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Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks

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  • Marcos Souto
  • Benjamin M. Tabak
  • Francisco Vazquez

Abstract

This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps189.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 189.

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Date of creation: Jul 2009
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Handle: RePEc:bcb:wpaper:189

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Web page: http://www.bcb.gov.br/?english

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  1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  2. Dale F. Gray & James P Walsh, 2008. "Factor Model for Stress-Testing with a Contingent Claims Model of the Chilean Banking System," IMF Working Papers 08/89, International Monetary Fund.
  3. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis," IMF Working Papers 04/121, International Monetary Fund.
  4. Michael T. Gapen & Dale F. Gray & Cheng Hoon Lim & Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 05/155, International Monetary Fund.
  5. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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Cited by:
  1. Xisong Jin & Francisco Nadal De Simone, 2013. "Banking Systemic Vulnerabilities: A Tail-risk Dynamic CIMDO Approach," BCL working papers 82, Central Bank of Luxembourg.
  2. Xisong Jin & Francisco Nadal de Simone, 2011. "Market- and Book-Based Models of Probability of Default for Developing Macroprudential Policy Tools," BCL working papers 65, Central Bank of Luxembourg.
  3. Marcos Souto & Rodolphe Blavy, 2009. "Estimating Default Frequencies and Macrofinancial Linkages in the Mexican Banking Sector," IMF Working Papers 09/109, International Monetary Fund.
  4. Benjamin M. Tabak & Sergio R. S. Souza & Solange M. Guerra, 2013. "Assessing Systemic Risk in the Brazilian Interbank Market," Working Papers Series 318, Central Bank of Brazil, Research Department.
  5. Xisong Jin & Francisco Nadal De Simone, 2012. "An Early-warning and Dynamic Forecasting Framework of Default Probabilities for the Macroprudential Policy Indicators Arsenal," BCL working papers 75, Central Bank of Luxembourg.
  6. Sergio R. S. Souza & Benjamin M. Tabak & Solange M. Guerra, 2013. "Insolvency and Contagion in the Brazilian Interbank Market," Working Papers Series 320, Central Bank of Brazil, Research Department.

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