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Credit Default and Business Cycles: an empirical investigation of Brazilian retail loans

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  • Arnildo da Silva Correa
  • Jaqueline Terra Moura Marins
  • Myrian Beatriz Eiras das Neves
  • Antonio Carlos Magalhães da Silva

Abstract

We use microdata from the Credit Information System (SCR) of the Central Bank of Brazil to study the relationship between credit default and business cycles. In particular, we study the first part of the argument underlying the discussion about procyclicality related to the Basel II Accord: that recessions might increase credit defaults and have adverse impacts on the losses in portfolios of lender institutions. We explore both time series and cross-sectional variation in the data. Our data on the individual level are composed of retail loan transactions in two modalities—Consumer Credit and Vehicle Financing—from 2003 to 2008. Our results support the idea of a negative relationship between business cycles and credit default, but less strong than suggested in previous studies that use corporate data. We also find low and dispersed default correlations, and smaller losses in Value at Risk (VaR) experiments than those found in the literature. These results may be possibly explained by the fact that, in the retail sector, loans are given to a large number of individuals, which may help to diversify risks.

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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 260.

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Date of creation: Nov 2011
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Handle: RePEc:bcb:wpaper:260

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

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  1. Siem Jan Koopman & André Lucas & André Monteiro, 2005. "The Multi-State Latent Factor Intensity Model for Credit Rating Transitions," Tinbergen Institute Discussion Papers 05-071/4, Tinbergen Institute, revised 04 Jul 2005.
  2. Koopman, Siem Jan & Lucas, Andre & Klaassen, Pieter, 2005. "Empirical credit cycles and capital buffer formation," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3159-3179, December.
  3. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects Of Basel Ii," Working Papers wp2008_0809, CEMFI.
  4. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  5. Antonio Carlos Magalhães da Silva & Jaqueline Terra Moura Marins & Myrian Beatriz Eiras das Neves, 2009. "Loss Given Default: um estudo sobre perdas em operações prefixadas no mercado brasileiro," Working Papers Series 193, Central Bank of Brazil, Research Department.
  6. Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
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Cited by:
  1. Jaqueline Terra Moura Marins & Myrian Beatriz Eiras das Neves, 2013. "Credit Default and Business Cycles: an investigation of this relationship in the Brazilian corporate credit market," Working Papers Series 304, Central Bank of Brazil, Research Department.
  2. Ornelas, Jose Renato Haas & Barbachan, José Fajardo & Farias, Aquiles Rocha de, 2012. "Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options," EBAPE Working Papers 1, School of Public and Business Administration, Getulio Vargas Foundation (Brazil).
  3. Bruno Martins, 2012. "Local Market Structure and Bank Competition: evidence from the Brazilian auto loan market," Working Papers Series 299, Central Bank of Brazil, Research Department.
  4. Waldyr Areosa & Marta Areosa, 2012. "Information (in) Chains: information transmission through production chains," Working Papers Series 286, Central Bank of Brazil, Research Department.
  5. Angelo Marsiglia Fasolo, 2012. "A Note on Particle Filters Applied to DSGE Models," Working Papers Series 281, Central Bank of Brazil, Research Department.

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