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A macro stress test model of credit risk for the Brazilian banking sector

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Author Info

  • Vazquez, Francisco
  • Tabak, Benjamin M.
  • Souto, Marcos

Abstract

This paper proposes a model to conduct macro stress test of credit risk for the banking sector based on scenario analysis. We employ an original bank-level data set that splits bank credit portfolios in 21 granular categories, covering household and corporate loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between the logistic transformation of non-performing loans (NPLs) and GDP growth, with a lag response of up to three quarters. The results also indicate that the procyclical behavior of loan quality varies across credit types. This is novel in the literature and suggests that banks with larger exposures to highly procyclical credit types and economic sectors would tend to undergo sharper deterioration in the quality of their credit portfolios during an economic downturn. Lack of sufficient portfolio granularity in macro stress testing fails to capture these effects and thus introduces a source of bias that tends to underestimate the tail losses stemming from the riskier banks in a system.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 8 (2012)
Issue (Month): 2 ()
Pages: 69-83

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Handle: RePEc:eee:finsta:v:8:y:2012:i:2:p:69-83

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Web page: http://www.elsevier.com/locate/jfstabil

Related research

Keywords: Banking system; Stress tests; Financial crisis; Credit risk;

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References

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  1. Theodore M. Barnhill & Marcos R. Souto & Benjamin M. Tabak, 2006. "An Analysis of Off-Site Supervision of Banks' Profitability, Risk and Capital Adequacy: a portfolio simulation approach applied to brazilian banks," Working Papers Series 117, Central Bank of Brazil, Research Department.
  2. repec:fth:bfdipa:6/2001 is not listed on IDEAS
  3. Pesola, Jarmo, 2001. "The role of macroeconomic shocks in banking crises," Research Discussion Papers 6/2001, Bank of Finland.
  4. Rodolphe Blavy, 2006. "Assessing Banking Sector Soundness in a Long-Term Framework: The Case of Venezuela," IMF Working Papers 06/225, International Monetary Fund.
  5. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408 Bank for International Settlements.
  6. Sorge, Marco & Virolainen, Kimmo, 2006. "A comparative analysis of macro stress-testing methodologies with application to Finland," Journal of Financial Stability, Elsevier, vol. 2(2), pages 113-151, June.
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Cited by:
  1. Benjamin M. Tabak & Marcelo Yoshio Takami & J. M. C. Rocha & Daniel O. Cajueiro, 2011. "Directed Clustering Coefficient as a Measure of Systemic Risk in Complex Banking Networks," Working Papers Series 249, Central Bank of Brazil, Research Department.

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