To use or not to use? Capital buffers and lending during a crisis

Lucas Avezum

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: In this paper, we study the effect of having a greater management capital buffer on banks’ lending during a crisis. Using loan-level data merged with detailed supervisory data on banks’ balance sheets and regulatory requirements, we find that Portuguese banks with greater headroom above the overall capital requirement lent more to firms after the Covid-19 shock than banks with lower headroom, i.e., banks used, at least to some extent, their management buffers. The introduction of public-guarantee schemes in this period mitigated this effect as banks with lower capital headroom had the incentive to lend under these schemes. Moreover, we find that the effect of management buffer on lending is stronger for banks with lower market funding and more vulnerable firms, highlighting the importance of market pressure and risk aversion, respectively.

JEL-codes: E51 G28 H12 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202308

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