Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments
Bank of Spain
University of Zurich and SFI
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)
Jesus Saurina Salas
Bank of Spain
September 22, 2014
European Banking Center Discussion Paper No. 2012-011
To analyze the impact of macroprudential policy on the cyclicality of the supply of credit and associated spillovers to the real economy, we study dynamic provisioning. This policy mandates provisioning unrelated to specific loan losses to build up bank capital in good times to be used in bad times, thereby creating countercyclical buffers. It was introduced in Spain in 2000, revised four times and tested in its countercyclical nature during the crisis, always affecting individual banks differentially. The resultant time-varying bank-specific shocks that occur during a full credit cycle combined with comprehensive loan-, bank-, firm-level data until 2013 allow for identification. Robust estimates show that dynamic provisioning smooths credit supply cycles and, in bad times, critically upholds firm financing and performance. A policy-induced additional percentage point (pp) in bank capital buffer extends the supply of credit to firms (by 9 pp), thereby increasing firm employment (by 6 pp) and survival (by 1 pp). Moreover, a tightening of requirements in crisis times results in a severe credit crunch with associated firm death. Results suggest that building up capital buffers before the crisis is superior in terms of maintaining real activity and avoiding risk-shifting than changing requirements (for lowly capitalized banks) during the crisis. However, a capital tightening in good times induces both risk-taking by regulated banks (that supply more credit to firms with higher yield and leverage) and regulatory arbitrage by non-regulated and regulated-but-less-affected banks. In sum, results show that understanding the heterogeneity of the impact of a macroprudential policy across banks, firms, loans and over the entire cycle is crucial.
Number of Pages in PDF File: 44
Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
JEL Classification: E51, E58, E60, G21, G28
Date posted: May 1, 2012 ; Last revised: September 23, 2014
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