IDEAS home Printed from https://ideas.repec.org/p/bcb/wpaper/189.html
   My bibliography  Save this paper

Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks

Author

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

Abstract

This study constructs a set of credit risk indicators for 39 Brazilian banks, using the Merton framework and balance sheet information on the banks’ total assets and liabilities. Despite the simplifying assumptions, the methodology captures well several stylized facts in the recent history of Brazil. In particular, it identifies deterioration in the credit risk indicators of the banking sector, following the crisis in the early 2000s. The risk indicators were regressed against a number of macro-financial variables at both individual and systemic level, showing that an increase in the system EDF, interest rates, and CDS spreads will lead to a deterioration of the individual expected default probability.

Suggested Citation

  • Marcos Souto & Benjamin M. Tabak & Francisco Vazquez, 2009. "Linking Financial and Macroeconomic Factors to Credit Risk Indicators of Brazilian Banks," Working Papers Series 189, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:189
    as

    Download full text from publisher

    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps189.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Mr. Dale F Gray & Mr. James P Walsh, 2008. "Factor Model for Stress-testing with a Contingent Claims Model of the Chilean Banking System," IMF Working Papers 2008/089, International Monetary Fund.
    3. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Ms. Yingbin Xiao & Mr. Dale F Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis: Estimating Default Risk and Economy-Wide Risk Transfer," IMF Working Papers 2004/121, International Monetary Fund.
    6. Michael T. Gapen & Mr. Dale F Gray & Cheng Hoon Lim & Ms. Yingbin Xiao, 2005. "Measuring and Analyzing Sovereign Risk with Contingent Claims," IMF Working Papers 2005/155, International Monetary Fund.
    7. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xisong Jin & Francisco Nadal De Simone, 2012. "An Early-warning and Dynamic Forecasting Framework of Default Probabilities for the Macroprudential Policy Indicators Arsenal," BCL working papers 75, Central Bank of Luxembourg.
    2. Guerra, Solange Maria & Silva, Thiago Christiano & Tabak, Benjamin Miranda & de Souza Penaloza, Rodrigo Andrés & de Castro Miranda, Rodrigo César, 2016. "Systemic risk measures," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 442(C), pages 329-342.
    3. Jin, Xisong & Nadal De Simone, Francisco de A., 2014. "Banking systemic vulnerabilities: A tail-risk dynamic CIMDO approach," Journal of Financial Stability, Elsevier, vol. 14(C), pages 81-101.
    4. Souza, Sergio R.S. & Tabak, Benjamin M. & Silva, Thiago C. & Guerra, Solange M., 2015. "Insolvency and contagion in the Brazilian interbank market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 431(C), pages 140-151.
    5. Mr. Marcos R Souto & Mr. Rodolphe Blavy, 2009. "Estimating Default Frequencies and Macrofinancial Linkages in the Mexican Banking Sector," IMF Working Papers 2009/109, International Monetary Fund.
    6. Xisong Jin & Francisco Nadal De Simone, 2016. "Tracking Changes in the Intensity of Financial Sector's Systemic Risk," BCL working papers 102, Central Bank of Luxembourg.
    7. Souza, Sergio Rubens Stancato de & Silva, Thiago Christiano & Tabak, Benjamin Miranda & Guerra, Solange Maria, 2016. "Evaluating systemic risk using bank default probabilities in financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 66(C), pages 54-75.
    8. International Monetary Fund, 2012. "Brazil: Selected Issues Paper," IMF Staff Country Reports 2012/192, International Monetary Fund.
    9. Jin, Xisong & Nadal De Simone, Francisco, 2014. "A framework for tracking changes in the intensity of investment funds' systemic risk," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 343-368.
    10. Xisong Jin & Francisco Nadal de Simone, 2011. "Market- and Book-Based Models of Probability of Default for Developing Macroprudential Policy Tools," BCL working papers 65, Central Bank of Luxembourg.
    11. Xisong Jin & Francisco Nadal De Simone, 2017. "Systemic Financial Sector and Sovereign Risks," BCL working papers 109, Central Bank of Luxembourg.
    12. International Monetary Fund, 2013. "Brazil: Technical Note on Consumer Credit Growth and Household Financial Stress," IMF Staff Country Reports 2013/149, International Monetary Fund.
    13. Xisong Jin & Francisco Nadal De Simone, 2015. "Investment funds? vulnerabilities: A tail-risk dynamic CIMDO approach," BCL working papers 95, Central Bank of Luxembourg.
    14. João Barata Ribeiro Blanco Barroso & Sergio Rubens Stancato de Souza & Solange Maria Guerra, 2016. "Systemic Risk-Taking Channel of Domestic and Foreign Monetary Policy," Working Papers Series 412, Central Bank of Brazil, Research Department.
    15. Xisong Jin, 2018. "How much does book value data tell us about systemic risk and its interactions with the macroeconomy? A Luxembourg empirical evaluation," BCL working papers 118, Central Bank of Luxembourg.
    16. Benjamin M. Tabak & Sergio R. S. Souza & Solange M. Guerra, 2013. "Assessing Systemic Risk in the Brazilian Interbank Market," Working Papers Series 318, Central Bank of Brazil, Research Department.
    17. Nadal De Simone, Francisco, 2021. "Measuring the deadly embrace: Systemic and sovereign risks," Research in International Business and Finance, Elsevier, vol. 56(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dale F. Gray & Robert C. Merton & Zvi Bodie, 2007. "New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability," NBER Working Papers 13607, National Bureau of Economic Research, Inc.
    2. Dale F. Gray & Carlos J. García & Leonardo Luna & Jorge E. Restrepo, 2011. "Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 6, pages 159-197, Central Bank of Chile.
    3. Marta Gómez-Puig & Simón Sosvilla-Rivero & Manish K. Singh, 2018. "“Incorporating creditors' seniority into contingent claim models:Application to peripheral euro area countries”," IREA Working Papers 201803, University of Barcelona, Research Institute of Applied Economics, revised Feb 2018.
    4. Mr. Dale F Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 2013/218, International Monetary Fund.
    5. Ms. Yingbin Xiao, 2009. "French Banks Amid the Global Financial Crisis," IMF Working Papers 2009/201, International Monetary Fund.
    6. Singh, Manish K. & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "Bank risk behavior and connectedness in EMU countries," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 161-184.
    7. Emiliano Delfau, 2019. "Medidas de estabilidad financiera y pruebas de estrés aplicando el modelo de análisis de derechos contingentes en Argentina," CEMA Working Papers: Serie Documentos de Trabajo. 698, Universidad del CEMA.
    8. Daniel Oda, 2013. "Introducing Liquidity Risk in the Contingent-Claim Analysis for the Banks," Working Papers Central Bank of Chile 681, Central Bank of Chile.
    9. Emiliano Delfau, 2018. "Risk Framework Analysis in the Management of Sovereign Debt: The Argentine case," CEMA Working Papers: Serie Documentos de Trabajo. 634, Universidad del CEMA.
    10. Burcu Aydin & Mr. Myeongsuk Kim & Mr. Ho-Seong Moon, 2011. "Financial Linkages Across Korean Banks," IMF Working Papers 2011/201, International Monetary Fund.
    11. Episcopos, Athanasios, 2008. "Bank capital regulation in a barrier option framework," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1677-1686, August.
    12. Cheng Few Lee & Yibing Chen & John Lee, 2020. "Alternative Methods to Derive Option Pricing Models: Review and Comparison," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 102, pages 3573-3617, World Scientific Publishing Co. Pte. Ltd..
    13. Arslanalp, Serkan & Liao, Yin, 2014. "Banking sector contingent liabilities and sovereign risk," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 316-330.
    14. Xisong Jin & Francisco Nadal De Simone, 2017. "Systemic Financial Sector and Sovereign Risks," BCL working papers 109, Central Bank of Luxembourg.
    15. Singh, Manish K. & Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2021. "Quantifying sovereign risk in the euro area," Economic Modelling, Elsevier, vol. 95(C), pages 76-96.
    16. International Monetary Fund, 2009. "South Africa: Selected Issues," IMF Staff Country Reports 2009/276, International Monetary Fund.
    17. Soumaré, Issouf & Lai, Van Son, 2016. "An analysis of government loan guarantees and direct investment through public-private partnerships," Economic Modelling, Elsevier, vol. 59(C), pages 508-519.
    18. Serkan Arslanalp & Yin Liao, 2013. "Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors," CAMA Working Papers 2013-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Stephen Matteo Miller, 2024. "How much would it cost to guarantee debt for all publicly traded U.S. corporations?," Contemporary Economic Policy, Western Economic Association International, vol. 42(4), pages 604-622, October.
    20. Angoua, Paul & Lai, Van Son & Soumare, Issouf, 2008. "Project risk choices under privately guaranteed debt financing," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(1), pages 123-152, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bcb:wpaper:189. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rodrigo Barbone Gonzalez (email available below). General contact details of provider: https://www.bcb.gov.br/en .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.