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Explaining Bank Failures in Brazil: Micro, Macro and Contagion Effects (1994-1998)

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  • Adriana Soares Sales
  • Maria Eduarda Tannuri-Pianto

Abstract

We apply duration (survival) models with exponential hazard and exponential piecewise-constant hazard functions to study the determinants of bank failure over the period 1994 to 1998 in Brazil. The models deal empirically with left censoring in the data. We control for macroeconomic conditions and contagion effects, besides bank-specific factors. Our results indicate that foreign banks have distinct empirical survival functions relatively to other banks. For Brazil, macroeconomic and bank-level covariates explain the likelihood and timing of bank failure. Our indicator of system-wide financial fragility (IFF) suggests that the banking industry faced increased fragility after November 1995. We find evidence that the Program of Incentives to the Restructuring and Strengthening of the National Financial System (Proer) was able to distinguish solvent from insolvent banks.

Suggested Citation

  • Adriana Soares Sales & Maria Eduarda Tannuri-Pianto, 2007. "Explaining Bank Failures in Brazil: Micro, Macro and Contagion Effects (1994-1998)," Working Papers Series 147, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:147
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps147.pdf
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    References listed on IDEAS

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    1. Cole, Rebel A. & Gunther, Jeffery W., 1995. "Separating the likelihood and timing of bank failure," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1073-1089, September.
    2. Cysne, Rubens Penha & Costa, Sergio Gustavo Silveira da, 1997. "Effects of the real plan of the Brazilian banking system," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 304, FGV/EPGE - Escola Brasileira de Economia e Finan├žas, Getulio Vargas Foundation (Brazil).
    3. Marcelo Dabos & Walter Sosa Escudero, 2000. "Explaining and Predicting Bank Failure in Argentina Using Duration Models," Working Papers 26, Universidad de San Andres, Departamento de Economia, revised Apr 2000.
    4. Charles W. Calomiris & Andrew Powell, 2000. "Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-1999," NBER Working Papers 7715, National Bureau of Economic Research, Inc.
    5. Liliana Rojas-Suarez, 2001. "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.
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