ABSTRACT

We study how financial intermediaries amplify shocks to regulatory enforcement. In the Brazilian Amazon, anti-deforestation enforcement relies on optical satellite monitoring whose effectiveness varies predictably with seasonal cloud cover. After 2013, satellite alerts remained available but became less likely to trigger sanctions. Exploiting predetermined cloud patterns, we show that sanctions fall most where monitoring conditions are most favorable, while deforestation rises. Borrower risk subsequently declines: rural-credit defaults fall and agricultural lending expands. Using predetermined differences in banks’ enforcement-related risk taking and within-borrower comparisons across lenders, we show that high-exposure banks expand credit more strongly, isolating a credit-supply response. Within-municipality-year comparisons further show that borrowers more exposed to these banks accumulate more rural-credit operations and become 30 percentage points more likely to be detected engaging in illegal clearing after enforcement weakens. Together, these results reveal a financial multiplier: even without formal rules linking credit to compliance, lenders’ endogenous response materially magnifies the real effects of weaker enforcement.