Explaining Bank Failures in Brazil: Micro, Macro and Contagion Effects (1994-1998)

Abstract

We apply duration (survival) models with exponential hazard and exponential piecewise-constant hazard functions to study the determinants of bank failure over the period 1994 to 1998 in Brazil. The models deal empirically with left censoring in the data. We control for macroeconomic conditions and contagion effects, besides bank-specific factors. Our results indicate that foreign banks have distinct empirical survival functions relatively to other banks. For Brazil, macroeconomic and bank-level covariates explain the likelihood and timing of bank failure. Our indicator of system-wide financial fragility (IFF) suggests that the banking industry faced increased fragility after November 1995. We find evidence that the Program of Incentives to the Restructuring and Strengthening of the National Financial System (Proer) was able to distinguish solvent from insolvent banks.