Macroprudential and Monetary Policy: Loan-Level Evidence from Reserve Requirements

Abstract

We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflow boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks leads to a reduction in the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure to riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies.

JEL Classification: E51, E52, F38, G21, G28