Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic

Jose M. Berrospide, Arun Gupta and Matthew P. Seay
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Jose M. Berrospide: https://www.federalreserve.gov/econres/jose-m-berrospide.htm
Arun Gupta: https://www.federalreserve.gov/econres/arun-gupta.htm

No 2021-043, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying the effects of the pandemic on SME firms.

Keywords: Financial institutions; Capital regulation; Procyclicality; COVID-19 (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Pages: 38 p.
Date: 2021-07-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-ent, nep-fdg and nep-rmg
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-43

DOI: 10.17016/FEDS.2021.043

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