THE IMPACT OF INFLATION ON LEVEL OF DEBT OF BRAZILIAN FINANCIAL INSTITUTIONS

Financial institutions are naturally leveraged companies that use their debt to aim for profit in their operations. The role of financial intermediary gives these institutions the context needed to use financial leverage for profit. Among the several variables used in debt levels of these institutions, Hortlund (2005) highlights inflation as having a central role in this phenomenon. This study aimed to find out how inflation influences the debt of Brazilian financial institutions. To achieve this goal, data of brazilian banks from 1996 to 2013 were analyzed, being related to other variables in order to allocate more consistency of the model used. Through balanced and unbalanced panel data regressions, results indicate that different from the hypothesis defended by Hortlund (2005), inflation has a negative impact on debt earned by financial institutions during the period. Other findings of the study indicate that the representative variables of increased operations of these institutions, such as GDP growth, growth of assets and loans/assets positively impact the leverage of financial institutions, indicating that these are more likely to go into debt when they can apply this capital in productive operations. Finally, it was found out that the guidelines contained in the Capital Accords Basel II and Basel III, which were required by the national financial system, influenced negatively the levels of debt of financial institutions, making them less leveraged.