Useful, usable, and used? Buffer usability during the Covid-19 crisis

Aakriti Mathur (), Matthew Naylor and Aniruddha Rajan ()
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Aakriti Mathur: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Aniruddha Rajan: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1011, Bank of England working papers from Bank of England

Abstract: Macroprudential policies have been shown to be beneficial during booms but there is limited evidence on how well they operate during periods of stress. Using a difference‑in‑differences empirical strategy we test whether regulatory capital buffers, a key component of the Basel III reforms, helped to support lending provision by UK banks through Covid‑19. To identify credit supply effects, we exploit data on the universe of UK mortgages, which were outside the scope of government guaranteed lending schemes. We find that more constrained banks defended their capital surpluses to a greater extent during the pandemic, and did so by maintaining higher loan rates, lower loan values, and tighter terms on riskier lending. In contrast, banks receiving greater capital relief from the cut to the UK countercyclical capital buffer during the pandemic maintained more stable capital ratios, lending provision and risk‑taking capacity. Our results suggest regulatory buffers may be less usable than intended, but buffer releases can dampen these unintended consequences.

Keywords: Banks; capital regulation; lending; macroprudential policy; Covid-19 (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 G51 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2023-01-13
New Economics Papers: this item is included in nep-ban, nep-cba, nep-des, nep-eec, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1011

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