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The Banco de Portugal adopts the ECB’s guidance on the use of macroeconomic forecasts to estimate the expected credit loss during the COVID-19 pandemic

The Board of Directors of the Banco de Portugal has approved Circular Letter No CC/2020/00000036, which adopts the European Central Bank’s guidance on the use of macroeconomic forecasts to estimate the expected credit loss during the COVID-19 pandemic (SSM-2020-0154). Given that the ECB’s guidance is aimed at significant credit institutions, the Banco de Portugal’s Circular Letter extends it to all other institutions applying IAS/IFRS, including International Financial Reporting Standard 9 “Financial Instruments” (IFRS 9), in the preparation of their financial statements, pursuant to Notice of the Banco de Portugal No 5/2015 of 7 December 2015.

This guidance, which is available on the ECB's website, provides references to the use of macroeconomic forecasts to avoid excessively procyclical assumptions in their expected credit loss estimations, given the current context of heightened uncertainty and very limited availability of reasonable and supportable forward-looking information on the impact of COVID-19. In particular, this guidance covers: (i) the collective assessment of the significant increase in credit risk; (ii) the use of long-term macroeconomic forecasts; and (iii) the use of macroeconomic forecasts for specific years.