Imminent BACEN Credit Losses Resolutions: CMN 4966, BCB 352, and SCR
Banco Central do Brasil’s (BACEN/BCB) adaptation of the International Accounting Standards Board’s (IASB) International Financial Reporting Standards (IFRS 9) is set to go live in January 2025. Requirements to be implemented include Conselho Monetário Nacional (CMN) Resolution No. 4966/21 (accounting standards and criteria for financial instruments), BCB Resolution No. 352/23 (complementary to 4966), and a portion of Sistema de Informações de Créditos (SCR) reporting directly impacted by IFRS 9. A few SCR updated requirements go live in January 2026.
This constellation of requirements introduces a standard for calculating impairment via changes in the accounting and tax treatment of incurred and expected credit loss (ECL) for BACEN-authorized financial and non-financial institutions. The publication of Resolution No. 4966 in November 2021 represented the harmonization of Brazil’s accounting standards with international best practices, as well as the winding down of Resolution No. 2682. At the time, having four years to prepare seemed ample. Unfortunately, anecdotal evidence suggests that even at this late stage – with only seven months remaining – many banks are behind on their preparations for January 2025’s go live.
Even with a generous four-year lead time, many banks are unprepared for January 2025’s go live for BACEN 4966. Some may have underestimated the complexity of the requirements, including the need for a deeper level of granularity.
CMN Resolution No. 4966 (IFRS 9): Financial Instruments Data and Calculation Is Just The Beginning
This resolution establishes requirements for calculating cash flows from financial assets, including:
- The methodology for determining the effective interest rate of financial instruments
- A provision for losses associated with credit risk
- Criteria for hedge accounting, and
- The disclosure of financial instrument-related information
The requirements apply to authorized institutions, including banks, securities brokerages, securities-distribution companies, foreign exchange (FX) brokerages, consortium administrators, and payment institutions.
IFRS 9 Requirements: Overview
IFRS 9 comprises three pillars – classification and measurement, impairment, and hedge accounting – to which institutions must adhere to successfully implement its standards, depending on their business model for managing assets and contractual cash-flow characteristics. BACEN has gone as far as imposing a different ECL-calculation approach based on the segment: complete model for S1, S2, and S3, and simplified model for S4 and S5.
IFRS 9 specifies how an entity recognizes financial instruments in terms of:
- Classifications: Assets, liabilities, hybrid products available-for-sale (AFS), and held-to-maturity securities
- Measurements: Amortized cost (hold to collect), fair value through profit or loss (collect), and fair value through other comprehensive income (OCI) (collect and sell)
Impairment Recognition: Expected Credit Losses
The IFRS 9 standard outlines a three-stage (general) model for impairment based on changes in credit quality since initial recognition.
- Stage 1/Performing: Instruments that have had no significant credit-risk increase (deterioration) since recognition or that have low credit risk at the reporting date.
– ECL: Delays between 0 and 90 days, then probability of default (PD) = 12 months * loss given default (LGD) * exposure at default (EAD)
- Stage 2/Underperforming: Instruments that have had a significant credit-risk increase but do not yet have evidence of an impairment.
– ECL: Delay between 0 and 90 days, then PD = Lifetime * LGD * EAD
- Stage 3/Non-Performing: Instruments that have objective evidence of impairment (an ECL event) at the reporting date.
– ECL: Delay greater than 90 days, then PD = Max (1 * LGD * EAD + Incurred Losses)
– BACEN defines incurred losses by portfolio types – C1, C2, C3, C4, and C5 – and delineates how they must be treated in terms of minimum provisions.
BACEN and SCR Regulatory Reporting Requirements
The provision for expected credit and incurred losses is critical to support the setting up of general ledger (GL) postings by entity.
BACEN created more than 1,000 COSIF items, i.e., a chart of accounts to record provisions by a range of criteria, including classification (amortized cost, fair value OCI, fair value P&L), recognition stage (1, 2, or 3), and portfolio. Financial institutions must account for postings by product level, which requires more granularity and data-intensive processes. Lower granularity does not accommodate this level of reconciliation.
Granular data for credit operations reporting and balance sheet postings via SCR CADOC 3040 and accounting reports, includes:
- Data dictionary elaboration: Product and portfolio types, on- and off-balance sheet GL accounts, P&L, etc.
- Accounting events for COSIF compliance: Expected loss, incurred loss, additional provision, fair value adjustment, write-off, loss recovery, and reversal entries
- Monthly reporting: Provision accrual and prior month accrual reversal
BACEN/IFRS 9 Regulatory and Technical Drivers
Because IFRS 9 impairment calculations involve the computation of forward-looking parameters, scenario modeling (PD, LGD, and EAD) as well as tailored clustering and stage classification rules for ECL calculation, in-scope financial institutions (especially S1, S2, and S3) are required to implement a system to process all of it, with an appropriate level of granularity; in other words, one that captures essential details about financial instruments, counterparties, and collateral/guarantees.
Given that such details usually come from different data sources, including legacy systems, this can be quite a functional challenge for banks in terms of data staging, harmonization, and data lineage. Moreover, an IFRS 9 implementation changes the way that expected and minimum provisions for incurred losses are calculated for each transaction, making consistent ECL modeling and calculation crucial parts of the process. By properly addressing these challenges, banks can evaluate and optimize the impact of provisions on the balance sheet and submit updated regulatory reports, including SCR, that reflect the new COSIF accounts.
There are also technical challenges for banks – around the integration of GL data source(s) and/or multiple legacy products for provisioning, categorization, and postings – needing to create the necessary reconciliation logic and manual adjustments to avoid inconsistencies in recorded values. While some banks are well on their way in terms of preparations, others, including many S3 banks, are still struggling to define statistical parameter models for their ECL computation and how to process them; and others may not have the appropriate technology.
Key In-Force Dates
| January | 2025 | 2026 |
| Credit Losses Provision |
• Resolução CMN No. 4966 • Resolução BCB No. 352 |
|
| New COSIFs | Instrução Normativa Nos. 268, 269, 270, 271, 272, 273, 275, 320, 343, 378, 386, 404, 430, 431, 432, 433, 442, and 447 | |
| SCR | IFRS 9-related requirements | Remaining updated requirements |
| Frequency | Monthly |
So Many Resolutions, So Little Time To Prepare
Given that the last four years have gone by so quickly that some institutions are behind on their preparations, the next six months are apt to feel like the blink of an eye for BACEN-authorized institutions needing to comply with the constellation of requirements – BACEN 4966 (IFRS 9), BCB 352, and SCR CADOC 3040 – going live in January 2025. The requirements simultaneously call upon banks to perform complex ECL modeling and computations, establish the appropriate level of data granularity, conduct appropriate data staging and harmonization, while demonstrating transparent governance and cross-report reconciliation.
BACEN/IFRS 9 impairment calculations are complex, especially for in-scope financial institutions (S1, S2, and S3) that must implement a system to manage all the computational intricacies (such as the mandated complete-model approach), while instituting the necessary level of data granularity to capture essential details about financial instruments, counterparties, and collateral/guarantees. Such granularity emanates from diverse data sources including banks’ legacy systems.
For many, sourcing data presents a staging and harmonization challenge that requires a regulatory data dictionary (e.g., for GL, ECL, DLO, DDR, and DRM) and a system – ideally a single platform – that significantly reduces or eliminates the risks associated with manual processes and/or spreadsheet-based approaches, enterprise wide. The system’s ECL calculation engine must be robust enough to transparently consolidate data, models, and calculations across various portfolios and what-if scenarios, generating stressed ECL values, as well as movement analysis to identify the underlying drivers for changes in ECL between reporting periods.
In addition to addressing computation complexities, banks must demonstrate effective governance of their implementations. Having a system that provides complete visibility into business rules, data transformation, and audit trails is essential to their ability to comply with the regulator’s data transparency and lineage requirements. Furthermore, banks must achieve this level of transparency for each contract, including its characteristics (i.e., guarantees and/or collateral), computation details for PD/LGD/EAD, and ECL result.
Lastly, an institution’s reconciliation capabilities are also critical as they must allow for the integration of multiple reporting modules, i.e., able to accommodate direct mappings to SCR transactions (CADOC 3040 report), COSIF accounts, or GL. The regulator will also want assurances that the bank’s system is well maintained and flexible enough to easily incorporate updates, e.g., in the SCR reports and the COSIF chart of accounts.
The good news for banks is that all this hard work not only staves off the risk of non-compliance with BACEN 4966/IRFS 9, BCB 352 and SCR mandates but also, it can yield strategic benefits. Indeed, with a single platform, integrated regulatory data dictionary, and a holistic approach, BACEN-authorized institutions can monitor, manage, and adjust their positions, results, and tax provisioning, which supports timely counterparty-behavior analysis and enables banks to make more capital-efficient decisions. Worth the effort.
Increased GL reconciliation and reporting-granularity requirements benefit from standardized, industrialized processes, robust mechanisms for development and implementation, and a single-platform solution for end-to-end risk and regulatory reporting, full data control, and scalability across complex entities.
