Financial Stability in Brazil by Luiz A. Pereira da Silva, Adriana Soares Sales e Wagner Piazza Gaglianone published by Banco Central do Brasil (8/2012).
This paper proposes a working definition for “financial stability” related to systemic risk. Systemic risk is then measured as the probability of disruption of financial services taking into account its time and crosssectional dimensions and several risk factors. The paper discusses the implications of this definition for Brazil in the aftermath of the recent global financial crisis. A comparison with the United States and the Euro zone is provided. In addition, systemic risk in the Brazilian credit market is investigated given its crucial role as main financial stability driver. Finally, synthetic indicators of systemic risk are used to monitor financial stability. The link between systemic risk and synthetic indicators and/or wellcorrelated proxies (e.g., a credit-to-GDP gap) allows the calculation of the probability of disruption of the financial system across its time dimension. Therefore, if a Financial Stability Committee and/or the prudential regulator define its tolerance level for “financial stability” as a threshold measured by this probability of disruption, it might have the capability of determining the precise moment when it should strengthen its set of adequate macroprudential responses and policies.
