Credit Capacity and the Propagation of Funding Shocks: Evidence from U.S. and Brazilian Financial Intermediaries

2026-06-09

AI Summary

This study addresses why similar funding shocks generate markedly different credit responses across countries. Building and estimating a dynamic structural model with regulatory data from U.S. and Brazilian financial institutions over 2002–2025, the paper provides the first quantitative assessment of cross-national differences in credit capacity and their role in shock transmission. The findings reveal that U.S. institutions possess credit capacity approximately three to six times greater than their Brazilian counterparts, leading Brazil to experience more severe and persistent credit contractions following funding shocks. Crucially, baseline disparities in credit capacity—not differences in shock persistence—drive the heterogeneity in policy effectiveness and crisis propagation across countries. Combining institution-level empirical analysis with counterfactual simulations, the study underscores credit capacity as a pivotal transmission mechanism with significant theoretical and policy implications.

Abstract

Why do similar funding shocks generate sharply different credit outcomes across countries? We develop and estimate a dynamic structural model in which intermediary credit capacity governs the transmission of funding disruptions to lending. Using supervisory data on U.S. banks and credit unions and Brazilian banks and cooperatives from 2002--2025, we recover institution-level credit capacity and its dynamics across major crisis episodes. Credit capacity is three to six times larger in the United States than in Brazil, while persistence is similar across countries. As a result, funding shocks generate substantially larger and more persistent lending contractions in Brazil. Counterfactual analysis shows that differences in baseline credit capacity, rather than persistence, account for most cross-country variation in crisis propagation and policy effectiveness.

Problem

• credit capacity
• funding shocks
• cross-country differences
• financial intermediaries
• crisis propagation

Innovation

• credit capacity
• funding shocks
• dynamic structural model
• financial intermediaries
• cross-country comparison