Caution: do not cross! Capital buffers and lending in Covid-19 times

Cyril Couaillier, Marco Lo Duca, Alessio Reghezza () and Rodriguez d’Acri, Costanza

No 2644, Working Paper Series from European Central Bank

Abstract: While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic. JEL Classification: E61, G01, G18, G21

Keywords: bank lending; Buffer usability; coronavirus; credit register; macroprudential policy; MDA distance (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Note: 452517
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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