Macroprudential Policy, Countercyclical Bank Capital Buffers and Credit Supply: Evidence from the Spanish Dynamic Provisioning Experiments
60 Pages Posted: 15 Mar 2012
Date Written: March 14, 2012
We analyze the impact of countercyclical capital buffers held by banks on the supply of credit to firms and the subsequent corporate performance. Countercyclical bank capital buffers is a macroprudential policy measure which is going to be introduced by Basel III and that has been analyzed in research as an optimal instrument to reduce the likelihood and severity of banking crises. Countercyclical ‘dynamic’ provisioning that is unrelated to specific loan losses was introduced in Spain in 2000, and it was later modified in 2005 and in 2008. These provisioning experiments have been discussed in important policy meetings as the G-20, IMF, Fed, BIS, ECB and WB, and by academics as Tirole and Shin. These three policy experiments which entailed bank-specific countercyclical shocks to bank capital buffers, combined with the financial crisis that shocked banks according to their available buffers and in conjunction with comprehensive bank-, firm-, loan, and loan application level data from the Spanish credit register, underpin our identification strategy. Our estimates suggest that countercyclical capital buffers help mitigate credit supply cycles and in crisis times have positive effects on firm credit availability, assets, employment and survival. Our findings therefore hold important implications for both theory and macroprudential policy.
Keywords: bank capital, dynamic provisioning, credit availability, financial crisis
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation