Preemptive Strategies for the Assessment and Management of Financial System Risk Levels in Latin American Countries

Research and Event Summaries

Project Abstract

This study will focus on modeling the risk level of banks operating in a selected Latin American Country (e.g. Argentina, Brazil, or Mexico). It is proposed to extend and apply a simulation model developed by Professor Barnhill that explicitly links changes in the relevant variables that characterize the financial environment and the distribution of possible future bank capital ratios. This forward looking quantitative risk assessment methodology allows banks and regulators to identify potential risks before they materialize and make appropriate adjustments to bank portfolio credit qualities, sector and region concentrations, and capital ratios on a bank by bank basis. The proposed research will study new methods of modeling stochastic variables including neural networks and pay special attention to the correlated risks of business lending and mortgage lending. The simulation model will also be extended to model the risk of contemporaneous failure of two banks, which is an important step toward modeling financial system (i.e. many bank) systemic risk levels. The current one portfolio model has been applied by the authors to the study of risk profile of U.S. bond portfolios.

This paper was selected for presentation at a Federal Reserve Bank of Chicago conference on global risk management and is forthcoming in the Journal of Banking and Finance. The risk assessment methodology has also been applied to the largest South African Banks in the context of the Financial System Stability Assessment program undertaken by the IMF in 1999. This paper was selected by the Milken Institute for its annual research excellence award in the area of global-studies. It is also currently being applied to the study of Japanese Banks in collaboration with the Inter-American Development Bank and the Japan Center for International Finance.

Faculty

Theodore Barnhill (PI), Professor, Department of Finance
Mark Eppli, Associate Professor, Department of Finance
James Ferrer, Research Professor, Center for Latin American Issues
John Glascock, Professor, Department of Finance
Fredrick Joutz, Associate Professor, Department of Economics
Robert Savickas, Assistant Professor, Department of Finance

Events

Globalization and Risk in the International Financial System
Globalization Brown Bag, February 2003

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