Circular No. 3846 — Establishes Procedures and Parameters for the Internal Capital Adequacy Assessment Process (ICAAP)

The Collegiate Board of the Central Bank of Brazil, in a session held on September 13, 2017, based on the provisions of Articles 9, 10, item IX, and 11, item VII, of Law No. 4,595, of December 31, 1964, and considering the provisions of Article 40, §§ 2 and 3, of Resolution No. 4,557, of February 23, 2017,

R E S O L V E:

Art. 1. This Circular regulates the Internal Capital Adequacy Assessment Process (ICAAP), as provided for in Article 40, § 2, item “a”, of Resolution No. 4,557, of February 23, 2017.

Art. 2. The ICAAP must allow for the assessment of the sufficiency of capital maintained by the institution over a three-year horizon, considering:

I - the types of risks and respective levels:

a) to which the institution is exposed; and

b) that the institution is willing to assume;

II - the institution's capacity to manage risks effectively and prudently;

III - the institution's strategic objectives; and

IV - the competitiveness conditions and the regulatory environment in which the institution operates.

Art. 3. The ICAAP must cover:

I - the assessment and measurement of the capital requirement to cover the following risks, in accordance with Resolution No. 4,557, of 2017:

a) credit risk;

b) market risk;

c) interest rate risk for instruments classified in the banking book (IRRBB); and

d) operational risk;

II - assessment of the capital requirement to cover other relevant risks to which the institution is exposed, considering, at a minimum:

a) strategy risk, resulting from adverse changes in the business environment or the use of inadequate premises in decision-making;

b) reputation risk, resulting from negative perception of the institution by clients, counterparties, shareholders, investors, or supervisors; and

c) socio-environmental risk, in accordance with Resolution No. 4,327, of April 25, 2014;

III - assessment of the capital requirement based on the results of the stress testing program referred to in Section II of Chapter III of Resolution No. 4,557, of 2017; and

IV - description of the methodologies and premises used in the assessment and measurement of the capital requirement referred to in items I, II, and III.

§ 1. The credit risk mentioned in item I, item “a”, of the main text includes counterparty credit risk and concentration risk, defined in Article 21, § 3, items I and VI, of Resolution No. 4,557, of 2017.

§ 2. The ICAAP must additionally consider projections of asset and liability values, exposures not recorded on the balance sheet, and revenues and expenses forecast in the capital plan, as referred to in Article 41, sole paragraph, item II, of Resolution No. 4,557, of 2017.

§ 3. If correlations or diversification effects that result in a reduction of the capital requirement are incorporated, the institution must demonstrate the robustness of the estimates and the justification of the assumptions.

§ 4. The assessment of capital adequacy must consider the institution's liquidity risk profile and the liquidity of the markets in which the institution operates.

Art. 4. The ICAAP must be submitted to an independent validation process of the execution process that assesses, at a minimum:

I - the methodologies and premises used in the capital requirement estimates referred to in item IV of Art. 3;

II - the correlation estimates, when used;

III - the inclusion of all relevant risks;

IV - the scope, consistency, integrity, and reliability of input data, as well as the independence of its sources;

V - the consistency and reliability of the information comprising the report referred to in Art. 5; and

VI - the consistency and coherence between the information in the report referred to in Art. 5 and those contained in the capital and contingency capital plans.

§ 1. The validation process is the exclusive responsibility of the institution and must be carried out, at a minimum, every three years and, in particular, whenever any relevant change occurs in the ICAAP or the institution's risk profile.

§ 2. The validation process must be adequately documented, and its results submitted to the institution's board of directors and board of administration, if it exists.

Art. 5. The ICAAP must be the subject of an annual report prepared with a base date of December 31 and made available by April 30 of the following year.

Sole paragraph. The report referred to in the main text must be:

I - approved by the board of administration or, in its absence, by the institution's board of directors; and

II - kept available to the Central Bank of Brazil for a period of five years.

Art. 6. This Circular enters into force on the date of its publication.

Art. 7. Circular No. 3,547, of July 7, 2011, is hereby revoked.

Otávio Ribeiro Damaso Anthero de Moraes Meirelles Director of Regulation Director of Supervision