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The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Share the Burden?

  • Fabia A. de Carvalho
  • Cyntia F. Azevedo

There is consensus in the economic literature that the reserve requirements are a tax levied upon financial intermediation, yet the incidence of the tax remains controversial. In this paper, we test whether changes in reserve requirements in Brazil impact the stock returns of the financial system distinctly from the rest of the economy. We find evidence that Brazilian bank stock returns were affected by changes in reserve requirements on both time deposits and transaction accounts, which implies that the tax burden of required reserves was not fully passed through to banks' borrowers or clients. Stock returns of non-financial firms were also affected by these changes, suggesting that in some cases, reserve requirements on time deposits and transaction accounts served as a non-neutral instrument of monetary or fiscal policy in Brazil.

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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 160.

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Date of creation: Feb 2008
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Handle: RePEc:bcb:wpaper:160
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  1. Scott E. Hein & Jonathan D. Stewart, 2002. "Reserve requirements: A modern perspective," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 41-52.
  2. Fabozzi, Frank J. & Thurston, Thom B., 1986. "State Taxes and Reserve Requirements as Major Determinants of Yield Spreads among Money Market Instruments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 427-436, December.
  3. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  4. Cosimano, Thomas F. & McDonald, Bill, 1998. "What's different among banks?," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 57-70, February.
  5. Bental, Benjamin & Eden, Benjamin, 2002. "Reserve requirements and output fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1597-1620, November.
  6. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  7. Baltensperger, Ernst, 1982. "Reserve Requirements and Economic Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(2), pages 205-15, May.
  8. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
  9. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
  10. Osborne, Dale K. & Zaher, Tarek S., 1992. "Reserve requirements, bank share prices, and the uniqueeness of bank loans," Journal of Banking & Finance, Elsevier, vol. 16(4), pages 799-812, August.
  11. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
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