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March 19, 2020

COVID-19 | Banking and Financial Operations

Banking and Financial Operations​ - updated on Mar 19 at 05:19 pm

THE BRAZILIAN CENTRAL BANK PUBLISHES MEASURES AIMING TO REDUCE THE ADVERSE EFFECTS OF COVID-19 ON THE ECONOMY

In line with the continuing efforts by the Brazilian government to mitigate the effects of the COVID-19 pandemic, the National Monetary Council (CMN), in an extraordinary meeting, approved the Resolutions Nos. 4,782 and 4,783, published on March 16th, 2020, by the Brazilian Central Bank (BCB) in order to facilitate the renegotiation of loans granted to corporations and families.

Resolutions No. 4,782

The financial institutions are required to maintain a risk and capital management structure. According to the CMN rules[1], such institutions are required to classify an asset as “problematic” once there is credible evidence that a client no longer possesses the (financial) capacity to honor its obligation or when there is a restructuring of the loan transaction that implies in the granting of advantages to the client due to the deterioration of its credit score. When qualifying an asset as problematic, the financial institution must establish a corresponding expected loss estimate that reflects in the provisioning and capital availability of the corresponding institution.

The Resolution No. 4,782 exempts banks from classifying as problematic those assets subject to restructuring until September 30th, 2020, unless such assets were already classified as such on the date the Resolution came into force or if there is evidence of the absence of the client’s financial capacity to honor with the new conditions agreed.

Resolution No. 4,783

Since 2013, the financial institutions are required to maintain minimum capital levels in accordance with the parameters of “Basel III”. In addition to the minimum capital requirements (or equity reference), the Additional of Capital Principal (ACP) was instituted, whereby financial institutions are required to maintain additional equity for the maintenance of their own capital in order to face countercyclical movements or systemic risk.

The Resolution No. 4,783 decreased the percentage of ACP maintenance from 2.5% to 1.25% until March 31st, 2021, gradually reestablishing the percentage to return to the level of 2.5% as of April 1st, 2022. According to a note published by the Brazilian Central Bank, this measure would increase the capital margin in the National Financial System (SFN) in an amount of R$56 billion that would increase the loan capacity to an amount around R$637 billion.

[1] Item I and II of the 1st paragraph of the Clause 24 of the Resolution 4,557.

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