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

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

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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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps260.pdf
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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
Contact details of provider: Web page: http://www.bcb.gov.br/?english

References listed on IDEAS
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  1. Rafael Repullo & Javier Suarez, 2008. "The Procyclical Effects Of Basel Ii," Working Papers wp2008_0809, CEMFI.
  2. Pamela Nickell & William Perraudin & Simone Varotto, 2001. "Stability of ratings transitions," Bank of England working papers 133, Bank of England.
  3. 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.
  4. repec:dgr:uvatin:20050071 is not listed on IDEAS
  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. 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.
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