The Effect of Central Bank Communication on the Capital Buffer of Banks: Evidence from an Emerging Economy

Bruno Pires Tiberto,Rodolfo Tomás Da Fonseca Nicolay,Claudio Oliveira De Moraes

doi:10.33119/erfin.2018.3.1.1

Bruno Pires Tiberto, Rodolfo Tomás Da Fonseca Nicolay + Show 1 more

Open Access

https://doi.org/10.33119/erfin.2018.3.1.1

Copy DOI

Abstract

The global financial crisis has revealed that the coordination between monetary policy and financial stability should be part of economic policy. This study examines the effects of monetary policy on the capital buffer (financial stability proxy) in the Brazilian economy and, in particular, how communication about both monetary policy and normative macroprudential policy affect the capital buffer maintained by banks. The study presents three main results: i) banks react strongly to monetary policy changes by increasing (reducing) the capital buffer in response to an increase (decrease) in the interest rate; ii) banks increase (decrease) the capital buffer when the central bank monetary policy communication signals an increase (decrease) in interest rates; and iii) banks use the capital buffer to accommodate the new measures of regulatory capital: the announcement of restrictive (liberalizing) capital measures reduces (increases) the capital buffer.

Highlights

Financial stability is fundamental to the performance of the economy
In order to verify the effects of monetary policy on financial stability, we estimate the baseline model taking into account the effects of macroeconomic variables on the capital buffer
The empirical evidence presented in this work suggests that banks behave procyclically in relation to monetary policy changes, increasing the capital buffer to protect themselves against a possible scenario of economic deterioration and reducing the capital buffer in a scenario of economic boom

Summary

Introduction

Financial stability is fundamental to the performance of the economy. Prior to the global financial crisis (GFC), policymakers viewed financial stability as a typical regulatory problem. The second represents a novel approach to measuring the effect of capital regulatory measures on financial stability To our knowledge, this is the first work that analyzes the relationship between the capital buffer, monetary policy, and central bank communication. Our work has three main results that contribute to the empirical literature on the capital buffer, monetary policy, and central bank communication. The central bank normative macroprudential policy communication does not have the desired effect on soundness and safety of the financial system because banks use the capital buffer to accommodate the new measures of regulatory capital: the announcement of restrictive (liberalizing) capital measures reduces (increases) the capital buffer.

Data and Methodology

Estimates and Results

Conclusion

A Appendix