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A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector

Author

Listed:
  • Francisco Vazquez
  • Benjamin M. Tabak
  • Marcos Souto

Abstract

This paper proposes a model to conduct macro stress test of credit risk for the banking system based on scenario analysis. We employ an original bank level data set with disaggregated credit loans for business and consumer 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) NPLs and GDP growth, with a lag response up to three quarters. The models also indicate substantial variations in the cyclical behavior of NPLs across credit types. Stress tests suggest that the banking system is well prepared to absorb the credit losses associated with a set of distressed macroeconomic scenarios without threatening financial stability.

Suggested Citation

  • Francisco Vazquez & Benjamin M. Tabak & Marcos Souto, 2010. "A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector," Working Papers Series 226, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:226
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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