BCB establishes new Capital and Compulsory Deposit Regulations due to impacts of the climate emergency in Rio Grande do Sul

In response to a market request, the National Monetary Council (“CMN“) decided to grant banks and payment institutions operating in the state of Rio Grande do Sul a specific and temporary relief from capital requirements and compulsory deposit, as applicable. Thus, on May 13, 2024, the Central Bank of Brazil (“BCB” or the “Central Bank”) published

• BCB Resolution No. 378, which, in light of the impacts caused by the climate emergency in Rio Grande do Sul, establishes, for a fixed period of time, temporary criteria for restructuring transactions securitized by counterparties affected by this event, in order to manage credit risk for prudential conglomerates classified as Type 2 or Type 3, payment institutions that are not part of a prudential conglomerate, securities distribution companies, securities brokerage companies and foreign exchange brokerage companies, as well as conglomerates led by these institutions (“BCB Resolution 378/2023“); and
• BCB Resolution No. 379, which amends the rules on compulsory deposit of funds from savings deposits, to establish exemptions from the requirement due to the state of public calamity in the state of Rio Grande do Sul (“BCB Resolution No. 379/2023”).

According to BCB Resolution 378/2024, transaction restructurings are exempt from being classified as “problem assets” due to the potential impact on the financial capacity of borrowers located in the state of Rio Grande do Sul, for the purposes of the provisions of paragraph 1, article 22 of BCB Resolution No. 265, of November 25, 2022, paragraph 2, article 22 of BCB Resolution No. 198, of March 11, 2022, paragraph 1, article 30 of BCB Resolution No. 201, of March 11, 2022, paragraph 1, article 24 of Resolution No. 4,557, of February 23, 2017, and paragraph 1 of article 27 of Resolution No. 4,606, of October 19, 2017.

In addition, BCB Resolution 378/2024 provides for the possibility of immediate reversal of characterizing the exposure caused by these obligations as problem assets, classified as such based exclusively on the likelihood of default as a result of the fact that the counterparty does not maintain its original financial capacity to honor the obligation under the conditions agreed at the inception of the financial transaction, under the terms of item I of paragraph 1, article 22 of BCB Resolution no. 265, of 2022; item I of paragraph 2, article 22 of BCB Resolution No. 198, of 2022; item I of paragraph 1, article 30 of BCB Resolution No. 201, of 2022; item I of paragraph 1, article 24 of Resolution No. 4,557, of 2017; or item I of paragraph 1, article 27 of Resolution No. 4,606, of 2017.

The Central Bank emphasizes that these rules do not apply to the restructuring of transactions already characterized as problem assets on the date of publication of BCB Resolution 378/2024, or to transactions in which there is evidence of the counterparties’ financial weakness to fulfill the obligations.

In addition, the Central Bank determines that the credit analysis documentation relating to restructurings carried out under BCB Resolution 378/2024 must be kept at the disposal of the Central Bank for a period of 5 years.

According to BCB Resolution No. 379/2024, financial institutions that have registered with the Central Bank’s Credit Information System (“SCR”), using the form “Documento 3040” (credit risk data), on the base date of March 31, 2024, a minimum of 10% of their total volume of loans granted to individuals residing or legal entities established in municipalities covered by the state of public calamity referred to in the Legislative Decree No. 36 of May 07, 2024, are entitled to a 100% deduction on the demand for funds from savings deposits in the free and rural modalities.

Moreover, BCB Resolution 379 provides that the above will apply: (i) as of the calculation period from May 13, 2024 to May 17, 2024, which will be adjusted on May 27, 2024; (ii) as of the calculation period from June 02, 2025 to June 06, 2025, which will be adjusted on June 16, 2025, and the amount of the deduction will be progressively reduced for each new calculation period by an amount equivalent to 5% of the liability generated in the period, until it is extinguished.

Although infrequent, the measures adopted by the CMN and published by the BCB are urgent and seek to support the supply of credit and generate, with the exemption from compulsory deposits, greater liquidity available to economic agents operating in the state of Rio Grande do Sul, thus enabling them to partially absorb the adverse impacts caused to the state’s economy as a result of the climate calamity. Finally, the BCB announced in a statement that it will continue to monitor the evolution of the measure implemented for the region, while keeping in mind the adoption of other measures that may become necessary, “in order to maintain the efficient functioning and soundness of the financial system”.

Demarest’s Banking and Finance team is available to provide any further clarifications on the topic that may be necessary.