Credit supply responses to reserve requirement: loan-level evidence from macroprudential policy

BIS Working Papers No 674
November 2017

Paper produced as part of the BIS Consultative Council for the Americas (CCA) research project on "The impact of macroprudential policies: an empirical analysis using credit registry data" implemented by a Working Group of the CCA Consultative Group of Directors of Financial Stability (CGDFS).



This paper estimates the impact of changing reserve requirements for banks on the credit supply in Brazil. We use a database that covers virtually all loans to private non-financial firms from the first quarter of 2008 to the second quarter of 2015. During this period, there were several interventions using reserve requirements. In our first exercise, we average the reserve requirement shocks using a macroprudential policy index. In a second exercise, we focus on the response of credit supply to relaxing reserve requirements in 2008, in response to a credit crunch, and tightening them in 2010 when credit was overheating.


The reaction to changes in reserve requirements may depend on the state of the economy and on bank characteristics. It also has implications on the composition of credit and the riskiness of borrowers. Estimates of the effects of reserve requirements on the credit supply are important for emerging markets, particularly for countries that use this tool to smooth the credit cycle. However, there is little loan-level evidence of the impact of reserve requirements. We explore a larger and longer dataset with policy shocks from tightening and easing cycles.


The results from the first exercise show that easing reserve requirements increases lending by the affected banks compared to  non-affected banks. A tightening of reserve requirements has the opposite effect. From the second exercise, we find that the tightening phase of reserve requirements had less impact on lending than the easing one. This suggests that the supply of bank credit reacts more to an easing than to a tightening. We find evidence that these policies have less impact on small and foreign banks. Finally, banks are prone to lend less to riskier firms during easing and more to riskier firms during tightening.



This paper estimates the impact of reserve requirements (RR) on credit supply in Brazil, exploring a large loan-level dataset. We use a difference-in-difference strategy, first in a long panel, then in a cross-section. In the first case, we estimate the average effect on credit supply of several changes in RR from 2008 to 2015 using a macroprudential policy index. In the second, we use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening. We find evidence of a lending channel where more liquid banks mitigate RR policy. Exploring the two phases of countercyclical policy, we find that the easing impacted the lending channel on average two times more than the tightening. Foreign and small banks mitigate these effects. Finally, banks are prone to lend less to riskier firms.

JEL classification: E51, E52, E58, G21, G28

Keywords: Reserve requirement, credit supply, capital ratio, liquidity ratio, macroprudential policy