Notice No. 7/2023

Published in: DR, 2nd Series, Part E, No. 205, of 23-10-2023 Mod. 99999910/T – 01/14

Index

Text of the Notice
Annex I – Reporting Models
Annex II – Filling Instructions

Text of the Notice

Risk concentrations occur when different exposures are subject to the same risk factor or to correlated risk factors, potentially constituting a source of significant financial difficulties for institutions and even jeopardizing their viability. Risk concentrations arise from (i) balance sheet exposures subject to credit risk, (ii) off-balance sheet elements (including guarantees and other commitments) and contingent liabilities, (iii) exposures subject to market risk or other risks arising from excessive exposure of institutions to certain asset classes, products, guarantees, or currencies. Thus, to supervise concentration risk, the Bank of Portugal must have relevant information on this matter.

Currently, the legal framework applicable to institutions, notably Article 115-P of the General Regime of Credit Institutions and Financial Companies (RGICSF), provides general requirements regarding concentration risk, namely that institutions must have robust policies and procedures for the treatment and control of risk arising from risky positions on each individual counterparty considered, including central counterparties, sets of interconnected counterparties, and counterparties operating in the same economic sector or the same geographic region, or arising from the same activity or commodity, or from the application of credit risk reduction techniques. Similar to other risks, institutions must have effective processes for the identification, management, monitoring, and communication of risks, including concentration risks, to which they are or may be exposed, as stated in Article 14 of RGICSF.

Part IV of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) further provides rules on monitoring and reporting on large exposures, requiring institutions, in accordance with Article 393, to have internal control mechanisms that allow identifying, managing, monitoring, reporting, and recording all large exposures and changes therein, which necessarily implies controlling all risky positions.

The supervisory information reporting framework defined at the European Union level, currently provided for in Commission Implementing Regulation (EU) No 2021/451 of 17 December 2020 (FINREP/COREP), provides for semi-annual reporting requirements on large exposures, resulting from paragraphs 1 and 2 of Article 394 of CRR, which are limited to a reduced set of counterparties.

In this context, in order to accommodate legislative developments, it was identified that there is a need to review the regulatory framework of the Bank of Portugal regarding concentration risk, provided for in Instruction No. 5/2011.

For the purposes of this revision, the changes resulting from the transposition of Directive 2013/36/EU of the Parliament and of the Council of 26 June 2013, the aforementioned requirements of CRR, the standards and guidelines associated published by the European Banking Authority, the general requirements regarding the identification, management, and control of risks required by Notice No. 3/2020, and the Core principles for effective banking supervision of the Basel Committee were considered.

From this revision, it was understood that it was not necessary to continue including specific requirements on concentration risk management, as established in Instruction No. 5/2011, since such normative framework already results from the above-mentioned elements, directly applicable to institutions. In this context, Instruction No. 5/2011 is revoked.

At the level of information reporting for supervisory purposes, and in particular for the analysis and assessment provided for in paragraph b) of paragraph 1 of Article 116-B of RGICSF, the Bank of Portugal considers it relevant to complement the reporting requirements provided for in Article 394 of CRR and FINREP/COREP reports with information on individual, sectoral, and geographical concentration risks.

In this sense, the Bank of Portugal concluded that the need for complementary reporting requirements remains, in line with those provided for in Instruction No. 5/2011. However, it is understood that these should be simplified and become limited to regular quantitative reporting, while qualitative reporting should remain only within the scope of Instruction No. 3/2019 on the internal capital adequacy assessment process (ICAAP). Quantitative reporting will have uniform formats, a reporting taxonomy, and filling instructions consistent with Commission Implementing Regulation (EU) No 2021/451. Significant credit institutions will not be covered, as they are currently subject to supervisory reporting on this matter to the European Central Bank, within the Single Supervisory Mechanism.

In this framework, this Notice establishes the reporting models on credit concentration risk, including information on the distribution of exposures by counterparty category and by NACE code, as well as specific information on the top 100 borrowers. The reporting maintains an annual periodicity, expressly establishing the possibility for the Bank of Portugal to determine, considering the type of activities and the risk profile of each credit institution, additional reporting obligations with distinct levels of information. This Notice was subject to public consultation, in accordance with Article 101 of the Administrative Procedure Code. Thus, the Bank of Portugal, using the competence conferred upon it by Article 17 of its Organic Law, approved by Law No. 5/98 of 31 January, in its current wording, by paragraph f) of paragraph 1 of Article 116, by paragraph b) of paragraph 1 of Article 116-B, and by Articles 120 and 121-A of RGICSF, approves the following Notice:

Article 1.

Object
This Notice regulates the periodic reporting of information for supervisory purposes to the Bank of Portugal on concentration risk and establishes the specific rules and procedures applicable to the provision of information in standardized format for this purpose.

Article 2.

Scope
1 – This Notice is applicable:
a) On a consolidated basis, to credit institutions subject to consolidated supervision by the Bank of Portugal; b) On an individual basis, to credit institutions that do not form part of a group subject to consolidated supervision by the Bank of Portugal; c) To branches in Portugal of credit institutions headquartered in third countries. 2 – Institutions classified as significant in terms of paragraph 4 of Article 6 of Council Regulation (EU) No 1024/2013 of 15 October 2013, which confers specific tasks upon the European Central Bank regarding prudential supervision policies for credit institutions, are not covered by the provisions of this Notice. 3 – The Bank of Portugal may also determine, through a case-by-case assessment, that the institutions referred to in paragraph a) of paragraph 1 comply with the reporting requirements listed in the following article on an individual or sub-consolidated basis.

Article 3.

Reporting Requirements
The institutions referred to in the previous article must submit to the Bank of Portugal:
a) Information relating to gross exposures resulting from activities not included in the trading book (loans and advances, fixed and variable income securities, off-balance sheet elements, and derivatives) by counterparty category; b) Information relating to gross exposures to non-financial enterprises, by NACE code, resulting from activities not included in the trading book; c) Detailed information relating to the one hundred largest borrowers resulting from activities not included in the trading book (excluding risky positions on Central Administration and Central Banks and securitized assets).

Article 4.

Reporting Models and Instructions
1 – The information from the previous article must be submitted according to the reporting models contained in Annex I to this Notice:
a) ConcRisk 01 - Distribution of gross exposures by counterparty type resulting from activities not included in the trading book, and respective calculation of the Herfindahl Index; b) ConcRisk 02 - Distribution of gross exposures to non-financial enterprises, by NACE code, resulting from activities not included in the trading book, and respective calculation of the Herfindahl Index; c) ConcRisk 03 - Detailed information for the one hundred largest borrowers resulting from activities not included in the trading book, and respective calculation of the Herfindahl Index. 2 – The models referred to in paragraph 1 define the structure and characteristics of the information to be communicated to the Bank of Portugal, to be filled out in accordance with the instructions contained in Annex II and in compliance with the technical specifications available in the BPnet system.

Article 5.

Periodicity and Format of Reporting Models
1 – The information from the previous articles must be submitted:
a) With an annual periodicity, referencing 31 December, until the last day of February of the following year; b) Through the BPnet system and in XBRL format.
2 – In duly justified cases, notably considering the type of activities or risk profile of the institution, the Bank of Portugal may request from the institutions referred to in Article 2 the submission of information reports with content, periodicity, reference date, or submission deadlines distinct from those provided for in the articles and the previous number.

Article 6.

Repealing Provision
Instruction No. 5/2011 of the Bank of Portugal of 15 March 2011, which defines risk concentration and establishes the forms of monitoring thereof by institutions, is revoked.

Article 7.

Entry into Force
This Notice enters into force on the day following its publication.

3 October 2023. - The Governor, Mário Centeno.

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Annex to Notice No. 7/2023

Mod. 99999910/T – 01/14

Annex I – Reporting Models

ConcRisk 01.00 - Distribution of gross exposures by counterparty type resulting from activities not included in the trading book

	Total Gross Nominal Exposure Value	Herfindahl Index (all debtors)	of which: Direct Exposures	of which: Off-balance Sheet Elements	of which: Indirect Exposures	of which: Additional Exposures from operations where there is risk on underlying assets
Code	010	020	030	040	050	060
Total Portfolio 010
Central Banks 020
Public Administrations 030
Credit Institutions 040
Other Financial Enterprises 050
Non-Financial Enterprises 060
Households 070

ConcRisk 02.00 - Distribution of gross exposures to non-financial enterprises, by NACE code, resulting from activities not included in the trading book

	Total Gross Nominal Exposure Value	Herfindahl Index (all debtors)	of which: Direct Exposures	of which: Off-balance Sheet Elements	of which: Indirect Exposures	of which: Additional Exposures from operations where there is risk on underlying assets
Code	010	020	030	040	050	060
Total Portfolio of Non-Financial Enterprises 010
A Agriculture, forestry and fishing 020
B Mining and quarrying 030
C Manufacturing 040
D Electricity, gas, steam and air conditioning supply 050
E Water supply; sewerage, waste management and remediation activities 060
F Construction 070
G Wholesale and retail trade; repair of motor vehicles and motorcycles 080
H Transportation and storage 090
I Accommodation and food service activities 100
J Information and communication 105
K Financial and insurance activities 110
L Real estate activities 120
M Professional, scientific and technical activities 130
N Administrative and support service activities 140
O Public administration and defence; compulsory social security 150
P Education 160
Q Human health and social work activities 170
R Arts, entertainment and recreation 180
S Other service activities 190

ConcRisk 03.00 - Detailed information for the one hundred largest borrowers resulting from activities not included in the trading book

Debtor	Total Gross Nominal Exposure Value	Code	Name	LEI Code	of which: Direct Exposures	of which: Off-balance Sheet Elements	of which: Indirect Exposures	of which: Additional Exposures from operations where there is risk on underlying assets
Code	010				020	030	040	050	060	070	080
010
020
...
100
...
1000

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Annex II – Filling Instructions

1. For the calculation of the total gross nominal exposure value for each of the reports, the following shall be considered for this purpose:
   a. The value of exposures from activities not included in the trading book relating to loans and advances, debt securities, equity instruments, derivative instruments, guarantees provided including those associated with credit derivatives; b. The exposure value shall consider direct¹, indirect², and additional exposures from operations where there is risk on underlying assets³, as well as off-balance sheet values before provisions or the effect of any type of risk mitigant.

2. Exposures must be considered at the highest level of consolidation and grouped by debtor (for the calculation of the exposure and the Herfindahl Index), and counterparties belonging to the same group must not be considered separately.

3. Linked client groups must be considered as a single counterparty, considering the predominant single debtor for determining the counterparty type and economic activity sector, in conformity with the concept of 'group of linked clients' in point 39 of paragraph 1 of Article 4 of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR), and as provided in Instruction No. 28/2018 of the Bank of Portugal, which implements EBA/GL/2017/15 Guidelines and the Commission's regulatory technical standards regarding Part IV of CRR.

4. In the case of debtors where the gross nominal exposure is in a currency other than the Euro, the Bank of Portugal's reference exchange rate on the reference date of the report shall be used.

5. In the calculation of the Herfindahl Index, institutions shall take into account all counterparties and the exposures of each portfolio, considering the following formula:
   $$HHI = \sum_{i=1}^{N} (\frac{x_i}{X})^2$$

¹ Risk positions in terms of immediate borrower.
² Whenever a risky position on a client is guaranteed by third parties or secured by securities issued by third parties (this latter can be calculated in accordance with Article 403 of CRR).
³ As provided in Article 390, paragraph 7 of CRR.

ConcRisk 01 - Distribution of gross exposures by counterparty type resulting from activities not included in the trading book

6. This model captures the total gross nominal exposure value, its disaggregation, and the calculation of the Herfindahl Index by counterparty type, for the total of activities not included in the trading book, considering the specific treatment defined in paragraphs 1 to 5 of this Annex.

Lines

• 010 Total Portfolio: Aggregation of all elements resulting from activities not included in the trading book.
• 020 Central Banks: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.
• 030 Public Administrations: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.
• 040 Credit Institutions: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.
• 050 Other Financial Enterprises: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.
• 060 Non-Financial Enterprises: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.
• 070 Households: Disaggregation in accordance with report F18.00.a - Productive and non-productive exposures of Regulation No. 2021/451.

Columns

• 010 Total Gross Nominal Exposure Value: Calculation as provided in paragraphs 1 to 4 of this Annex.
• 020 of which: Direct Exposures: Identification of the gross nominal exposure resulting from direct exposures calculated as provided in paragraphs 1 to 4 of this Annex.
• 030 of which: Off-balance Sheet Elements: Identification of the gross nominal exposure resulting from off-balance sheet elements calculated as provided in paragraphs 1 to 4 of this Annex.
• 040 of which: Indirect Exposures: Identification of the gross nominal exposure resulting from indirect exposures calculated as provided in paragraphs 1 to 4 of this Annex.
• 050 of which: Additional Exposures from operations where there is risk on underlying assets: Identification of the gross nominal exposure resulting from additional exposures from operations where there is risk on underlying assets calculated as provided in paragraphs 1 to 4 of this Annex.
• 060 Herfindahl Index (all debtors): Calculation as provided in paragraph 5 of this Annex, considering that x corresponds to the exposure value of each of the counterparties belonging to the total of activities not included in the trading book (for the calculation of the HHI of the total portfolio) while, for the calculation of the HHI by counterparty segment, x corresponds to the exposure value that makes up each counterparty segment considering the total perimeter to total exposure in each segment.

ConcRisk 02 - Distribution of gross exposures to non-financial enterprises, by NACE code, resulting from activities not included in the trading book

7. This model captures the distribution of exposures to non-financial enterprises, its disaggregation, and the calculation of the Herfindahl Index resulting from activities not included in the trading book, by economic activity sector (distribution by NACE code). This information should be aligned with the information reported in model CcnR01 for non-financial enterprises (line 060) and consider the specific treatment defined in paragraphs 1 to 5 of this Annex.

Lines

• 010 Total Portfolio: Aggregation of all elements resulting from activities not included in the trading book.
• 020 A Agriculture, forestry and fishing: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 030 B Mining and quarrying: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 040 C Manufacturing: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 050 D Electricity, gas, steam and air conditioning supply: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 060 E Water supply; sewerage, waste management and remediation activities: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 070 F Construction: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 080 G Wholesale and retail trade; repair of motor vehicles and motorcycles: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 090 H Transportation and storage: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 100 I Accommodation and food service activities: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 105 J Information and communication: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 110 K Financial and insurance activities: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 120 L Real estate activities: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.
• 130 M Professional, scientific and technical activities: Disaggregation in accordance with report F06.01 of Regulation No. 2021/451.