Resolution CMN No. 3721 — Establishes the Implementation of a Credit Risk Management Structure

RESOLUTION NO. 3721

Dispenses with the implementation of a credit risk management structure.

The Central Bank of Brazil, in accordance with Article 9 of Law No. 4,595, of December 31, 1964, makes public that the National Monetary Council, in a session held on April 30, 2009, based on Articles 4, item VIII, of the aforementioned law, 2, item VI, 8 and 9 of Law No. 4,728, of July 14, 1965, and 20 of Law No. 4,864, of November 29, 1965, in Law No. 6,099, of September 12, 1974, with the alterations introduced by Law No. 7,132, of October 26, 1983, in Law No. 10,194, of February 14, 2001, with the alterations introduced by Law No. 11,524, of September 24, 2007, and in Article 6 of Decree-Law No. 759, of August 12, 1969,

RESOLVES:

Art. 1 Financial institutions and other institutions authorized to operate by the Central Bank of Brazil must implement a credit risk management structure compatible with the nature of their operations and the complexity of the products and services offered and proportional to the size of the institution's exposure to credit risk.

§ 1 The structure referred to in the caput must enable the continuous and integrated management of credit risk, both of operations classified in the trading portfolio, as provided for in Resolution No. 3,464, of June 26, 2007, and of operations not classified in the trading portfolio.

§ 2 The provisions of this resolution do not apply to consortium administrators, whose credit risk management structure will follow the rules issued by the Central Bank of Brazil in the exercise of its legal competence.

Definition of Credit Risk

Art. 2 For the purposes of this resolution, credit risk is defined as the possibility of occurrence of losses associated with the non-compliance by the borrower or counterparty of their respective financial obligations as agreed, the devaluation of a credit contract resulting from the deterioration in the risk classification of the borrower, the reduction of gains or remuneration, the advantages granted in renegotiation, and recovery costs.

Sole Paragraph. The definition of credit risk includes, among others:

I - counterparty credit risk, understood as the possibility of non-compliance by a specific counterparty of obligations related to the settlement of operations involving the trading of financial assets, including those related to the settlement of derivative financial instruments;

II - country risk, understood as the possibility of losses associated with the non-compliance of financial obligations as agreed by a borrower or counterparty located outside the Country, due to actions taken by the government of the country where the borrower or counterparty is located, and transfer risk, understood as the possibility of occurrence of obstacles in the foreign exchange conversion of received values;

III - the possibility of occurrence of disbursements to honor guarantees, sureties, joint obligations, credit commitments or other operations of a similar nature;

IV - the possibility of losses associated with the non-compliance of financial obligations as agreed by an intermediary party or contracting party of credit operations.

Scope

Art. 3 The credit risk management structure must allow for the identification, measurement, control and mitigation of risks associated with each institution individually and with the financial conglomerate, according to the Accounting Plan of the Institutions of the National Financial System (COSIF), as well as the identification and monitoring of risks associated with other companies integrated into the economic-financial consolidation, defined in Resolution No. 2,723, of May 31, 2000, with the alteration introduced by Resolution No. 2,743, of June 28, 2000.

Credit Risk Management Structure

Art. 4 The credit risk management structure must provide for:

I - policies and strategies for credit risk management clearly documented, which establish operational limits, risk mitigation mechanisms and procedures intended to maintain exposure to credit risk at levels considered acceptable by the institution's management;

II - adequate validation of the systems, models and internal procedures used for credit risk management;

III - estimation, according to consistent and prudent criteria, of losses associated with credit risk, as well as comparison of estimated values with losses actually observed;

IV - procedures for credit recovery;

V - systems, routines and procedures to identify, measure, control and mitigate exposure to credit risk, both at the individual level and at the aggregated level of operations with similar characteristics, which must cover, at a minimum, the relevant sources of credit risk, the identification of the borrower or counterparty, risk concentration and the method of aggregation of operations;

VI - adequacy of the levels of Reference Equity (PR), as provided for in Resolution No. 3,444, of February 28, 2007, and provisioning compatible with the credit risk assumed by the institution;

VII - evaluation of operations subject to credit risk, taking into account market conditions, macroeconomic prospects, changes in markets and products and the effects of sectoral and geographic concentration, among others;

VIII - adequate assessment regarding the retention of risks in operations for the sale or transfer of financial assets;

IX - adequate measurement of counterparty credit risk arising from derivative financial instruments and other complex financial instruments;

X - establishment of limits for the execution of operations subject to credit risk, both at the individual level and at the aggregated level of the group with common economic interest and of borrowers or counterparties with similar characteristics;

XI - establishment of clearly defined and documented criteria and procedures, accessible to those involved in the credit granting and management process, for:

a) prior analysis, execution and renegotiation of operations subject to credit risk;

b) collection and documentation of information necessary for the complete understanding of the credit risk involved in the operations;

c) periodic evaluation of the degree of sufficiency of guarantees;

d) detection of signs and prevention of deterioration in the quality of operations, based on credit risk;

e) treatment of exceptions to the limits established for the execution of operations subject to credit risk;

XII - classification of operations subject to credit risk into categories, based on consistent and verifiable criteria, according to the following aspects:

a) economic-financial situation, as well as other updated registration information of the borrower or counterparty;

b) use of instruments that provide effective mitigation of the credit risk associated with the operation;

c) period of delay in fulfilling financial obligations as agreed;

XIII - prior evaluation of new types of operations with respect to credit risk and verification of the adequacy of the procedures and controls adopted by the institution;

XIV - execution of simulations of extreme conditions (stress tests), encompassing economic cycles, changes in market and liquidity conditions, including the breaking of premises, the results of which must be considered when establishing or reviewing policies and limits;

XV - issuance of periodic managerial reports to the institution's management regarding the performance of risk management as a result of the policies and strategies adopted;

XVI - practices to ensure that exceptions to the policy, procedures and established limits are reported appropriately;

XVII - documentation and storage of information regarding losses associated with credit risk, including those related to credit recovery.

§ 1 The policies and strategies for credit risk management referred to in item I must be approved and reviewed, at least annually, by the institution's board of directors and by the board of directors, if any, in order to determine their compatibility with the institution's objectives and market conditions.

§ 2 The documentation related to the implementation of the credit risk management structure and the policies and strategies adopted must be kept at the institution available to the Central Bank of Brazil.

§ 3 The systems, routines and procedures referred to in item V must be re-evaluated, at least annually.

Art. 5 The institutions mentioned in Art. 1 must maintain a sufficient quantity of technically qualified professionals in their areas of credit granting and intermediation of securities, securities and derivatives.

Art. 6 The institution's board of directors and the board of directors, if any, must ensure that the remuneration structure adopted does not incentivize behaviors incompatible with a level of risk considered prudent in the long-term policies and strategies adopted by the institution.

Transparency

Art. 7 The description of the credit risk management structure must be evidenced in a public access report, with a minimum annual frequency.

§ 1 The board of directors or, in its absence, the institution's board of directors must state in the report mentioned in the caput its responsibility for the disclosed information.

§ 2 The institutions mentioned in Art. 1 must publish, together with the financial statements, a summary of the description of their credit risk management structure, indicating the location of the report cited in the caput.

Unit Responsible for Credit Risk Management

Art. 8 The activity of credit risk management must be executed by a specific unit in the institutions referred to in Art. 1.

§ 1 The unit referred to in the caput must be segregated from the trading units and the unit executing the internal audit activity, as provided for in Article 2 of Resolution No. 2,554, of September 24, 1998, with the wording given by Resolution No. 3,056, of December 19, 2002.

§ 2 The systems and models used in credit risk management must be adequately understood by the members of the unit referred to in the caput, even if developed by third parties.

Art. 9 The constitution of a single responsible unit is admitted:

I - for the management of credit risk of the financial conglomerate and its respective integrated institutions;

II - for the activities of identification and monitoring of credit risk of non-financial companies integrated into the economic-financial consolidation.

Art. 10. The constitution of a single unit responsible for the management of credit risk of a cooperative credit system located in any entity supervised by the Central Bank of Brazil integrated into the respective system is admitted.

Final Provisions

Art. 11. The provisions of Art. 10 apply to the unit responsible for the management of operational risk, as provided for in Resolution No. 3,380, of June 29, 2006, and to the unit responsible for the management of market risk, as provided for in Resolution No. 3,464, of 2007.

Art. 12. The institutions mentioned in Art. 1 must indicate a director responsible for credit risk management.

§ 1 For the purposes of the responsibility referred to in the caput, it is admitted that the indicated director performs other functions in the institution, except those related to the administration of third-party resources and the execution of operations subject to credit risk.

§ 2 For institutions integrated into a conglomerate that have opted for the constitution of a single credit risk management structure in accordance with Art. 9, only the institution in which the mentioned structure is located must indicate a responsible director.

Art. 13. The credit risk management structure must be implemented by October 29, 2010, observing the following schedule:

I - by October 30, 2009: indication of the responsible director and definition of the organizational structure for the implementation of credit risk management;

II - by April 30, 2010: definition of the institutional policy, processes, procedures and systems necessary for its effective implementation;

III - by October 29, 2010: effective implementation of the credit risk management structure.

Sole Paragraph. The definitions mentioned in items I and II must be approved by the boards of directors of the institutions referred to in Art. 1 and by the board of directors, if any.

Art. 14. The Central Bank of Brazil may:

I - determine the adoption of additional controls and procedures, establishing a deadline for their implementation, if it considers the credit risk management implemented by the institutions mentioned in Art. 1 to be inadequate or insufficient;

II - impose more restrictive operational limits on the institution that fails to observe, within the established deadline, the determination referred to in item I.

Art. 15. This resolution enters into force on the date of its publication.

Rio de Janeiro, April 30, 2009.

Henrique de Campos Meirelles
President