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Liquidity and reserve requirements in Brazil

  • Patrice Robitaille
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    The international reform initiative that followed the global financial crisis of 2008-09 has resulted in the introduction of liquidity requirements for banks. Under one requirement, the Liquidity Coverage Ratio (LCR), banks will need to hold enough highly liquid assets to survive for a month in a stress scenario. Banks' required reserve balances can be used to fulfill this liquidity requirement and this may be seen as an attractive option for emerging market economies, where financial sectors are often underdeveloped. In this paper, I examine the Brazilian experience prior to and during the global crisis as a case study that can shed light into the challenges of using reserve requirements as a liquidity management tool. Brazilian reserve requirements did not ensure adequate liquidity, in part because the smallest banks were exempted from the requirements. Financial innovations were also used by banks to circumvent reserve requirements. In Brazil, the use of reserve requirements as a liquidity management tool is often justified by the argument that reserve requirements fulfilled a critical liquidity provision role in the fall of 2008. I argue that Brazilian reserve requirements did not actually serve well the liquidity provision goal.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1021.

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    Date of creation: 2011
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    Handle: RePEc:fip:fedgif:1021
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    1. Arvind Krishnamurthy, 2009. "Amplification Mechanisms in Liquidity Crises," NBER Working Papers 15040, National Bureau of Economic Research, Inc.
    2. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
    3. Carlos Montoro & Ramon Moreno, 2011. "The use of reserve requirements as a policy instrument in Latin America," BIS Quarterly Review, Bank for International Settlements, March.
    4. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
    5. Christiano A. Coelho & João M.P. De Mello & Bruno Funchal, 2012. "The Brazilian Payroll Lending Experiment," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 925-934, November.
    6. repec:idb:brikps:66338 is not listed on IDEAS
    7. Fabia Aparecida de Carvalho & Cyntia F. Azevedo, 2008. "The incidence of reserve requirements in Brazil: Do bank stockholders share the burden?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 61-90, May.
    8. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
    9. Eduardo Augusto de Souza Rodrigues & Tony Takeda, 2004. "Recolhimentos Compulsórios E Distribuição Das Taxas De Empréstimos Bancários No Brasil," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 095, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    10. Baer, Werner & Nazmi, Nader, 2000. "Privatization and restructuring of banks in Brazil," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(1), pages 3-24.
    11. Espinosa-Vega, Marco A, 1995. "Multiple Reserve Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 762-76, August.
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