit, in accordance with current legislation.

Section II Advanced IRB Approach

Art. 69. The estimation of the value of the LGD parameter used in the advanced IRB approach must meet the following requirements:

I - be individualized for each type of exposure;

II - take into account the particular characteristics of the exposures;

III - encompass a complete economic cycle, including periods characterized by high losses relative to the long-term average in credit operations;

IV - be equal to or higher than the long-term weighted average of the loss percentages given default;

V - adopt conservative estimates, if:

a) a relevant positive correlation is observed between the default frequency and the value of the LGD parameter or when it is not possible to demonstrate the non-existence of said correlation; or

b) it is not possible to accurately dispose of the effective cash flow of each exposure in an individualized manner;

VI - adequately reflect collection procedures; and

VII - consider any differences between the collection procedures that generated the data and the current procedures used by the institution.

§ 1º The value of the LGD parameter of an exposure may be estimated jointly with that of other exposures.

§ 2º The weighting provided for in item IV of the caput must be carried out through the annual default rate or the number of defaults, in a manner consistent and adequate to the characteristics of the periods considered.

§ 3º For exposures classified in the "retail" category, the value of the LGD parameter must be estimated for each homogeneous risk group, which may be obtained from the loss rates observed in the long term and the PD parameter, as per Art. 59.

§ 4º The definition of the economic cycle must consider credit portfolio performance indicators, among them:

I - portfolio growth; and

II - severity and frequency of default events.

§ 5º In calculating the LGD parameter relative to exposures whose credit risk is mitigated by financial receivables, the use of the cash flows from these receivables received before the verification of default is permitted, subject to authorization by the Central Bank of Brazil.

§ 6º In the case where the institution is able to estimate the LGD parameter relative to the exposure, but not the LGD parameter relative to the collateral associated with the exposure, the application of the treatment of Art. 83 is permitted, considering the LGD relative to the exposure in substitution for the standardized LGD referred to in item I of the caput of Art. 83.

§ 7º The use of a discount rate in calculating the LGD parameter lower than that used in calculating the expected loss for accounting purposes, in accordance with specific regulation, must be justified according to consistent and verifiable criteria, adequately documented, and subject to evaluation by the Central Bank of Brazil.

Art. 70. Potential dependencies between the credit risk of the counterparty and the guarantor or the guarantee itself, regardless of its nature, as well as mismatches in terms and currencies, must be considered conservatively.

Art. 71. Estimates of the value of the LGD parameter must be based on historical recovery rates and consider:

I - potential mismatches between the market value of pledged collateral and its value upon liquidation;

II - potential restrictions on the timely liquidation of collateral; and

III - potential impediments or difficulties in the transfer of collateral.

Art. 72. In the treatment of pledged collateral, requirements and procedures consistent with those listed in Art. 2, § 1, of Circular No. 3,809, of August 25, 2016, must be established.

Art. 73. The estimation of the Loss Given Default (LGD) parameter value for a non-performing exposure must consider the occurrence of unexpected additional losses during the recovery period.

Art. 74. The value of the LGD parameter used in the Advanced IRB Approach for exposures not covered by collateral must be equal to or greater than 25% (twenty-five percent).

§ 1º For exposures not covered by collateral classified in the "retail" category, the value of the LGD parameter must be equal to or greater than:

I - 50% (fifty percent), when classified in the subcategory "qualified revolving retail credit"; or

II - 30% (thirty percent), in other cases.

§ 2º For exposures not covered by collateral classified in the "wholesale" category that represent a claim against a private legal entity with gross annual revenue exceeding BRL 3,000,000,000.00 (three billion reais) in the most recent available fiscal year, the value of the LGD parameter must be equal to or greater than:

I - 75% (seventy-five percent), in the case of an exposure expressly or economically subordinated to another class of exposures from the same counterparty; or

II - 45% (forty-five percent), in other cases.

Art. 75. For exposures covered by collateral, the minimum value for the LGD parameter must be calculated based on the formula provided for in Art. 83, considering the substitution of the LGDS parameter referred to in item VII of the caput of Art. 83 with:

I - 0% (zero percent), for the LGD applicable to the portion covered by financial collateral;

II - 10% (ten percent), for the LGD applicable to the portion covered by real estate or receivables; or

III - 15% (fifteen percent), for the LGD applicable to the portion covered by other real guarantees.

§ 1º For the purposes of the caput, in the case of exposures classified in the "wholesale" category that represent a claim against a private legal entity with gross annual revenue exceeding BRL 3,000,000,000.00 (three billion reais) in the most recent available fiscal year, the value of the LGDS parameter must be equal to 25% (twenty-five percent), for the LGD applicable to the portion covered by non-financial collateral.

§ 2º In the case of a portion without collateral coverage, the value applicable under the terms of Art. 74 must be considered for the LGD related to the uncovered portion referred to in item I of the caput of Art. 83.

Single Subsection: Surety Guarantees and Credit Derivatives

Art. 76. The use of the Advanced IRB Approach allows for considering the existence of surety guarantees or credit derivatives in the estimation of the LGD parameter value or the Probability of Default (PD) parameter value, provided that such consideration is consistent and verifiable.

§ 1º For the purposes of the provision in the caput, the treatment provided for in Art. 95 is permitted.

§ 2º In the case of adopting credit risk mitigation instruments as defined in the caput, compliance with the following requirements must be demonstrated:

I - the criteria for guarantor eligibility are clearly defined and documented; and

II - the guarantee contract is:

a) not rescindable by the guarantor;

b) valid until the full settlement of the underlying obligation, as well as any ancillary obligations arising therefrom; and

c) enforceable in a jurisdiction where the guarantor holds liquidatable assets.

§ 3º In the case of adopting credit risk mitigation instruments in the form of credit derivatives, compliance with the following additional requirements to those established in § 2º must be demonstrated:

I - the reference exposure used to determine the settlement value of the credit derivative, in the event of default, is the same exposure subject to the credit risk mitigation instrument, unless the requirements provided for in Art. 24, § 1º, of Circular No. 3,809, of 2016, are met;

II - the exposure used to determine the default of the credit derivative is identical to the exposure subject to the credit risk mitigation instrument, except in the case provided for in Art. 24, § 2º, of Circular No. 3,809, of 2016;

III - a robust analysis of the credit derivative's payment structure is conducted, considering its influence on the recovery process; and

IV - satisfactory treatment of residual risks.

§ 4º The consideration of conditional surety guarantees is permitted for exposures subject to the Advanced IRB Approach, provided that adequate treatment of the potential reduction in the effect of credit risk mitigation related to the respective conditions is demonstrated.

§ 5º Repo transactions, securities financing, or other similar operations in which the institution, acting as an intermediary, provides a surety guarantee, must be considered as own exposures.

§ 6º The value of the LGD parameter and the value of the PD parameter must be equal to or greater than those applicable to the provider of the surety guarantee or to the counterparty of the credit derivative.

CHAPTER IV
ON THE EAD PARAMETER

Section I: General Provisions

Art. 77. The estimate of the Exposure at Default (EAD) parameter value must be equal to or greater than the exposure value calculated in accordance with Resolution BCB No. 229, of 2022, gross of provisions and any partial write-offs, when:

I - the exposure is recorded in the balance sheet, in accordance with current regulations;

II - the Credit Conversion Factor (CCF) applicable in Resolution BCB No. 229, of 2022, is equal to 100% (one hundred percent) or no CCF is applicable; or

III - the CCF applicable in Resolution BCB No. 229, of 2022, is less than 100% (one hundred percent), if the exposure is classified in the "wholesale" category and represents a claim against a private legal entity with gross annual revenue exceeding BRL 3,000,000,000.00 (three billion reais) in the most recent available fiscal year.

§ 1º For exposures for which the CCF applicable in Resolution BCB No. 229, of 2022, is less than 100% (one hundred percent), subject to item III of the caput, the minimum value of the EAD parameter estimate must be the sum:

I - of the value recorded in the institution's assets, in accordance with current regulations, gross of provisions and any partial write-offs; and

II - of the value corresponding to 50% (fifty percent) of the exposure not recorded in the institution's assets, calculated in accordance with Resolution BCB No. 229, of 2022.

§ 2º The value of the EAD parameter related to exposures in financial derivative instruments, foreign currency purchase and sale settlement operations, gold, securities, and others subject to counterparty credit risk must be calculated in the manner established in Annex I of Resolution BCB No. 229, of 2022, through the application of the Standardized Approach for Counterparty Credit Risk (SA-CCR).

§ 3º For exposures related to repo transactions and securities lending, the value of the EAD parameter must be calculated in the manner established in Circular No. 3,809, of 2016, through the application of the Comprehensive Approach.

§ 4º In calculating the value of the EAD parameter related to exposure resulting from investment in investment fund shares, the active operations included in the fund's portfolio must be considered as exposures of the institution, proportionally to its participation in the fund's equity.

§ 5º If it is not possible to identify the active operations included in the fund's portfolio, for the purposes of the treatment established in § 4º, the exposure resulting from investment in the shares of the respective fund must receive the treatment established in Resolution BCB No. 229, of 2022.

Section II: The EAD Parameter in the Basic IRB Approach

Art. 78. The use of the Basic IRB Approach implies the use of exposure values established in Resolution BCB No. 229, of 2022, gross of provisions and any partial write-offs.

Section III: The EAD Parameter in the Advanced IRB Approach

Art. 79. For contingent exposures, the probability of drawdowns occurring before the verification of default must be reflected in the estimates of the EAD parameter value.

§ 1º For contingent exposures, methodologies, processes, and procedures must be defined to estimate the possibility of additional disbursements after the occurrence of default.

§ 2º A contingent exposure is considered to be an exposure associated with a credit limit.

Art. 80. The use of the Advanced IRB Approach implies compliance with the following minimum requirements for internal estimation of the EAD parameter value:

I - individualized estimation, through the long-term weighted average of exposure values at the time default is verified, calculated for sets of similar exposures and counterparties, considering a sufficiently long time period;

II - consideration of a complete economic cycle, including periods characterized by high losses in credit operations relative to the long-term average;

III - adoption of conservative estimates, if a significant positive correlation is observed between the frequency of default and the EAD parameter value, or when it is not possible to demonstrate the non-existence of such correlation; and

IV - use of intuitive and plausible criteria, based on reliable internal analyses.

§ 1º The weighting provided for in item I of the caput must be made through the default rate or the number of defaults, in a manner consistent and appropriate to the characteristics of the respective periods.

§ 2º The use of an internally calculated CCF is conditioned on compliance with the minimum requirements mentioned in the caput.

§ 3º The institution using the Advanced IRB Approach must be able to describe in a well-founded manner the calculation model for the EAD parameter value and its determining factors.

§ 4º The estimates of the EAD parameter value must be revised for each portfolio, at least annually, upon the occurrence of a material fact or at the discretion of the Central Bank of Brazil.

§ 5º The estimates of the EAD parameter value must be adjusted in a conservative manner in the case of identifying the existence of a positive correlation between the probability of default of a counterparty and the exposure value to that same counterparty, due to the specific characteristics of the operation.

CHAPTER V
ON THE CALCULATION OF THE RISK PARAMETER M

Art. 81. The value of the M parameter must be limited to a minimum of 1 (one) year and a maximum of 5 (five) years and must correspond to the remaining term of the operation or, at the institution's discretion, to the result of the following formula:

I - t = time period, in years; and

II - FCt = Cash Flow (principal, interest, and fees stipulated in contracts) with payment scheduled for period "t".

§ 1º For repo transactions, securities financing, credit derivatives with daily margin adjustment, foreign exchange operations with spot settlement, and operations linked to foreign trade settleable with an irrevocable letter of credit issued by a large international bank after the shipment of goods, the minimum value for the M parameter must be equal to the greater value between one day and the effective maturity term, in years.

§ 2º Exposures eligible for calculating the value of the M parameter in the manner provided for in § 1º must be linked to an instrument for immediate settlement in the event of default.

§ 3º For the purposes of the provision in § 1º, irrevocable is understood to mean a letter of credit regarding which there is no conditionality that could obstruct payment.

§ 4º For contingent exposures, the value of the M parameter must correspond to the final agreed maturity, subject to the limits mentioned in the caput.

§ 5º If no contractual maturity is provided, the value of the M parameter must be equal to 5 (five) years.

TITLE VI
ON CREDIT RISK MITIGATION IN THE BASIC IRB APPROACH

CHAPTER I
ON RISK MITIGATORS

Art. 82. Differentiated treatment is permitted for exposures covered by the following credit risk mitigation instruments, within the scope of the Basic IRB Approach:

I - eligible financial guarantee (financial collateral);

II - eligible real guarantee (non-financial collateral);

III - agreement for netting and settlement of obligations;

IV - surety guarantee; and

V - credit derivative.

§ 1º The use of the option provided for in the caput is conditioned on compliance with the requirements established in Art. 2, § 1º, of Circular No. 3,809, of 2016.

§ 2º The credit risk mitigation instrument must be associated with a specific operation, except in the following cases:

I - use of a bilateral netting agreement for the settlement of obligations;

II - exclusive association of the instrument to a set of exposures where the default of one exposure belonging to the set directly implies the default of the other exposures; or

III - use of a surety guarantee or credit derivative associated with more than one exposure, provided that the enforcement of the mitigating instrument for one or more exposures does not compromise the credit risk mitigation of the others.

§ 3º Collateral may be pledged by the counterparty or by a third party on behalf of that counterparty.

CHAPTER II
ON FINANCIAL AND NON-FINANCIAL COLLATERAL

Section I: General Rule

Art. 83. In the case of using collateral as a credit risk mitigation instrument, the differentiated treatment referred to in the caput of Art. 82 consists of calculating the factor K by substituting, in the formula provided for in Art. 39, the value of the LGD parameter with the value of Loss Given Default (LGD*) obtained as follows:

I - LGD = standardized value of the Loss Given Default parameter, according to Art. 68;

II - E = current value of the exposure, without considering credit risk mitigation;

III - C = current value of the collateral;

IV - HE = standardized adjustment factor associated with the exposure;

V - HC = adjustment factor associated with the collateral;

VI - Hfx = standardized adjustment factor associated with currency mismatch in which the exposure and the financial collateral used are denominated or indexed; and

VII - LGDS = Loss Given Default parameter associated with the collateral.

§ 1º The following are defined in Circular No. 3,809, of 2016:

I - the standardized adjustment factor associated with the exposure;

II - the standardized adjustment factor associated with currency mismatch in which the exposure and the financial collateral used are denominated or indexed; and

III - the term adjustment factor.

§ 2º Adjusted by their respective adjustment factors, the value of the collateral applied in the formula provided for in the caput must not exceed the value of the exposure.

§ 3º In the case of financial collateral:

I - the adjustment factor associated with the mitigating instrument must correspond to the standardized adjustment factor associated with the nature of the financial collateral used, defined in Circular No. 3,809, of 2016; and

II - the LGDS parameter must assume the value of 0% (zero percent).

§ 4º In the case of non-financial collateral:

I - the adjustment factor associated with the mitigating instrument must assume the value of 40% (forty percent); and

II - the LGDS parameter must assume the value of:

a) 25% (twenty-five percent), in the case of non-financial collateral of the type "commercial and residential real estate (CRE/RRE)"; or

b) 45% (forty-five percent), in other cases.

§ 5º In the case of an exposure covered by multiple collaterals, each collateral must be considered separately and successively until the value of LGD* is sensitized by the values of all collaterals considered.

Section II: Financial Collateral

Art. 84. Financial collateral is considered to be that recognized in Circular No. 3,809, of 2016.

Section III: Non-Financial Collateral

Art. 85. Non-financial collateral includes:

I - "commercial and residential real estate (CRE/RRE)";

II - "financial receivables"; and

III - "other non-financial collateral", in accordance with Art. 90.

Subsection I: Operations Secured by Real Estate

Art. 86. The use of non-financial collateral of the CRE/RRE type is conditioned on compliance with the following requirements:

I - the set of requirements established in Art. 49 of Resolution BCB No. 229, of 2022; and

II - the collateral must be subject to periodic revaluations, such that:

a) the value of the collateral and any factors that may influence it, including elements of a fiscal and environmental nature, are monitored with a minimum annual frequency;

b) the frequency of evaluations, in the case of volatile markets or those subject to significant changes, is adjusted to reflect such characteristics; and

c) the asset is evaluated by an expert, in the case of indications of a substantial reduction in the value of the collateral relative to general market variations or the occurrence of credit events, including default.

§ 1º In the case of using non-financial collateral of the CRE/RRE type, credit granting policies, including the types of CRE/RRE collateral accepted, must be clearly documented.

§ 2º Necessary measures must be adopted to ensure that non-financial collateral of the CRE/RRE type is adequately insured against damage and deterioration.

Subsection II: Operations Secured by Financial Receivables

Art. 87. Financial receivables with an original effective term of less than or equal to 1 (one) year, whose payment consists of financial flows originating from commercial transactions where the counterparty is the creditor, are eligible as non-financial collateral of the type "financial receivables".

§ 1º The pledging of financial receivables as collateral, referred to in the caput, must occur through fiduciary assignment or assignment of credit rights.

§ 2º The financial receivables mentioned in the caput include checks, promissory notes, credit card invoices, and utility company invoices.

§ 3º The following financial receivables are not eligible as non-financial collateral of the type "financial receivables":

I - those linked to securitization or credit derivatives; and

II - those drawn against affiliates of the borrower, including subsidiaries and employees.

§ 4º The legal instruments by which the collateral is constituted and the procedures adopted for the enforcement and settlement of its rights must ensure to the institution, unequivocally, the rights over the collateral and be subject to periodic reviews to verify and ensure the continuous legal sustainability of the collateral and the legal conditions necessary for its timely enforcement.

§ 5º The legal framework in which the collateral is formalized must guarantee the institution's priority right over it.

§ 6º All relevant aspects of collateralization through financial receivables must be duly documented.

§ 7º Robust control must be maintained over the periodic receipt of revenues from the collateral.

§ 8º Adequate procedures must be adopted to determine the credit risk of the receivables used as collateral, including an analysis of the business, the borrower's industry, and the types and profiles of customers with whom the counterparty does business.

§ 9º The adequacy and credibility of the credit granting policy underlying the receivables accepted as collateral must be reviewed, in cases where the institution relies on this policy to assess the credit risk of its customers.

§ 10. For risk management purposes, the degree of overcollateralization between the exposure amount and the value of the receivables must be defined, considering all appropriate factors, including the performance of the receivables, the concentration within the group of receivables pledged by the individual borrower, the counterparty, the potential concentration risk relative to the total of its exposures, and the degree of correlation of the counterparty with the ultimate debtors of the receivables.

Art. 88. Each exposure, both effective and contingent, related to the collateral must be continuously monitored, including, when appropriate:

I - verification of the required margins or levels of collateralization relative to the total amount of receivables and their characteristics, including their quality;

II - monitoring of payments and replenishments of receivables, as well as their respective terms;

III - procedures for verifying receivable payments and confirming the existence of available credit lines;

IV - monitoring and corroborative analysis of the collateral;

V - monitoring of the concentration of a borrower's receivables relative to their drawees;

VI - regular financial analysis of borrowers;

VII - regular financial analysis of the drawees of the receivables, especially when using a small number of high-value receivables; and

VIII - periodic review of compliance with agreed contractual clauses, as well as legal and other restrictions.

Sole Paragraph. Compliance with adopted exposure concentration limits must be periodically monitored.

Art. 89. In the event of default, the enforcement of financial receivables used as non-financial collateral must occur according to a formalized and adequately documented process, applicable to both regular situations and deterioration of the quality of the receivables.

Subsection III: Other Non-Financial Collateral

Art. 90. At the discretion of the Central Bank of Brazil, other instruments may be considered non-financial collateral of the type "other non-financial collateral", provided they meet the following requirements:

I - existence of a sufficiently liquid market for the sale of the collateral, in a timely and economically efficient manner, in the relevant jurisdiction;

II - existence of verifiable market prices, which allow for comparison between these and the amount received at the time of collateral enforcement, in its relevant jurisdiction;

III - priority over any other creditors regarding revenues derived from the enforcement of the collateral;

IV - detailed contractual description of the collateral, as well as specifications of the forms and frequency of its revaluations;

V - adequate documentation of internal policies and procedures regarding the types of collateral accepted, including those concerning the amounts of each collateral and the respective mitigated exposure; and

VI - adequacy of the credit granting policy to the characteristics of the operations carried out, addressing:

a) the appropriate values of each collateral relative to the amount of covered exposures;

b) the ability to timely liquidate the collateral;

c) the ability to objectively determine the market price of the collateral;

d) the ability to determine the frequency with which the value of the collateral can be promptly obtained, including valuations and appraisals performed by qualified professionals;

e) the ability to determine the volatility of the collateral's value; and

f) the assessment of the impact of factors such as obsolescence, deterioration, and loss of value of the collateral resulting from behavioral changes.

§ 1º Collateral constituted in the form of inventory or equipment must be insured or periodically revalued based on physical inspection.

§ 2º The collateral must not present significant discrepancies between its assessed value and its market price and liquidation value.

Section IV of Leasing Operations

Art. 91. Financial leasing operations must receive the same treatment that would be granted, in the case of using the basic IRB approach, to exposures covered by non-financial collateral identical to the asset subject to the lease, observing the following specific requirements:

I - the risk management structure employed by the lessor must ensure the timely obtaining of information regarding the location of the asset subject to the lease, its method of use, its age, and its projected obsolescence;

II - the lessor must have legally secured its status as owner and the full capacity to exercise its rights, in a timely manner, over the asset subject to the lease; and

III - the difference between the depreciation rate of the asset subject to the lease and the amortization rate of the installments must not be of such magnitude as to result in an overestimation of the credit risk mitigation effect attributed to the asset subject to the lease.

CHAPTER III
OF BILATERAL NETTING AGREEMENTS

Art. 92. In the case of using a bilateral agreement for netting and settlement of obligations as a credit risk mitigation instrument, the differentiated treatment referred to in the caput of Art. 82 consists of calculating the K factor using the value of the Exposure at Default (EAD*) parameter obtained from the following formula:

EAD* = EAD x (E* / E), where:

I - E = value of the effective exposure, calculated based on the provisions of Arts. 14, 15, and 16 of Circular No. 3,809, of 2016, except for the calculation of the E parameter, which must observe the provisions of item II;

II - E* = current value of the exposure, without considering credit risk mitigation; and

III - EAD* = value of the EAD parameter, disregarding the credit risk mitigation resulting from netting agreements.

Sole Paragraph. The effect of credit risk mitigation produced by a netting agreement must not be reflected in an adjustment of the LGD parameter.

Art. 93. Bilateral agreements for netting and settlement of obligations are eligible for use as credit risk mitigation instruments, provided they meet the requirements established in Art. 13 of Circular No. 3,809, of 2016.

CHAPTER IV
OF GUARANTEES AND CREDIT DERIVATIVES

Art. 94. In the case of using a guarantee or credit derivative as a credit risk mitigation instrument, the differentiated treatment referred to in the caput of Art. 82 consists of calculating the K factor relative to the portion of the exposure covered by:

I - applying the treatment for the category or subcategory to which the guarantor belongs; and

II - considering the value of the PD parameter relative to the guarantor as the value of the PD parameter of the exposure.

§ 1º If the institution uses the standardized approach for credit risk for the exposure to the guarantor, the recognition of the credit risk mitigation instrument implies the use of the standardized approach for credit risk for the associated exposure.

§ 2º If the underlying obligation is denominated in a currency different from the reference currency of the guarantee used, the value of the guarantee must be adjusted according to Art. 20 of Circular No. 3,809, of 2016.

§ 3º The same differentiated treatment applied to guarantees must be applied to the guarantees listed in Arts. 27, 28, 29, and 30 of Circular No. 3,809, of 2016.

Art. 95. The recognition of a guarantee or credit derivative is subject to the requirements of Arts. 19, 22, 23, and 24 of Circular No. 3,809, of 2016, as applicable.

CHAPTER V
OF MATURITY MISMATCHES

Art. 96. The provisions contained in Arts. 25 and 26 of Circular No. 3,809, of 2016, must be applied to the effective maturity dates of the credit risk mitigation instrument and the exposure subject to mitigation.

Sole Paragraph. The provisions of the caput do not apply when the credit risk mitigation instrument consists of financial receivables with an effective maturity of less than 1 (one) year, as defined in Art. 87, whose financial resources remain under the custody of the institution until there is the replacement of new receivables or the settlement of the credit.

TITLE VII
OF LOSSES AND PROVISIONS

CHAPTER I
OF EXPECTED LOSS

Section I of General Provisions

Art. 97. For exposures subject to IRB approaches, the expected loss amount is defined as the result of multiplying the expected loss percentage (EL) by the value of the EAD parameter.

Art. 98. The estimated value for EL must be obtained by multiplying the value of the PD parameter by the value of the LGD parameter.

§ 1º For defaulted exposures, the value of the PD parameter is equal to 100% (one hundred percent).

§ 2º For defaulted exposures subject to the advanced IRB approach, the estimated value for EL is equal to the estimated expected loss, determined according to Art. 99.

Section II of Loss Estimation

Art. 99. The estimated value for EL for defaulted exposures must be calculated based on current economic circumstances and consider:

I - the time elapsed since the occurrence of default;

II - the percentage already recovered; and

III - the recovery prospects for the remaining balance.

Art. 100. The total expected loss corresponds to the sum of the expected loss amounts obtained for each exposure.

CHAPTER II
OF PROVISIONS

Art. 101. The total provisions related to exposures submitted to IRB approaches must be segregated from the total provisions related to exposures that receive the treatment established in the standardized approach for credit risk.

Sole Paragraph. Discrepancies between the segregated amount of provisions related to exposures submitted to IRB approaches and the respective expected loss amount, determined according to Art. 97, must be justified.

TITLE VIII
OF THE USE OF IRB APPROACHES

CHAPTER I
OF DATABASES

Art. 102. The use of an IRB approach implies the storage of data for the following periods:

I - for exposures classified in the "retail" category, the calculation of the estimates of the values of the PD, LGD, and EAD parameters must consider, at a minimum, data related to the previous 5 (five) years; and

II - for other exposures:

a) the calculation of the estimates of the values of the PD parameter must consider, at a minimum, data related to the previous 5 (five) years; and

b) the calculation of the estimates of the values of the LGD and EAD parameters must consider data related, at a minimum, to the previous 7 (seven) years, preferably comprising a complete economic cycle.

Sole Paragraph. The observation periods used for the calculation of the estimates of the values of the PD, LGD, and EAD parameters must be long enough to ensure estimates consistent with the periods mentioned in the caput.

Art. 103. The use of external databases and external classifications of exposures according to credit risk is admitted as complementary sources of information for calculating risk parameter estimates, provided that the compatibility of external data and classifications with the risk factors to which the own exposures are subject is demonstrated.

Art. 104. The use of models developed by third parties is admitted as part of the internal classification process of exposures according to credit risk.

§ 1º The use of models developed by third parties must meet the same requirements for validation of the use of internally developed systems, observing the following additional requirements:

I - the documentation of the level of integration of the models into the internal classification process of exposures must be satisfactory; and

II - the degree of understanding of the models, their results, and implications must be adequate for their use in the risk classification and measurement system.

§ 2º The validation process referred to in Arts. 108 to 117 must prove the adequacy of models developed by third parties to the nature of the own exposures and to the methodology adopted in the internal classification process of exposures.

§ 3º The performance of models developed by third parties and the integrity of the data used in the internal classification process of exposures must be periodically reviewed.

Art. 105. The use of data shared among institutions is permitted.

Sole Paragraph. The use of shared data among institutions imposes the same conditions as the use of external databases.

CHAPTER II
OF PROOF OF USE

Art. 106. The institution that uses an IRB approach must prove the continuous, integrated, and comprehensive use of this approach, at a minimum, in the following processes:

I - definition of tolerated risk levels;

II - establishment and alteration of limits;

III - decision-making regarding the assumption of risks;

IV - alterations to strategy and policies for credit risk management;

V - preparation of management reports;

VI - performance of the Internal Capital Adequacy Assessment Process (ICAAP), in accordance with specific regulation;

VII - scheduling and conducting simulations of extreme conditions (stress tests);

VIII - pricing and measurement of profitability of operations; and

IX - origination and monitoring of operations subject to credit risk.

Sole Paragraph. The proof referred to in the caput comprises the identification, description, and documentation of the continuous, integrated, and comprehensive use of the risk parameters associated with the IRB approach used.

Art. 107. The practices and criteria associated with the classification system must be aligned with the various areas of the institution involved in the credit process, including risk management and commercial areas, considering:

I - the criteria used for segmentation of exposure categories, as well as those used for defining risk levels and homogeneous risk groups;

II - the values and procedures related to recovery and collection processes; and

III - the measurement techniques and parameters used for calculating expected losses.

Sole Paragraph. The final risk classification must consider the analyses performed at the evaluation instances to which the exposure was submitted.

CHAPTER III
OF THE VALIDATION PROCESS

Art. 108. The use of an IRB approach is conditioned to the performance of a validation process of the internal models and systems for classifying credit risk, in order to prove their adequacy to the current risk profile, scope, and consistency.

§ 1º The proof referred to in the caput comprises, at a minimum, critical analysis:

I - of the methodologies, assumptions, and theoretical foundations used in the models;

II - of the adequacy of the development process of the internal systems for classifying credit risk, including the adopted models, their logical foundation, and the variables used;

III - of the main definitions adopted internally, including default criteria and portfolio segmentation criteria and risk parameters;

IV - of the precision and adequacy of the estimated values for risk parameters and for losses;

V - of the segmentation of portfolios into risk levels sufficient for significant risk differentiation;

VI - of the use of all relevant information for adequate measurement of credit risk;

VII - of the identification of historical intervals that support the estimates of risk parameters;

VIII - of the scope, consistency, integrity, and reliability of the input data for models and information technology systems and of the database construction processes;

IX - of the existence of processes that assess the potential impact on credit risk arising from new products;

X - of the adequacy of goodness-of-fit tests and stress tests;

XI - of the proof defined in Art. 106 and compliance with the provisions of Art. 107 and its respective documentation;

XII - of the adequacy of internal controls of the systems to their complexity;

XIII - of the compatibility of the calculations performed by information technology systems and operational logic with the assumptions and methodologies adopted;

XIV - of the adequacy of the technological infrastructure and the functioning of the information technology systems used in the models, including tests, homologations, and certifications;

XV - of the integrity, scope, and consistency of the documentation of the models used;

XVI - of the content and scope of periodic risk measurement reports, goodness-of-fit tests, and stress tests;

XVII - of the adequacy of the critical analysis and approval process referred to in Art. 118;

XVIII - of the adequacy of the capital calculation relative to exposures submitted to IRB approaches; and

XIX - of compliance with the requirements mentioned in Arts. 102 to 105.

§ 2º The validation process is the exclusive responsibility of the institution, which must demonstrate to the Central Bank of Brazil the adequacy and fit of the models used to its risk profile.

§ 3º The validation process must analyze the maximum tolerated deviations between the estimates of the risk parameters mentioned in Art. 60 and their realized values, considering the moment of the current economic cycle and systematic variations in default rates.

Art. 109. The validation process must be performed, at least, every 3 (three) years or whenever any relevant alteration occurs in the systems, models, the institution's risk profile, or the monthly value of the institution's RWACIRB portion.

§ 1º The relevance of alterations mentioned in the caput must be defined according to consistent and verifiable criteria, adequately documented, and subject to evaluation by the Central Bank of Brazil.

§ 2º In the case of the goodness-of-fit tests referred to in item X of § 1º of Art. 108, their adequacy must be evaluated with a frequency of at least annually.

Art. 110. The validation process must be independent of the development processes of the systems and models and of the use of their results.

Art. 111. The validation process must be conducted by technically qualified personnel and submitted to an appropriate incentive structure, in order to ensure:

I - critical and effective analysis; and

II - absence of pressure from external and internal agents of the institution who may benefit from specific results arising from the validation process.

Art. 112. The validation process must include information technology systems acquired from third parties.

Art. 113. The validation process may be restricted to aspects affected by relevant alterations in the systems, models, or the institution's risk profile, provided that a prior critical analysis of these alterations and an adequate diagnosis of their consequences on the IRB approach used is prepared.

§ 1º The exercise of the option referred to in the caput is subject to approval by the Central Bank of Brazil.

§ 2º The non-approval, by the Central Bank of Brazil, of the restricted validation process under the caput implies the performance of a validation process that comprises the critical analysis of the aspects mentioned in Art. 108, § 1º.

Art. 114. The validation process must consider the use of alternative quantitative validation methodologies and resort to comparisons with appropriate and updated external data sources, covering an adequate observation period.

Art. 115. The validation process must be adequately documented, and its results must be submitted to the institution's board of directors and board of trustees.

Sole Paragraph. Changes in validation methods and information used, with respect to both databases and collection intervals used, must be clearly documented and justified.

Art. 116. The institution that uses an IRB approach must implement a structure responsible for the validation process.

Sole Paragraph. The institution must designate a person responsible for the validation process.

Art. 117. Relevant alterations in the institution's risk profile, as well as the relevant alterations described in Art. 109, including in the validation process, and those that cause a significant impact on the calculation of the monthly value of the institution's RWACIRB portion, must be immediately communicated to the Central Bank of Brazil.

Sole Paragraph. The provisions of the caput also apply to alterations that are not relevant in isolation but are relevant collectively.

CHAPTER IV
OF THE CRITICAL ANALYSIS PROCESS

Art. 118. Alterations that do not warrant the performance of the validation process described in Arts. 108 to 117 must be submitted to a critical analysis and approval process previously defined and documented.

CHAPTER V
OF AUDIT

Art. 119. The internal risk classification system must be submitted to internal audit evaluation with a minimum annual frequency, covering, at least:

I - effectiveness of the validation process referred to in Arts. 108 to 117;

II - performance of validation processes in cases of relevant changes in the model or the institution's risk profile, according to Art. 109;

III - organization of the credit risk management structure;

IV - use of systems and models in a continuous, integrated, and comprehensive manner in granting and monitoring credit;

V - insertion of stress tests in risk management;

VI - integrity of goodness-of-fit tests and their effective use in verifying performance and improving systems and models;

VII - observance of risk management policies and strategies, including compliance with limits and related procedures;

VIII - sufficiency and technical qualification of professionals in business, operational, risk management, information technology, and any other areas involved in the development, validation, and use of systems and models;

IX - integrity and adequacy of management information systems;

X - involvement of the institution's board of directors in the credit risk management process;

XI - timeliness and quality of information provided to the board of trustees;

XII - processes for obtaining estimates of the values of the PD, LGD, and EAD parameters and their adequacy to the institution's risk profile;

XIII - degree of compliance with the requirements established in this Resolution; and

XIV - adequacy of the critical analysis and approval process mentioned in Art. 118.

§ 1º The evaluation process by internal audit must be conducted by technically qualified personnel, in an independent manner.

§ 2º The provisions of items I, II, and VIII of the caput must be performed independently of the validation process referred to in Arts. 108 to 117.

§ 3º The internal audit evaluation activity must be documented.

TITLE IX
OF REGISTRATION

CHAPTER I
OF REQUIREMENTS

Art. 120. At the time of requesting the authorization referred to in Art. 2, the institution must have been using, for a minimum period of 3 (three) years, internal systems for classifying credit risk and estimating parameters aligned with the minimum requirements for using IRB approaches, observing the provisions of Art. 12, item III, covering, at a minimum, 60% (sixty percent) of the exposures within the scope of application referred to in Art. 122, weighted by the respective RWRs established in Resolution BCB No. 229, of 2022, for credit risk.

§ 1º During the prior use period referred to in the caput, the IRB approach is subject to the provisions of Art. 106.

§ 2º IRB approaches must be adopted for, at a minimum, 95% (ninety-five percent) of the exposures within the scope of application weighted by the respective RWRs established in Resolution BCB No. 229, of 2022, within a maximum period of 5 (five) years, from the request referred to in the caput, through a progressive implementation plan.

§ 3º The criteria for determining the exposures within the scope of application for which IRB approaches have not been adopted, even after the expiration of the period referred to in § 2º, must be consistent and verifiable.

§ 4º The use of the advanced IRB approach is not conditioned to the prior use of the basic IRB approach.

§ 5º During the progressive implementation conducted according to the plan mentioned in § 2º, exposures classified in a category for which the use of the basic IRB approach is initially authorized may migrate to the advanced IRB approach, subject to prior authorization by the Central Bank of Brazil.

§ 6º Exposures of subsidiaries located in foreign jurisdictions may, subject to prior authorization by the Central Bank of Brazil, be excluded from the calculation of the percentage referred to in § 2º, provided they are subject to their own progressive implementation plan.

Art. 121. At the time of requesting the authorization referred to in Art. 2, the institution must be using:

I - the Comprehensive Approach, in the use of financial collateral, in accordance with Art. 8 of Circular No. 3,809, of 2016; and

II - the SA-CCR Approach, in the calculation of counterparty credit risk arising from operations with financial derivative instruments, in accordance with Annex I of Resolution BCB No. 229, of 2022.

CHAPTER II
OF PARTIAL USE

Art. 122. The scope of application of the IRB approaches subject to the request referred to in Art. 120 must be composed of one or more of the following categories, subcategories, and portfolios:

I - "financial institutions";

II - "wholesale", excluding wholesale financial receivables and the subcategory "revenue-generating real estate development";

III - "revenue-generating real estate development";

IV - wholesale financial receivables;

V - "qualified revolving retail credit";

VI - "residential";

VII - "other retail exposures", excluding retail financial receivables; and

VIII - retail financial receivables.

§ 1º The provisions of the caput do not apply to the request for specific authorization for a rural credit business unit, provided that the percentage referred to in the caput of Art. 120 is 100% (one hundred percent).

§ 2º For the purposes of this Resolution, rural credit is considered the granting of financial resources to rural producers, natural or legal persons, and agricultural cooperatives, destined for the purposes of financing, investment, commercialization, and industrialization of agricultural, livestock, forestry, extractive, fishing, and aquaculture production.

§ 3º The inclusion of financial products in the use of IRB approaches must be immediately communicated to the Central Bank of Brazil, observing relevance criteria.

§ 4º The subcategory "revenue-generating real estate development" includes its special subcategory "high volatility commercial real estate financing" (HVCRE).

Art. 123. Candidate institutions for the use of IRB approaches must request their respective authorization through a petition signed by the institution's Chief Executive Officer and the Chief Risk Officer (CRO), as provided for in Article 44 of Resolution No. 4,557 of 2017 and Article 52 of BCB Resolution No. 265 of 2022.

§ 1º The request referred to in the caput must explicitly discriminate:

I - the categories, subcategories, business units, and the respective IRB approaches for which authorizations are requested; and

II - the portfolios and their respective rating systems for which authorizations are requested.

§ 2º Throughout the progressive implementation plan provided for in Article 120, § 2º, the extension of the IRB approach used for new systems or the migration from the basic IRB approach to the advanced approach, whether or not provided for in said plan, are subject to the proof of continuous, integrated, and comprehensive use established in Article 106 and to authorization by the Central Bank of Brazil.

§ 3º The request referred to in the caput must be accompanied by the following documentation:

I - declarations attesting to:

a) knowledge that, once the use of IRB approaches is authorized for certain exposures, the methodology established in the standardized approach for credit risk may no longer be used to calculate the RWA amount component related to these exposures, except with prior authorization from the Central Bank of Brazil;

b) compliance with the minimum requirements established in this Resolution and knowledge that the eventual non-compliance with specific aspects does not compromise the consistency in the use of IRB approaches and in credit risk management;

c) prior use, for a minimum period of 3 (three) years, of the specified IRB approach for risk classification and risk parameter estimation, as provided for in Article 120, for at least 60% (sixty percent) of the exposures within the scope of application weighted by their respective Risk Weight Factors (RWFs); and

d) truthfulness and integrity of the information sent;

II - a progressive implementation plan for the subsequent 5 (five) years for the IRB approaches for 95% (ninety-five percent), observing Article 120, § 6º, of the exposures belonging to the scope of application weighted by their respective RWFs, containing a schedule, measures, and responsibilities for its implementation;

III - a report prepared based on the document "Information on Internal Credit Risk Rating Systems," to be published by the Central Bank of Brazil;

IV - an adaptation plan, containing a schedule, measures, and responsibilities for full compliance with the specific aspects mentioned in item I, letter "b"; and

V - an internal audit opinion, containing the conclusions on the assessment established in Article 119.

Art. 124. Authorization requests for the use of an IRB approach will be submitted to a selection and prioritization process by the Central Bank of Brazil.

Sole Paragraph. In the selection and prioritization process referred to in the caput, the following criteria will be taken into consideration:

I - completeness and adequacy of the documents mentioned in Article 123, § 3º, to the requirements established in this Resolution;

II - the institution's history regarding risk and control assessments, economic-financial solidity, transparency in relationships, compliance with regulations, and timely compliance with determinations;

III - the degree of development of the credit risk management structure, the estimation of risk parameters, and internal credit risk rating systems; and

IV - the date of the authorization request.

Art. 125. During the analysis process by the Central Bank of Brazil of the request for the use of an IRB approach, the institution must:

I - promptly provide any additional information;

II - inform, in the manner to be established by the Central Bank of Brazil, the monthly value of the RWACIRB component calculated through the requested IRB approach; and

III - facilitate access to people, documents, and systems involved in the development and use of the requested IRB approach.

Art. 126. The use of an IRB approach and the estimation of risk parameter values for the calculation of the RWACIRB component shall occur only for portfolios expressly authorized by the Central Bank of Brazil and after the date stipulated in the respective authorization.

Sole Paragraph. The authorization referred to in the caput is not linked to exposure categories or business units, and may be restricted to products or another criterion established by the Central Bank of Brazil.

Art. 127. The relevant changes mentioned in Article 109, as well as the change of approach whose use was previously authorized, are subject to prior authorization by the Central Bank of Brazil.

TITLE X
FINAL PROVISIONS

Art. 128. Circular No. 3,648 of March 4, 2013, is hereby revoked.

Art. 129. This Resolution enters into force on July 1, 2023.

Otávio Ribeiro Damaso
Director of Regulation