XXVI Edition

14-15-16 December 2017"

Macroprudential Instruments and Intra-Group Dynamics: The Effects of Reserve Requirements in Brazil

Chris Juerschick, Halle Institute for Economic Research
Ossandon Busch Matias, Halle Institute for Economic Research
Tonzer Lena, Halle Institute for Economic Research

The introduction of macroprudential policies to steer credit cycles has been a central part of the post-crisis consensus on banking regulation. This paper investigates whether the combination of banks’ funding structure and dynamics within a banking group affect the transmission of macroprudential policies to credit supply. Using novel bank-level data on the Brazilian banking system for the period 2008-2014, we provide robust evidence that reserve requirements imposed on banks’ headquarters affect credit supply by individual regional bank branches. However, this effect crucially depends on headquarter banks’ funding exposure to targeted deposits. Although this result holds even conditional on the stance of monetary policy, foreign-owned banks are less prone to transmit the effects of reserve requirements to their branches’ credit supply. This heterogeneous effect of reserve requirements highlights the limitations of current macroprudential policy frameworks.

Area: Banking

Keywords: Macroprudential regulation, financial intermediation, intra-group dynamics

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