Skip to main content

Financial fragility in a general equilibrium model: the Brazilian case


This paper employs a general equilibrium approach to model the Brazilian financial system. We show that the model is able to replicate the main characteristics of the data and to predict short-term trends. We calibrate the model for the years of 2002–2006, which comprise a crisis period in Brazil’s financial system. Empirical results suggest that the financial system is improving in terms of financial stability over time. Furthermore, the model has been proven useful to model the Brazilian banking system and could be employed to evaluate the impact of changes in financial regulation on the banking system.

This is a preview of subscription content, access via your institution.


  • Aspachs O., Goodhart C.A.E., Tsomocos D.P., Zicchino L.: Towards a measure to financial fragility. Ann Finance 3, 37–74 (2007)

    Article  Google Scholar 

  • Baer W., Nazmi N.: Privatization and restructuring of banks in Brazil. Q Rev Econ Financ 40, 3–24 (2000)

    Article  Google Scholar 

  • Beck T., Demirguc-Kunt A., Levine R.: Bank concentration, competition and crises: first results. J Bank Financ 30, 1581–1603 (2006)

    Article  Google Scholar 

  • Bolt, W., de Haan, L., Hoeberichts, M., van Oordt, M., Swank, J.: Bank Profitability During Recessions. DNB Working Papers 251, Netherlands Central Bank, Research Department (2010)

  • Boyd J.H., Nicoló G.D.: The theory of bank risk taking and competition revisited. J Financ 60(3), 1329–1343 (2005)

    Article  Google Scholar 

  • Cajueiro D., Tabak B.M.: The role of banks in the Brazilian interbank market: does bank type matter?. Phys A 387, 6825–6836 (2008)

    Article  Google Scholar 

  • Caprio G., Kinglebiel D.: Episodes of Systematic and Borderline Financial Distress. The World Bank, mimeo (2002)

    Google Scholar 

  • Catarineu-Rabell E., Jackson P., Tsomocos D.: Procyclicality and the new Basel accord banks’ choice of loan rating system. Econ Theory 26(3), 537–557 (2005)

    Article  Google Scholar 

  • Chang E.J., Guerra S.M., Lima E.J.A., Tabak B.M.: The stability-concentration relationship in the Brazilian banking system. J Int Financ Mark Inst Money 18(4), 388–397 (2008)

    Article  Google Scholar 

  • Fang, Y., Hasan, I., Marton, K.: How Institutions Affect Bank Risk: Evidence From a Natural Experiment in Transition Economies, Paper Sessions, FMA Annual Meeting Program (2011)

  • Freixas X., Parigi B., Rochet J.C.: Systemic risk, interbank relations and liquidity provision by the central bank. J Money Credit Bank 32, 611–638 (2000)

    Article  Google Scholar 

  • Goodhart C.A.E., Sunirand P., Tsomocos D.P.: A model to analyse financial fragility: applications. J Financ Stab 1, 1–30 (2004)

    Article  Google Scholar 

  • Goodhart C.A.E., Sunirand P., Tsomocos D.P.: A risk assessment model for banks. Ann Finance 1, 197–224 (2005)

    Article  Google Scholar 

  • Goodhart C.A.E., Sunirand P., Tsomocos D.P.: A model to analyse financial fragility. Econ Theory 27, 107–142 (2006a)

    Article  Google Scholar 

  • Goodhart C.A.E., Sunirand P., Tsomocos D.P.: A time series analysis of financial fragility in the UK banking system. Ann Financ 2, 1–21 (2006b)

    Article  Google Scholar 

  • Goodhart C., Peris M., Tsomocos D., Vardoulakis A.: On the dividend restrictions and the collapse of the interbank market. Ann Finance 6(4), 455–473 (2010)

    Article  Google Scholar 

  • Hoggarth G., Reis R., Saporta V.: Costs of banking system instability: some empirical evidence. J Bank Finance 26, 825–855 (2002)

    Article  Google Scholar 

  • Pederzoli C., Torricelli C., Tsomocos D.: Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework. Ann Finance 6(1), 33–49 (2010)

    Article  Google Scholar 

  • Peria M.S.M., Moky A.: How foreign participation and market concentration impact bank spreads: evidence from Latin America. J Money Credit Bank 36(3), 511–537 (2004)

    Article  Google Scholar 

  • Saade A., Osorio D., Estrada D.: An equilibrium approach to financial stability analysis. Ann Finance 3, 75–106 (2007)

    Article  Google Scholar 

  • Staub R.B., Souza G., Tabak B.M.: Evolution of bank efficiency in Brazil: a DEA approach. Eur J Oper Res 202(1), 204–213 (2010)

    Article  Google Scholar 

  • Tabak B.M., Fazio D.M., Cajueiro D.O.: The effects of loan portfolio concentration on Brazilian banks’ return and risk. J Bank Finance 35(11), 3065–3076 (2011)

    Article  Google Scholar 

  • Tsomocos D.P.: Equilibrium analysis, banking and financial instability. J Math Econ 39, 619–655 (2003)

    Article  Google Scholar 

  • Tsomocos D.P., Bhattacharya S., Goodhart C.A.E., Sunirand P.: Banks, relative performance and sequential contagion. Econ Theory 32, 381–398 (2007)

    Article  Google Scholar 

  • World Bank: Global Development Finance. Washington (2002)

Download references

Author information

Authors and Affiliations


Corresponding author

Correspondence to Benjamin M. Tabak.

Additional information

The authors are grateful to partial financial support from CNPQ foundation. The opinions expressed in this paper are those of the authors and do not necessarily reflect those of the Banco Central do Brasil or its members. We also thank anonymous referees for helpful suggestions and comments.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Tabak, B.M., Cajueiro, D.O. & Fazio, D.M. Financial fragility in a general equilibrium model: the Brazilian case. Ann Finance 9, 519–541 (2013).

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI:


  • General equilibrium
  • Financial stability
  • Banking system
  • Financial regulation
  • Calibration

JEL Classification

  • G01
  • G10
  • G15
  • G18
  • G21