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Contagion Analysis: CAR WASH OPERATION Summary

Core Content

This document presents a contagion analysis focused on the CAR WASH OPERATION, which refers to a large-scale corruption scandal in Brazil involving Petrobras and its affiliated engineering companies. The analysis aims to evaluate the potential impacts on the financial system if these companies were to default, including supplier contagion and employment effects.

Main Points

• Contagion Framework: The analysis uses a network-based approach to model how the default of one company can propagate through the economic and financial sectors.
• Economic Groups: The study considers the economic groups associated with the companies involved in the scandal, not just the companies themselves.
• Real Sector Network: This network includes credit transactions, funding instruments, derivatives, FX, and equity exposures, providing a comprehensive view of the financial linkages.
• Labor Force: The impact on employment is also assessed, highlighting the unemployment effects that could result from company defaults.
• Contagion Process: The process of contagion continues until the network stabilizes, with a focus on identifying failed economic groups and mapping their financial system exposures.

Key Information

Exposures to the Financial System

• Credit Transactions: The primary source of exposure.
• Funding Instruments: Include various financial tools used by companies.
• Derivatives (including OTC): Financial contracts that can transmit risk.
• FX and Equity: Additional exposures that contribute to the overall financial risk.

Sources of Data

• Credit Register: Provided by the Central Bank of Brazil.
• Clearings: From BM&Fbovespa and CETIP.
• Equity Clearings: From BM&FBovespa and CBLC.

Contagion Chain

• First Round Defaults: Direct impact on companies involved in the scandal.
• Second Round Defaults: Impact on suppliers and related entities.
• Other Rounds Defaults: Further propagation through the network.
• Total Affected Companies: 51,000 companies in a network of 313,000.
• Vulnerable Groups: 30 groups including 447 companies.

Employment Impact

• Identified Employees: 5.2 million employees affected by the potential defaults.
• Unemployment: A significant consequence of the financial contagion.

Capital Needs

• Vulnerable Companies: R$130 million in capital needs.
• All Companies: R$3.4 billion in capital needs.
• Regulatory Capital Impact: 0% for vulnerable companies and 0.4% for the entire system.

Financial Sector Network

• Real Financial Sector Network: Highlights the actual financial linkages within the financial sector.
• All FIs Participations: Must be approved by the Central Bank, indicating regulatory oversight in financial transactions.

Summary of Results

• Net Exposure: The financial system's exposure to the CAR WASH OPERATION is visualized over time, showing changes from Dec/14 to Jun/16.
• Contagion Effects: The analysis demonstrates how the default of a single company can lead to a chain reaction across multiple levels of the economic and financial networks.
• Policy Implications: The results suggest the importance of monitoring and managing financial exposures within and across economic groups, especially in the context of large-scale corporate defaults.

Conclusion

The CAR WASH OPERATION has significant contagion effects on the financial system, affecting suppliers, employees, and financial institutions. The analysis underscores the interconnectedness of the real and financial sectors and the potential systemic risks associated with the default of major companies. The capital needs and regulatory capital impact further emphasize the financial stability concerns and the need for proactive risk management.