Resolution CMN No. 4606 — Simplified Optional Methodology for Minimum Simplified Reference Equity (PRS5) Calculation and Simplified Risk Management Structure

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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 October 19, 2017, based on Articles 3, item VI, and 4, items VIII and XI, of the aforementioned Law, Articles 9 and 10 of Law No. 4,728, of July 14, 1965, Article 20, § 1, of Law No. 4,864, of November 29, 1965, Articles 7 and 23 of Law No. 6,099, of September 12, 1974, and Article 1, § 1, and 12 of Complementary Law No. 130, of April 17, 2009,

R E S O L V E S:

CHAPTER I

OF THE OBJECT AND SCOPE OF APPLICATION

Art. 1. This Resolution provides for the simplified optional methodology for calculating the minimum requirement for Simplified Reference Equity (PRS5), the requirements for opting for this methodology, and the additional requirements for the simplified structure for continuous risk management referred to in Resolution No. 4,557, of February 23, 2017.

Art. 2. The option to use the simplified methodology for calculating the minimum PRS5 requirement is available to financial institutions and other institutions authorized to operate by the Central Bank of Brazil belonging to the following groups:

I - Group I: single credit cooperatives;

II - Group II: non-banking institutions operating in credit granting, except development agencies; and

III - Group III: non-banking institutions operating in the gold, foreign exchange markets, or as fiduciary agents.

§ 1. For the purposes of this Resolution, non-banking institutions are considered those that are not authorized to accept demand deposits and do not use the word "bank" in their name.

§ 2. For institutions subject to preparing consolidated financial statements, the option referred to in the caput is applicable when the prudential conglomerate is composed exclusively or by institutions of group II or by institutions of group III, being prohibited for prudential conglomerates formed by institutions from groups II and III jointly.

§ 3. The option referred to in the caput does not apply to the institutions referred to in Article 2, § 5, item II, of Resolution No. 4,553, of January 30, 2017.

CHAPTER II

OF THE REQUIREMENTS FOR OPTING FOR THE USE OF THE SIMPLIFIED OPTIONAL METHODOLOGY

Art. 3. The option to use the simplified methodology for calculating the minimum PRS5 requirement is conditioned on meeting the following requirements:

I - size compatible with classification in Segment 5 (S5), defined in Article 2 of Resolution No. 4,553, of 2017; and

II - simplified risk profile.

§ 1. For institutions belonging to a prudential conglomerate, the requirements referred to in the caput must be met on a consolidated basis.

§ 2. For institutions authorized to operate by the Central Bank of Brazil after the entry into force of this Resolution, the initial verification of compliance with the requirements referred to in the caput is based on the information contained in the business plan submitted to the Central Bank of Brazil.

Art. 4. A simplified risk profile is considered to be the compliance with the following requirements:

I - absence of operations:

a) subject to variation in stock prices, except for investments in stocks registered in permanent assets;

b) in a system maintained by a stock exchange;

c) with a financial derivative instrument; and

d) of asset lending;

II - absence of investment in credit securitization titles;

III - absence of committed operations, except:

a) sale operations with a commitment to repurchase with own assets; or

b) purchase operations with a commitment to resell with fixed-rate federal public titles, indexed to an interest rate or a price index;

IV - exclusive investment in shares of investment funds that:

a) observe the restrictions established in items I to III;

b) do not maintain exposures arising from credit operations; and

c) are classified, in accordance with the regulations of the Securities and Exchange Commission (CVM), as Fixed Income Funds or Investment Fund in Shares of an Investment Fund classified as a Fixed Income Fund;

V - non-performance of activities of:

a) underwriting the issuance of securities (TVM) for resale;

b) intermediation of public offering and distribution of TVM in the market;

c) purchase and sale of TVM on behalf of third parties;

d) administration of TVM portfolios;

e) custody of TVM;

f) underwriting, transfer and authentication of endorsements, splitting of cautionary notes, receipt and payment of redemptions, interest and other proceeds of TVM;

g) establishment, organization and administration of funds and investment clubs;

h) issuance of share deposit certificates;

i) book-entry share services;

j) margin account operations; and

VI - absence of instruments authorized by the Central Bank of Brazil to compose the Supplementary Capital or Level II, in accordance with Article 24 of Resolution No. 4,192, of March 1, 2013.

Art. 5. For institutions belonging to group I or group II, a simplified risk profile also includes the absence of:

I - sold or bought exposure in gold or foreign currency;

II - operations subject to:

a) exchange rate variation; or

b) variation in the price of commodities (commodities).

CHAPTER III

OF THE MINIMUM REQUIREMENT FOR SIMPLIFIED REFERENCE EQUITY

Section I

Of the Calculation of Simplified Reference Equity (PRS5)

Subsection I

Of the Definitions

Art. 6. For the purposes of calculating the PRS5 value, the following definitions apply:

I - subsidiary is the entity belonging to a prudential conglomerate, with the exception of the lead institution; and

II - non-controlling interest is the portion of the subsidiary's capital not held, directly or indirectly:

a) by the lead institution of the prudential conglomerate; or

b) by the controller, in the case of a subsidiary that is also an institution authorized to operate by the Central Bank of Brazil.

Subsection II

Of the PRS5 of the Prudential Conglomerate

Art. 7. The calculation of PRS5 must be performed on a consolidated basis for institutions belonging to the same prudential conglomerate.

Subsection III

Of the Methodology for Calculating PRS5

Art. 8. The PRS5 is calculated through:

I - the sum of the values corresponding to:

a) share capital constituted by quotas, quota-shares, or non-redeemable shares without dividend cumulation mechanisms;

b) capital reserves, revaluation reserves, and profit reserves;

c) unrealized gains resulting from asset valuation adjustments;

d) accumulated surpluses or profits;

e) credit result accounts; and

f) deposit in a linked account to cover capital deficiency, constituted in accordance with Article 6 of Resolution No. 4,019, of September 29, 2011; and

II - the deduction of values corresponding to:

a) unrealized losses resulting from asset valuation adjustments;

b) shares or any other instruments of own issuance, authorized to compose PRS5, acquired directly or indirectly;

c) accumulated losses or deficits;

d) debit result accounts; and

e) prudential adjustments listed in Article 9.

§ 1. In the share capital mentioned in item "a" of item I of the caput, the capital increase in the process of authorization in the institutions mentioned in Article 2 must not be considered, except for the capital increase carried out through the incorporation of reserves and accumulated surpluses or profits.

§ 2. The following must not be considered in PRS5:

I - funds raised but not yet fully paid up;

II - shares for which the institution has created, upon issuance, an expectation of redemption, reimbursement, amortization, repurchase, or cancellation; and

III - shares whose purchase was financed, directly or indirectly, by the issuing institution or by any entity of the prudential conglomerate.

Art. 9. The prudential adjustments mentioned in Article 8, item II, item "e", correspond to the following equity elements:

I - premiums paid in the acquisition of investments based on an expectation of future profitability, net of deferred tax liabilities associated with them;

II - intangible assets;

III - actuarial assets related to defined benefit pension funds, net of deferred tax liabilities associated with them, to which the financial institution does not have unrestricted access;

IV - added value of direct or indirect investments:

a) in the share capital of non-financial entities that do not form the prudential conglomerate;

b) in instruments of Principal Capital, Supplementary Capital, and Level II, as defined, respectively, in Articles 4, 6, and 7 of Resolution No. 4,192, of 2013, of an institution that does not form the prudential conglomerate;

V - non-controlling interest in the capital of subsidiaries;

VI - tax credits resulting from temporary differences that depend on the generation of future taxable profits or revenues for their realization;

VII - tax credits resulting from fiscal losses and negative base of the Social Contribution on Net Profit and those originating from this contribution relating to assessment periods closed until December 31, 1998, calculated in accordance with Article 8 of Provisional Measure No. 2,158-35, of August 24, 2001; and

VIII - deferred permanent assets.

Sole paragraph. The value of the quota-shares corresponding to credit cooperatives' participation in the capital of central credit cooperatives or confederations of credit is not subject to deduction.

Subsection IV

Of the Transition to PRS5

Art. 10. References in normative acts published by the Central Bank of Brazil to Reference Equity, Level I, or Principal Capital, as defined in Resolution No. 4,192, of 2013, refer to the PRS5 established in this Resolution, when dealing with an institution opting for the simplified optional methodology for calculating the minimum PRS5 requirement.

Section II

Of the Calculation of Risk-Weighted Assets in Simplified Form (RWAS5)

Art. 11. The institution opting for the simplified methodology provided for in this Resolution must calculate the amount of risk-weighted assets in simplified form (RWAS5), which corresponds to the sum of the following parts:

I - RWAROSimp, relating to the calculation of the capital requirement for covering operational risk through a simplified standardized approach;

II - RWARCSimp, relating to exposures to credit risk subject to the calculation of the capital requirement through a simplified standardized approach; and

III - RWACAMSimp, relating to exposure in gold, foreign currency, and assets subject to exchange rate variation through a simplified standardized approach.

Sole paragraph. The procedures and parameters for calculating the parts mentioned in the caput must be established by the Central Bank of Brazil.

Section III

Of the Calculation of the Minimum PRS5 Requirement

Art. 12. The minimum PRS5 requirement for the institution that opts for the use of the simplified methodology for calculating the minimum PRS5 requirement corresponds to:

I - 12% (twelve percent) of the RWAS5 amount, for a single credit cooperative affiliated with a central cooperative; and

II - 17% (seventeen percent) of the RWAS5 amount, for other institutions.

Art. 13. The institution opting for the simplified methodology provided for in this Resolution must permanently maintain a PRS5 amount in value higher than the minimum requirement established in this Resolution.

CHAPTER IV

OF THE DEDUCTION OF EXCESS FIXED ASSETS AND CAPITAL ALLOCATION

Art. 14. For the purposes of verifying compliance with the minimum requirement mentioned in Article 12, any excess of resources applied in Fixed Assets relative to the percentages established in Articles 3 and 4 of Resolution No. 2,283, of June 5, 1996, must be deducted from PRS5.

Art. 15. The institution that opts for the allocation of PRS5 in accordance with Article 2 of Resolution No. 4,589, of June 29, 2017, must deduct the allocated value from PRS5 for the purposes of verifying compliance with the minimum requirement referred to in Article 12.

CHAPTER V

OF THE COMMUNICATION REGARDING THE

SIMPLIFIED OPTIONAL METHODOLOGY

Art. 16. The option or withdrawal of the use of the simplified methodology provided for in this Resolution must be:

I - approved by the board of directors; and

II - communicated to the Central Bank of Brazil.

§ 1. The confirmation of receipt of the communication by the Central Bank of Brazil conditions the start and end of the use of the methodology referred to in the caput.

§ 2. The requirements and requests listed in this Resolution must be met:

I - prior to the communication of the option mentioned in the caput; or

II - until the confirmation of receipt of the withdrawal communication by the Central Bank of Brazil.

§ 3. The communication for the option mentioned in the caput is waived for an institution classified in S5 on the date of entry into force of this Resolution and that opts for the methodology it addresses.

Art. 17. The withdrawal of the use of the simplified methodology provided for in this Resolution implies the prohibition of exercising the option provided for in this Resolution for a period of twelve months counted from the confirmation of receipt, by the Central Bank of Brazil, of the communication referred to in Article 16.

Art. 18. The non-compliance with at least one of the requirements established in Article 4 and, when applicable, also in Article 5, implies the immediate prohibition of using the methodology provided for in this Resolution.

Sole paragraph. The prohibition referred to in the caput remains for a period of 36 months.

CHAPTER VI

OF THE SIMPLIFIED STRUCTURE FOR CONTINUOUS RISK MANAGEMENT

Section I

General Provisions

Art. 19. In addition to the provisions of Article 3 of Resolution No. 4,557, of 2017, the simplified structure for continuous risk management of an institution opting for the methodology provided for in this Resolution must observe the requirements referred to in this Chapter.

Sole paragraph. For single credit cooperatives opting for the simplified optional methodology provided for in this Resolution that are part of two- or three-tier systems, the periodic evaluation of the processes of the simplified risk management structure is the responsibility of the central cooperative or confederation.

Art. 20. The simplified structure for continuous risk management must identify, measure, evaluate, monitor, report, control, and mitigate:

I - operational risk, as defined in Article 22;

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

III - credit risk, as defined in Article 25, for institutions belonging to group I or group II and, when relevant, for institutions belonging to group III; and

IV - other risks to which the institution is exposed in a relevant manner.

Art. 21. The simplified structure for continuous risk management must provide for:

I - documentation of risk management policies, strategies, routines, and procedures, as referred to in Article 61, item II, of Resolution No. 4,557, of 2017;

II - reporting to the institution's administration of exceptions to the policies mentioned in item I;

III - monitoring of capital and liquidity levels;

IV - maintenance of a funding profile adequate to expected and unexpected, current and future liquidity needs, including those arising from exposures not recorded in the institution's balance sheet;

V - maintenance of an adequate stock of liquid assets that can be readily converted into cash to meet obligations;

VI - a plan to address situations of liquid asset scarcity, indicating responsibilities, strategies, procedures, and alternative sources of resources to meet the institution's obligations;

VII - prior identification of risks inherent to relevant modifications in existing products and services, as well as to new products and services;

VIII - documentation of the responsibilities of the institution's personnel regarding risk management; and

IX - preparation of periodic management reports covering the performance of the simplified risk management structure.

Sole paragraph. The monitoring of the liquidity level, referred to in item III of the caput, must consider all operations carried out in the financial and capital markets, as well as possible contingent or unexpected exposures, including those associated with settlement services, provision of guarantees and collateral, and contracted and unused credit and liquidity lines.

Section II

Of Operational Risk Management

Art. 22. For the purposes of this Resolution, operational risk is defined as the possibility of occurrence of losses resulting from external events or failure, deficiency, or inadequacy of internal processes, people, or systems.

§ 1. The definition referred to in the caput includes legal risk associated with inadequacy or deficiency in contracts entered into by the institution, sanctions due to non-compliance with legal provisions, and compensation for damages to third parties resulting from the activities developed by the institution.

§ 2. Among operational risk events, the following are included:

I - internal fraud;

II - external fraud;

III - labor lawsuits and deficient workplace safety;

IV - inappropriate practices regarding clients, products, and services;

V - damage to physical assets owned or used by the institution;

VI - situations that cause interruption of the institution's activities;

VII - failures in systems, processes, or information technology (IT) infrastructure; and

VIII - failures in execution, compliance with deadlines, or management of the institution's activities.

Art. 23. The simplified continuous risk management structure, referred to in Article 21, must additionally provide for, for operational risk:

I - decision criteria regarding the outsourcing of services and selection of their providers;

II - evaluation, management, and monitoring of operational risk arising from outsourced services relevant to the regular functioning of the institution;

III - IT infrastructure that ensures integrity, security, and availability of data related to risk management; and

IV - business continuity policy.

§ 1. Contracts regarding the provision of outsourced IT services must include permission for the Central Bank of Brazil to access:

I - terms signed;

II - documentation and information regarding the services provided; and

III - contractor's premises.

§ 2. The business continuity policy referred to in the caput, item IV, must provide for:

I - identification and documentation of critical business processes;

II - strategies to ensure the continuity of the institution's activities and limit losses resulting from the interruption of critical business processes;

III - a business continuity plan that establishes procedures for restarting and recovering activities in case of interruption of critical business processes.

Art. 24. The institution must ensure adequate training on operational risk for all employees and relevant outsourced service providers.

Section III

Of Credit Risk Management

Art. 25. For the purposes of this Resolution, credit risk is defined as the possibility of occurrence of losses associated with:

I - non-compliance by the counterparty with its obligations as agreed;

II - devaluation or reduction of remunerations and expected gains in a financial instrument resulting from the deterioration of the counterparty's or intervenor's credit quality;

III - restructuring of financial instruments;

IV - recovery costs of exposures characterized as problematic assets, in accordance with Article 27; or

V - disbursements to honor financial guarantees provided for in Resolution No. 4,512, of July 28, 2016.

§ 1. For the purposes of credit risk management, the following are considered:

I - counterparty: the borrower, the guarantor, and the issuer of a title or security acquired; and

II - restructuring of financial instruments: renegotiation that implies the granting of advantages to the counterparty due to the deterioration of its credit quality or the credit quality of the intervenor.

§ 2. The advantages mentioned in § 1, item II, include those formalized in the original financial instruments or in new instruments used for settlement or refinancing of those.

§ 3. The definition of credit risk includes concentration risk, understood as the possibility of losses associated with significant exposures:

I - to the same counterparty;

II - to counterparties between which a control relationship exists, when one of the counterparties holds, directly or indirectly, more than 50% (fifty percent) of the voting capital of the other counterparty;

III - to counterparties operating in the same economic sector, geographic region, or segment of products or services;

IV - associated with the same type of financial product or service; and

V - whose risk is mitigated by the same type of instrument.

Art. 26. The simplified continuous risk management structure must additionally provide for, for credit risk:

I - the management of exposures with similar characteristics, both at an individual and aggregate level, covering aspects such as significant sources of credit risk, identification of the counterparty or intervenor, and the form of aggregation of exposures;

II - the identification of significant risk factors for the purposes of managing concentration risk, according to criteria defined by the institution itself;

III - management of credit risk of exposures not recorded in the institution's balance sheet;

IV - observed the current accounting regulations, mechanisms to ensure that provisioning levels are sufficient in view of the credit risk incurred by the institution;

V - criteria and procedures, clearly defined and documented, accessible to those involved in the processes of granting and monitoring operations subject to credit risk, including:

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

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

c) detection of signs and adoption of measures regarding the deterioration of the counterparty's credit quality;

d) collection and receipt of credits; and

e) recovery of exposures characterized as problematic assets, in accordance with Article 27;

VI - criteria and procedures for identification, monitoring, and control of exposure characterized as a problematic asset, in accordance with Article 27; and

VII - documentation and storage of information regarding losses associated with credit risk, including those related to restructuring, in accordance with Article 25, § 1, item II, and credit recovery.

Art. 27. For the purposes of credit risk management, exposure must be characterized as a non-performing asset when at least one of the following events is verified:

I - the respective obligation is overdue for more than ninety days;

II - there are indications that the respective obligation will not be fully honored without recourse to guarantees or collateral.

§ 1º The indications that an obligation will not be fully honored include:

I - the institution considers that the counterparty no longer has the financial capacity to honor the obligation under the agreed conditions;

II - the institution, regardless of regulatory requirement, recognizes significant deterioration in the credit quality of the borrower or counterparty;

III - the operation related to the exposure is restructured, in accordance with Art. 25, § 1º, item II;

IV - the institution files for bankruptcy or takes similar action against the counterparty; and

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

§ 2º Exposures characterized as non-performing assets may only have this status changed in the face of evidence of the counterparty's resumption of the capacity to honor its obligations under the agreed conditions.

§ 3º The criteria for the evidence referred to in § 2º must be previously established by the institution and clearly documented.

Section IV

On Governance

Art. 28. It is the responsibility of the director responsible for the simplified continuous risk management structure, as provided for in Art. 62 of Resolution No. 4,557, of 2017:

I - to supervise the development, implementation, and performance of the simplified risk management structure, and ensure its improvement;

II - to support and participate in the strategic decision-making process related to risk management, assisting the board of directors; and

III – to supervise the processes and controls related to the calculation of the RWAS5 amount and the minimum PR requirement.

Art. 29. It is the responsibility of the board of directors, for the purposes of risk management:

I - to approve and review, with a minimum frequency of two years, the risk management policies and strategies and ensure their observance by the institution;

II - to ensure the timely correction of deficiencies in the simplified risk management structure;

III - to authorize, when necessary, exceptions to the established policies and procedures;

IV - to promote the dissemination of a risk management culture within the institution;

V - to ensure that the institution maintains adequate and sufficient levels of capital and liquidity; and

VI - to comprehensively understand the risks that may impact the institution's capital and liquidity.

Art. 30. In the absence of a board of directors, the competencies attributed to it by this Resolution shall apply to the institution's executive board.

CHAPTER VII

FINAL PROVISIONS

Art. 31. The institution that opts for the use of the simplified optional methodology provided for in this Resolution must send to the Central Bank of Brazil, in the manner established by it, the minimum information related to the calculation of PRS5 and the RWAS5 amount.

Art. 32. The Central Bank of Brazil may determine that the values related to the instruments authorized to compose PRS5 be disregarded, if non-compliance with the requirements and conditions established in this Resolution is found.

Art. 33. Central credit cooperatives opting for the calculation of risk-weighted assets in the simplified manner (RWARPS), as provided for in Resolution No. 4,194, of March 1, 2013, must be classified in Segment 4 (S4) within six months.

Sole Paragraph. The central credit cooperative must observe the simplified optional methodology provided for in this Resolution during the period referred to in the main text.

Art. 34. Art. 1º of Resolution No. 3,488, of August 29, 2007, shall be effective with the following wording:

“Art. 1º The limit of Reference Equity (PR), calculated in accordance with Resolution No. 4,192, of March 1, 2013, for exposure to gold, foreign currency, and operations subject to exchange rate variation by financial institutions and other institutions authorized to operate by the Central Bank of Brazil, calculated in accordance with the procedures and parameters established by the aforementioned agency, is 30% (thirty percent).

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§ 4º The provisions of the main text do not apply to institutions classified in Segment 5 (S5), in accordance with Resolution No. 4,553, of January 30, 2017.” (NR)

Art. 35. Art. 1º of Resolution No. 4,192, of 2013, shall be effective with the following wording:

“Art. 1º This Resolution establishes the methodology for calculating Reference Equity (PR) calculated by financial institutions and other institutions authorized to operate by the Central Bank of Brazil.

Sole Paragraph. The following are exempt from the provisions of the main text:

I - institutions opting for the simplified optional methodology for calculating the minimum requirement for Simplified Reference Equity (PRS5), in accordance with Resolution No. 4,606, of October 19, 2017; and

II - microentrepreneur credit societies and small business credit companies.” (NR)

Art. 36. Art. 1º of Resolution No. 4,193, of March 1, 2013, shall be effective with the following wording:

“Art. 1º ........................................................

Sole Paragraph. The provisions of the main text do not apply to institutions classified in Segment 5 (S5), in accordance with Resolution No. 4,553, of January 30, 2017.” (NR)

Art. 37. This Resolution enters into force on February 18, 2018.

Art. 38. Resolution No. 4,194, of March 1, 2013, is hereby repealed.

Ilan Goldfajn
President of the Central Bank of Brazil