BCB Outlines ESG Focus and Prudential Rules for Payment Activities
The Central Bank of Brazil (BCB) published the revised prudential rules for payment activities made by certain financial institutions, a report that sets out deliverables in the area of environmental, social, and governance (ESG), and a report that focuses on the implementation, projects undertaken, and achievements with respect to the regulatory sandbox initiative. The report notes that, in the first cycle of the central bank regulatory sandbox, 52 projects were registered and seven were selected, with report also explaining the selection rationale for these projects.
Revised prudential rules for payment activities
The National Monetary Council (CMN) recently approved Resolution 5049, which revises the prudential rules for payment activities. The Resolution addresses the calculation of the capital required for the risks associated with payment services (RWASP) for type 1 conglomerates falling within segments S2 to S5 (largely comprising of banks). The clusters classified in S1 (banks of systemic importance) are not subject to these rules and will continue to follow the Basel regulatory standard. The new regulation specifies that Type 1 and Type 3 conglomerates are subject to the same rules for the calculation of minimum capital requirements. This CMN Resolution exempts the subsidiary financial institutions of the capital requirement calculation payment institution in an individualized manner.
Continuing the improvement of the prudential framework applicable to payment institutions and their conglomerates, BCB also approved the Resolution 265 establishing the risk management structure, capital management structure, and policy for the disclosure of prudential conglomerate information classified as Type 3. Under the rules still in force, the conglomerate's leading payment institution is subject to the risk management requirements set forth in Circular No. 3681, while the subsidiary financial institution is subject to the commands of Resolution No. 4557. The new BCB Risk and Capital Management Resolution covers the requirements present in the two rules mentioned and will apply to the Type 3 conglomerate, bringing greater efficiency and security in the risk and capital management of this type of conglomerate. Finally, the circulars and resolutions that establish the methodology for calculating the risk-weighted portions of assets for credit, market, and operational risks for their application to Type 3 conglomerates were adjusted. BCB Resolution No. 200 already stated that these conglomerates were subject to such requirements, but it was necessary to adjust the wording of the circulars to explain that the regulations also apply to type 3 conglomerates. Specifically, the BCB Resolution 266 amends circular and BCB resolution establishing procedures for calculating the portions of the risk-weighted asset amount, the Additional Principal Capital Countercyclical (ACPCountercyclical), and capital to cover the risk of interest rate variation on instruments classified in the banking portfolio (IRRBB) for application to the conglomerate of the Type 3; it also amends the circulars that establish the simplified risk-weighted asset requirements for application to Type 2 and 3 conglomerates.
Deliverables in area of ESG
The ESG report sets out the activities undertaken toward improving supervision and data collection in financial sector of Brazil in 2022. The report also outlines the expected deliverables for 2023, including the following:
Establishment of the Green Bureau of Rural Credit and identification of social and environmental benefits with respect to the rural credit operations
Development of sustainability score system and improvement of control mechanisms using georeferencing tools
Improvements in the dissemination of information by financial institutions, based on recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD)
Estimations of the effects of socio-environmental risks on the economy and the National Financial System (SFN)
- Assessment of SFN exposure to transition risks and analysis of extreme drought risk-sensitivity
- Structuring and expansion of information collection and improvement in social risk supervision process
- Inclusion of sustainability criteria for selection of counterparties in the management of international reserves and for investment selection
- Reduction of the environmental impact of specified aspects and promotion of the sustainability culture of sustainability by the Committee for Organizational Social and Environmental Responsibility (CRSO).
Related Links (in Portugese)
Keywords: Americas, Brazil, Banking, Basel, Regulatory Capital, ESG, Climate Change Risk, Sustainable Finance, Lending, BCB
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