State-dependent assessment of the deposit–credit channel in Latin America

This paper studies how international capital inflows affect domestic credit supply in Latin America through the banking system’s deposit base and how this transmission varies across states of uncertainty. Using cross-border capital flows from the U.S. Treasury International Capital (TIC) system as an external instrument, we isolate exogenous shocks to deposit growth and estimate their causal impact on credit supply. The identification strategy builds on the premise that shifts in U.S. investors’ portfolios reflect global push factors—such as U.S. monetary policy and global risk appetite—rather than contemporaneous credit conditions in recipient economies. The results indicate that deposits are a key driver of credit supply, with instrumental variable estimates showing that exogenous increases in deposits, particularly those induced by bond inflows, significantly expand credit. However, this transmission is highly state-dependent: during episodes of elevated global volatility (VIX) or regional policy uncertainty (EPU-LATAM), the pass-through to lending weakens as banks absorb deposits as liquidity buffers or reallocate them toward safer assets. Complementary micro-level evidence from Peru confirms this nonlinear transmission at the bank-district level. Overall, the findings highlight deposits as a key conduit of global liquidity into domestic credit, but one whose effectiveness hinges critically on the surrounding risk environment.