Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles

BIS Working Papers  |  No 832  | 
18 December 2019


We analyse whether the global financial cycle affects credit supply in Brazil, its related real effects, and whether local unconventional policies can attenuate such spillovers. After the announcement of the tapering of US quantitative easing by Federal Reserve Chairman Ben Bernanke in May 2013, domestic banks with a greater reliance on foreign debt reduced the supply of credit to firms in local currency, which in turn lowered employment. However, the Central Bank of Brazil (BCB) attenuated these negative effects by announcing a large intervention programme in the FX derivatives market, consisting in providing insurance against FX risks - hedger of last resort.


There is a large literature exploring the lending channel in emerging market economies and its dependence on global financial conditions. However, that literature does not evaluate how local unconventional policies, such as FX interventions, can attenuate the effects of the global financial cycle on local credit markets and on the overall economy. A growing literature on FX interventions has focused on sterilised FX interventions. The evidence on the effectiveness of these tools is a source of controversy, though. In this paper, we use micro-data from Brazil and focus on a different form of intervention using FX derivatives and find a potent channel that directly affects domestic banks, with related effects on firms' credit intake and labour demand.


For identification, we exploit global financial cycle shocks, the differential reliance of domestic banks on foreign debt, and central bank interventions in FX derivatives using three matched administrative registers: the register of foreign credit flows to banks, the credit register, and a matched employer-employee database. We find that banks with larger foreign debt liabilities contracted credit supply following the "taper tantrum", which tightened financial conditions for firms more dependent on these banks for funding, with related implications for firms' labour demand. After these events, the BCB intervention programme halved these effects. In addition to exploring these two subsequent shocks in a difference-in-difference strategy, we analyse a panel over 2008-15 and find a broader channel: banks with larger foreign debt responded to US dollar appreciation, increased FX volatility, and tighter US monetary policy by decreasing credit supply. FX interventions mitigated these effects of the global financial cycle on credit, confirming that policies promoting the supply of hedging instruments are effective in decreasing local economy exposure to global conditions.


We show that local central bank policies attenuate global financial cycle (GFC)'s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (followed by strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, a large FX intervention program supplying derivatives against FX risks-hedger of last resort-halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local related policies confirm these results.

JEL codes: E5, F3, G01, G21, G28

Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging