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

Rodolfo Tomás da Fonseca Nicolay; Claudio Oliveira de Moraes; Bruno Pires Tiberto

doi:10.33119/ERFIN.2018.3.1.1

Rodolfo Tomás da Fonseca Nicolay Catholic University of Petrópolis and Candido Mendes University, Brazil http://orcid.org/0000-0003-1325-5136
Claudio Oliveira de Moraes Central Bank of Brazil and Candido Mendes University, Brazil
Bruno Pires Tiberto Central Bank of Brazil, Brazil

DOI: https://doi.org/10.33119/ERFIN.2018.3.1.1

Keywords: Central Bank Communication, Capital Buffer, Monetary Policy, Financial Stability

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.

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