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The Influence of Collateral on Capital Requirements in the Brazilian Financial System: an approach through historical average and logistic regression on probability of default

Listed author(s):
  • Alan Cosme Rodrigues da Silva
  • Antônio Carlos Magalhães da Silva
  • Jaqueline Terra Moura Marins
  • Myrian Beatriz Eiras da Neves
  • Giovani Antonio Silva Brito

Using data drawn from the Brazilian Central Bank Credit Information System, this paper evaluates the impact of the use of collateral on the probability of default and, consequently, on capital requirement levels in the Brazilian financial system. Literature suggests that the existence of collateral in some credit operations increases the debtor's readiness to honor its commitment and, therefore, could result in a lower probability of default. The methodology used to calculate capital requirements is based on the Basel II IRB-Foundation Approach, although the probabilities of default have been estimated by historical averages following Basel II orientation, and corroborated by a logistic regression model. The test of hypothesis about difference between collateralized and uncollateralized probabilities of default for each risk class indicates that they are statistically different. This result was obtained both from historical average probability of default as from logistic regression model.Sob condições específicas, incluindo o requerimento de capital de 11% adotado no Brasil e a Perda dado Default (ou LGD da sigla em inglês) estabelecida em 45%, este artigo também procura identificar um fator de equivalência da razão entre os requerimentos de capital para risco de crédito na Abordagem Padronizada Simplificada e aqueles calculados pela Abordagem Básica do IRB. Para a amostra utilizada, os resultados indicam que operações de não-varejo com garantia possuem uma probabilidade média de default de 2,46% e um fator de equivalência de 60%. Em contrapartida, operações não garantidas possuem uma probabilidade média de default de 6,66% e um fator de equivalência de 93%, aproximando-se bastante do fator de ponderação de 100% da Abordagem Padronizada Simplificada.

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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 187.

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Date of creation: Jun 2009
Handle: RePEc:bcb:wpaper:187
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