Banks and capital requirements: evidence from countercyclical buffers

Iñaki Aldasoro, Andreas Barth, Laura Comino Suarez and Riccardo Reale

No 1323, BIS Working Papers from Bank for International Settlements

Abstract: When capital requirements rise, banks can raise equity or reduce risk-weighted assets, typically by cutting lending. We show they also use credit default swaps (CDS). Linking EU trade-repository CDS data to syndicated loans for November 2017 to April 2024, we document that banks significantly increase CDS hedging on loans to firms in countries that raise their countercyclical capital buffer (CCyB). Our identification exploits within-bank comparisons of hedging for similar borrowers across countries with different CCyB rates. A 1 percentage point increase in the CCyB reduces the uninsured share of a loan by about 53 percentage points, with the strongest effects for banks most exposed to the buffer-raising country. Eligible credit risk transfer via CDS thus emerges as a first-order channel through which banks accommodate tighter capital requirements, potentially attenuating macroprudential policy transmission.

Keywords: bank capital requirements; CDS; countercyclical capital buffers (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 G32 (search for similar items in EconPapers)
Date: 2026-01
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