The National Monetary Council (CMN) issued two new resolutions on March 16 to ease prudential regulatory constraints imposed on banks in an attempt to maintain the flow of credit in the Brazilian economy and stimulate economic activity.

The first of these, CMN Resolution No. 4782/20, determined that, for the next six months, restructuring of debts with individuals and legal entities that have suffered deterioration in their credit capacity as a result of the current crisis no longer need to be considered "problematic assets" for the purposes of article 24 of CMN Resolution No. 4,557/17. In order to qualify for this exception, the transactions that will be restructured: (i) must not be characterized as problematic assets on the date of publication of this new rule; and (ii) must have individuals or legal entities with financial capacity to honor the obligation as counterparties, considering the new conditions agreed upon.

In practice, banks will not need to increase the provisioning normally required for this type of transaction, as the Risk Weighting Factor (FPR) applicable to these debts may be maintained at 85% of the exposure amount, as provided for in article 24-A of BCB Circular No. 3,644/13.

Through this act, the Central Bank of Brazil expects that up to R$ 3.2 trillion in debts may be renegotiated more easily, depending on the interest of the parties.[1]

It is important, however, that the financial institutions that make use of this exception log the adequacy of these renegotiations to the criteria mentioned above. In order to avoid abuses, CMN Resolution No. 4,782/20 requires that credit analysis documentation relating to restructurings carried out under such circumstances be kept at the disposal of the Central Bank of Brazil for five years.

The second rule, CMN Resolution No. 4,783/20, reduced financial institutions’ capital requirements until April of 2022. More specifically, the Additional Principal Capital Conservation (ACPconservation), currently set at 2.5% of institutions' risk weighted assets (RWA), will be reduced to 1.25% between April of this year and March of next year, with a gradual increase projected to return to the current level in April of 2022. ACPconservation is additional capital that banks must maintain in relation to the total volume of their exposures in normal times to ensure that in stress scenarios their core capital is more protected as losses occur.

With this measure, banks gain some room to expand their credit portfolios without the need to raise additional capital to that end. The expected result is an increase of approximately R$ 637 billion in the financial system's credit extension capacity.[2]

The CMN's changes to prudential rules show that this regulator is attentive to recent events and understands that what is usually prudent in times of normality may not be so in exceptional situations. Given that it has not yet been possible to size up the economic shock of the covid-19 outbreak, the expectation is that many other fostering measures may be established by the Brazilian government in the coming weeks, including significant regulatory changes with direct effects on the core business of financial institutions. Proper monitoring and necessary adjustments corresponding to these measures are essential to mitigate the structural effects of the crisis on financial institutions and on the Brazilian economy in general.

[1]Estadão. "BC facilitates renegotiation of debts of companies and families.",bc-facilita-renegociacao-de-dividas-de-empresas-e-familias,70003234653

[2] Idem