Brazil: Reserve Requirements, GFC

Abstract

After the collapse of Lehman Brothers in September 2008, deposits began to accumulate at large Brazilian banks, representing a flight to safety away from small and medium-sized banks. While total deposits in the Brazilian financial system grew by 13% from August 2008 to January 2009, the total deposits held by small and medium-sized banks declined by 23% and 11%, respectively. Because of high statutory reserve requirements and legal disincentives to lend directly to financial institutions, the Central Bank of Brazil (BCB) used reserve requirements as its primary tool for providing liquidity to incentivize large banks to provide credit to smaller banks, starting in October 2008. In October 2008, the BCB lowered reserve requirements for all banks. It also increased eligibility thresholds, which released some smaller banks from holding required reserves, provided voluntary deductions for large banks that lent to smaller banks, and effectively mandated that large banks spread liquidity to smaller banks. The BCB maintained these policies throughout the crisis and did not begin raising reserve requirements until 2010. The BCB estimated that these actions released BRL 116 billion (USD 71 billion) of reserves into the system, or 4% of GDP. Most of the impact was from increases in the deductions that banks could take from their requirements, rather than from the headline cuts in reserve requirement ratios.

Keywords: Brazil, GFC, liquidity rules, reserve ratio, reserve requirements

JEL Classification: G01, G28