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Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis

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  • Ricardo Schechtman
  • Valéria Salomão Garcia
  • Sergio Mikio Koyama
  • Guilherme Cronemberger Parente

Abstract

The new Basel II Capital Accord has demanded a lot of attention from regulatory and regulated entities due to its innovations in determining capital requirements, particularly in the area of credit risk. This paper simulates the application of Basel II IRB foundation approach for the computation of capital and provision requirements relative to the credit risk of major Brazilian banks' corporate credit portfolios. The IRB necessary parameters of probabilities of default are estimated using variables derived from the raw data present in the Public Credit Register of the Central Bank of Brazil. IRB requirements are compared with the current Brazilian regulatory requirements. By making use of the CreditRisk+ portfolio model this paper shows how it is possible to extend the previous comparison. The main result is that, for the situation analyzed, the IRB approach can be considered more conservative than the current Brazilian prescription.

Suggested Citation

  • Ricardo Schechtman & Valéria Salomão Garcia & Sergio Mikio Koyama & Guilherme Cronemberger Parente, 2004. "Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil - A Corporate Analysis," Working Papers Series 91, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:91
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    References listed on IDEAS

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    1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
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    Cited by:

    1. Solange Gouvea, 2007. "Price Rigidity in Brazil: Evidence from CPI Micro Data," Working Papers Series 143, Central Bank of Brazil, Research Department.
    2. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.
    3. Correa, Arnildo da Silva & Minella, André, 2010. "Nonlinear mechanisms of the exchange rate pass-through: A Phillips curve model with threshold for Brazil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 64(3), September.
    4. Gilneu F. A. Vivan & Benjamin M. Tabak, 2007. "A New Proposal for Collection and Generation of Information on Financial Institutions' Risk: the case of derivatives," Working Papers Series 133, Central Bank of Brazil, Research Department.
    5. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 214-230.
    6. Sergio R. S. Souza & Benjamin M. Tabak & Daniel O. Cajueiro, 2008. "Long-Range Dependence In Exchange Rates: The Case Of The European Monetary System," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 199-223.
    7. Mauricio S. Bugarin & Fabia A. de Carvalho, 2005. "Comment on ‘Market discipline and monetary policy’ by Carl Walsh," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 732-739, October.
    8. Powell, Andrew & Mylenko, Nataliya & Miller, Margaret & Majnoni, Giovanni, 2004. "Improving credit information, bank regulation, and supervision : on the role and design of public credit registries," Policy Research Working Paper Series 3443, The World Bank.
    9. Ricardo Schechtman, 2017. "Joint Validation of Credit Rating PDs under Default Correlation," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 235-282, June.
    10. Barbara Alemanni & José Renato Haas Ornelas, 2006. "Herding Behavior by Equity Foreign Investors on Emerging Markets," Working Papers Series 125, Central Bank of Brazil, Research Department.
    11. World Bank, 2005. "Corporate Governance Country Assessment : Brazil," World Bank Publications - Reports 8273, The World Bank Group.
    12. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
    13. Flávia Mourão Graminho, 2006. "A Neoclassical Analysis of the Brazilian "Lost-Decades"," Working Papers Series 123, Central Bank of Brazil, Research Department.
    14. Mirta Noemí Sataka Bugarin & Roberto de Goes Ellery Jr. & Victor Gomes Silva & Marcelo Kfoury Muinhos, 2005. "Steady State Analysis of an Open Economy General Equilibrium Model for Brazil," Working Papers Series 92, Central Bank of Brazil, Research Department.
    15. Benjamin M. Tabak, 2006. "The Dynamic Relationship Between Stock Prices And Exchange Rates: Evidence For Brazil," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(08), pages 1377-1396.
    16. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.
    17. Maria da Glória D. S. Araújo & Mirta Bugarin & Marcelo Kfoury Muinhos & Jose Ricardo C. Silva, 2006. "The Effect of Adverse Supply Shocks on Monetary Policy and Output," Working Papers Series 103, Central Bank of Brazil, Research Department.
    18. Jaqueline Terra Moura Marins & Eduardo Saliby & Joséte Florencio do Santos, 2006. "Out-Of-The_Money Monte Carlo Simulation Option Pricing: the join use of Importance Sampling and Descriptive Sampling," Working Papers Series 116, Central Bank of Brazil, Research Department.
    19. Aloísio P. Araújo & José Valentim M. Vicente, 2006. "Contagion, Bankruptcy and Social Welfare Analysis in a Financial Economy with Risk Regulation Constraint," Working Papers Series 118, Central Bank of Brazil, Research Department.
    20. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
    21. Ana Carla A. Costa & João M. P. de Mello, 2006. "Judicial Risk and Credit Market Performance: Micro Evidence from Brazil Payroll Loans," Working Papers Series 102, Central Bank of Brazil, Research Department.
    22. Angelo Marsiglia Fasolo, 2006. "Interdependence and Contagion: an Analysis of Information Transmission in Latin America's Stock Markets," Working Papers Series 112, Central Bank of Brazil, Research Department.
    23. Girault, Matias Gutierrez & Hwang, Jane, 2010. "Public credit registries as a tool for bank regulation and supervision," Policy Research Working Paper Series 5489, The World Bank.

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