The Brazilian experience on prudential regulation and its impacts on the 2008 financial crisis

Abstract

The Brazilian economy was severely hit by the 2008 crisis. In the beginning of the crisis, the vast majorities of the economic agents and authorities thought that Brazil could face some sort of decoupling since some macroeconomic fundamentals were very good. What we saw, however, was that the Brazilian economy was not decoupled, and expectations faced a huge deterioration soon after the bankruptcy of Lehman Brothers in September 15th. Two aspects regarding the impact of crisis in Brazil, however, deserve a great deal of attention: (a) although deep, the impact did not last for a long time. Actually, the GDP growth experienced a good recovery in the second quarter of 2009, showing that the health of the Brazilian economy was good; (b) the Brazilian banking system performed very well during the crisis, although we cannot say the system was not in danger in the worst time of the crisis. In spite of the confidence crisis faced by the banking system, it showed a great deal of resilience. In this aspect, we argue that the restructure faced by the banking system in the aftermath of the Real Plan, as well as the development of a solid supervision regulation helped a lot the system to avoid the systemic crisis that was an open possibility to the Brazilian banking system in the end of 2008. These notes, thus, discusse why the Brazilian banking system performed pretty well in the 2008 financial crisis and how the Brazilian banking (and prudential) regulation can be taken as responsible for this good performance. More specifically, the paper back to the middle of the 1990s, when the Real Plan was implemented, in order to understand the role played by the restructuring of the Brazilian financial system in helping to pave the way to the great resilience experienced by the Brazilian banking system during the 2008 crisis. More specifically, the prudential regulation that was

The asymmetric contagion effect from the U.S. stock market around the subprime crisis between 2007 and 2010

“…In general, scholars (Gorton, 2009;Sikka et al, 2009;Claessens et al, 2010;Longstaff, 2010) and the financial industry considered the report of the financial crisis of the New Century Financial Corp. as the beginning of the crisis. The Lehman Brothers' filing for bankruptcy on 15 September 2008 aggravated the subprime crisis, which also caused the degree of severity of the crisis to rise to a higher level (Swan, 2009;Longstaff, 2010;Sobreira, 2011;Afonso et al, 2012;Frankel and Saravelos, 2012;Dumontaux and Pop, 2013;Song and Zhu, 2018). In addition, the U.S. Congress passed the Emergency Economic Stabilisation Act (EESA), which included the 700 billion dollars 'Troubled Asset Relief Programʼ (TARP) on 4 October 2008.…”

“…Recent literature, such as that by Sikka et al (2009), Swan (2009), Longstaff (2010), Claessens et al (2010), Abad et al (2010), Sobreira (2011), Iyer and Peydr o (2011), Samarakoon (2011), Afonso et al (2012), Chouliaras et al (2012), Frankel and Saravelos (2012), Dumontaux and Pop (2013), Kenourgios et al (2013), Bekaert et al (2014) and Jiang et al (2017) about the contagion effect was based on the backgrounds of the subprime crisis and the European Monetary Union (EMU) sovereigndebt crisis (2009)(2010)(2011)(2012)(2013).…”