Everything You Need to Know About Resolution 4,966
by Milton Pifano
As of January 1st, 2025, Resolution CMN 4,966/2021 came into effect, establishing rules for calculating provisions for expected credit losses. This new regulation replaces the former Resolution 2,682 and aims to align provisioning methods with international standards under IFRS 9.
Resolution 4,966 defines two methodological approaches:
Simplified Methodology: mandatory for financial institutions classified as S4 and S5.
Complete Methodology: required for institutions classified as S1, S2, and S3.
Complete Methodology
In the complete approach, financial instruments are categorized into three stages for expected loss calculation:
Stage 1: Expected loss over 12 months.
Stage 2: Expected loss over the entire life of the instrument.
Stage 3: Financial assets already considered problematic, requiring higher provisioning.
Expected losses are calculated based on three international parameters (in line with IFRS 9 / Basel III):
PD (Probability of Default)
LGD (Loss Given Default)
EAD (Exposure at Default)
Simplified Methodology
The simplified methodology allows smaller institutions (S4 and S5) to use less complex criteria to estimate provisioning. Instead of detailed predictive models, the provision may be based on:
Payment and default history of the counterparty
Level of indebtedness and financial commitment
Income and net worth (for individuals)
Credit limits and financial system behavior
Characteristics of guarantees and collateral linked to the instrument
Can S4 Institutions Opt for the Complete Methodology?
Yes. The Central Bank allows S4 institutions to adopt the complete methodology, subject to prior approval.
Advantages of Adopting the Complete Methodology
Potentially Lower Provisions
If the credit portfolio has low risk and good collateral, the complete methodology may lead to lower provisioning levels, freeing up capital for new operations.More Accurate Risk Measurement
The complete model allows a more tailored analysis, taking into account historical data, counterparty behavior, collateral, and macroeconomic factors—helping avoid overprovisioning, which is common in the simplified approach.Alignment with Larger Institutions (S1–S3)
Adopting a more advanced model can ease future transitions to higher regulatory segments if the institution grows.
The Hence team is ready to assist your institution through this transition.
