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

  • Rodolfo Tomás da Fonseca Nicolay Catholic University of Petrópolis and Candido Mendes University, Brazil
  • Claudio Oliveira de Moraes Central Bank of Brazil and Candido Mendes University, Brazil
  • Bruno Pires Tiberto Central Bank of Brazil, Brazil
Keywords: Central Bank Communication, Capital Buffer, Monetary Policy, Financial Stability


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.


Altunbas, Y., Gambacorta, L., and Marques-Ibanez, D. (2009). Securitisation and the bank lending channel. European Economic Review, 53(8):996–1009.

Ayuso, J., Perez, D., and Saurina, J. (2004). Are capital buffers pro-cyclical?: Evidence from Spanish panel data. Journal of Financial Intermediation, 13(2):249–264. Bank Capital Adequacy Regulation under the New Basel Accord.

Basel Committee on Banking Supervision (2010). Guidance for national authorities operating the countercyclical capital buffer. Bank for International Settlements.

Blinder, A. S., Ehrmann, M., Fratzscher, M., Haan, J. D., and Jansen, D.-J. (2008). Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence. Working Paper 13932, National Bureau of Economic Research.

Borio, C. (2011). Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward. Annual Review of Financial Economics, 3(1):87–117.

Borio, C. and Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4):236–251.

Born, B., Ehrmann, M., and Fratzscher, M. (2012). Communicating About Macro-prudential Supervision – A New Challenge for Central Banks. International Finance, 15(2):179–203.

Brooks, C. (2014). Introductory Econometrics for Finance. Cambridge University Press.

Carvallo, O., Kasman, A., and Kontbay-Busun, S. (2015). The Latin American bank capital buffers and business cycle: Are they pro-cyclical? Journal of International Financial Markets, Institutions and Money, 36(C):148–160.

de Moraes, C. O., Montes, G. C., and Antunes, J. A. P. (2016). How does capital regulation react to monetary policy? New evidence on the risk-taking channel. Economic Modelling, 56:177–186.

Durbin, J. (1954). Errors in Variables. Review of the International Statistical Institute, 22(1/3):23–32.

Fitzenberger, B. (1998). The moving blocks bootstrap and robust inference for linear least squares and quantile regressions. Journal of Econometrics, 82(2):235–287.

Galati, G. and Moessner, R. (2013). Macroprudential Policy – A Literature Review. Journal of Economic Surveys, 27(5):846–878.

Guidara, A., Lai, V. S., Soumar´e, I., and Tchana, F. T. (2013). Banks’ capital buffer, risk and performance in the Canadian banking system: Impact of business cycles and regulatory changes. Journal of Banking and Finance, 37(9):3373–3387.

Hansen, L. (1982). Large Sample Properties of Generalized Method of Moments Estimators. Econometrica, 50(4):1029–54.

Hausman, J. (1978). Specification Tests in Econometrics. Econometrica, 46(6):1251–71.

Johnston, J. (1984). Econometric Methods. McGraw-Hill economics series. McGraw-Hill.

Jokipii, T. and Milne, A. (2008). The cyclical behaviour of European bank capital buffers. Journal of Banking and Finance, 32(8):1440–1451.

Jokipii, T. and Milne, A. (2011). Bank capital buffer and risk adjustment decisions. Journal of Financial Stability, 7(3):165–178.

Koenker, R. W. and Bassett, G. (1978). Regression Quantiles. Econometrica, 46(1):33–50.

Konishi, M. and Yasuda, Y. (2004). Factors affecting bank risk taking: Evidence from Japan. Journal of Banking and Finance, 28(1):215–232.

Lindquist, K.-G. (2004). Banks’ buffer capital: how important is risk. Journal of International Money and Finance, 23(3):493–513.

Milne, A. and Whalley, A. E. (2001). Bank capital regulation and incentives for risk-taking. Cass Business School Research Paper.

Montes, G. C. and Scarpari, A. (2015). Does central bank communication affect bank risk-taking? Applied Economics Letters, 22(9):751–758.

Nier, E. and Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Intermediation, 15(3):332–361.

Paoli, B. D. and Paustian, M. (2017). Coordinating Monetary and Macroprudential Policies. Journal of Money, Credit and Banking, 49(2–3):319–349.

Poloz, S. S. (2015). Integrating Financial Stability into Monetary Policy. Business Economics, 50(4):200–205.

Quint, D. and Rabanal, P. (2014). Monetary and Macroprudential Policy in an Estimated DSGE Model of the Euro Area. International Journal of Central Banking, 10(2):169–236.

Ramsey, J. B. (1969). Tests for Specification Errors in Classical Linear Least-Squares Regression Analysis. Journal of the Royal Statistical Society. Series B (Methodological), 31(2):350–371.

Repullo, R. (2005). Liquidity, Risk Taking, and the Lender of Last Resort. International Journal of Central Banking, 1(2).

Rosa, C. and Verga, G. (2007). On the consistency and effectiveness of central bank communication: Evidence from the ECB. European Journal of Political Economy, 23(1):146–175.

Rubio, M. and Carrasco-Gallego, J. A. (2014). Macroprudential and monetary policies: Implications for financial stability and welfare. Journal of Banking and Finance, 49:326–336.

Shim, J. (2013). Bank capital buffer and portfolio risk: The influence of business cycle and revenue diversification. Journal of Banking and Finance, 37(3):761–772.

Stolz, S. and Wedow, M. (2011). Banks’ regulatory capital buffer and the business cycle: Evidence for Germany. Journal of Financial Stability, 7(2):98–110.

Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1):25–51.

Woodford, M. (2010). Financial Intermediation and Macroeconomic Analysis. Journal of Economic Perspectives, 24(4):21–44.

Wooldridge, J. M. (2001). Applications of Generalized Method of Moments Estimation. Journal of Economic Perspectives, 15(4):87–100.

Wooldridge, J. M. (2009). Introductory Econometrics: A Modern Approach. ISE - International Student Edition. South-Western.

Wu, D.-M. (1974). Alternative Tests of Independence between Stochastic Regressors and Disturbances: Finite Sample Results. Econometrica, 42(3):529–546.

How to Cite
Nicolay, R., Moraes, C., & Tiberto, B. (2018). The Effect of Central Bank Communication on the Capital Buffer of Banks: Evidence from an Emerging Economy. Econometric Research in Finance, 3(1), 1 - 26.
Bookmark and Share