# **Box 2: Macroprudential policy in emerging markets: The cases of Brazil and Turkey**

During late 2010through early 2011, large capital inflows into Brazil fueled by the real carry trade hampered the effectiveness of monetary policy set in response to rising inflation expectations and a credit boom. The Brazilian Central Bank came to the conclusion that monetary policy alone could not address internal and external “imbalances” and decided to introduce a number of macroprudential measures to help monetary policy. In particular, it increased unremunerated RR on term deposits from 15 to 20 percent and additional remunerated RR (on demand and term deposits) from 8 to 12 percent. These measures reversed the loosening of RR that took place in late 2008 to create liquidity during the financial crisis. In addition, to curb credit growth, the tax on financial operations (IOF) was raised from 1.5 to 3.0 percent (annualized), and applied to credit operations for individuals, on a daily basis, for a maximum of one year. Capital requirements for consumer loan were also increased through a change in risk weights: for the fast-growing segment of vehicle financing, the weight was increased from 75 to 150 percent, which was equivalent to an increase in capital requirement of 8 to 16.5 percent. At the same time, in order to avoid the build-up of excessive maturity mismatches (in Brazil, bank liabilities have very short maturity and/or duration) the loan to value ratio (LTV) on vehicle loans was increased, penalizing longer maturities—the maximum LTV was set to 80 percent for loans between 24 and 36 months, to 70 for loans between 36 and 48 months, and to 60 percent for loans between 48 and 60. Finally, in order to curb the carry trade, the IOF on nonresident portfolio investments was increased from 2 to 4 percent (and ultimately to 6) and a 60 percent unremunerated RR on banks’ short position in the forex spot market was imposed; additional measures were also adopted to limit banks’ exposure in forex derivative markets. In 2012, faced with less favorable global conditions, the central bank adjusted the macroprudential stance reducing the additional RR on demand deposits from 12 to 6 percent first and then to zero, and the additional RR on time deposits from 12 to 11 percent. Finally, in the summer of 2013, confronted with strong currency depreciation pressures triggered by the Federal Reserve’s “tapering talks,” the IOF on forex operation was abolished; in December 2013, the IOF on cash withdrawals in foreign countries was increased from 0.38 to 6.38 percent.

Faced with policy dilemmas similar to Brazil’s, Turkey also relied heavily on macroprudential measures. RR changed very frequently. For instance, the RR on short term foreign currency deposits was reduced from 6 to 5 percent during the financial crisis and then was progressively increased up to 16 percent, only to be reduced again to the current 11.5 percent. RR for domestic currency deposits followed a similar pattern. In addition to the active use of RR—which on occasions moved in the opposite direction to the policy interest rate to contain the appreciation of the exchange rate and the cost of sterilized foreign exchange interventions—the Central Bank of Turkey allowed banks to satisfy a certain share of their RR for domestic currency deposits with foreign exchange or gold; interestingly, such a share has become an additional policy tool in the hands of the monetary authorities. Finally, during 2011, the Banking Regulation and Supervision Agency took a number of measures meant to prevent the build-up of excessive risk in the expansionary phase of the cycle. In addition to an (implicit) 25 percent nominal credit growth ceiling communicated to banks (relying on moral suasion), LTV ceilings on real estate loans were implemented; risk weights on consumer loans were increased (from 100 to 150 percent on maturities below two years, and from 100 to 200 percent on longer maturities); larger provisions were required for such loans and restrictions were imposed on the increase in credit cards limits for consumers with large outstanding credit.

_Sources: Pereira da Silva and Harris (2013), Central Bank of Brazil, IMF (2012) and Central bank of Turkey._ 36