Un-Used Bank Capital Buffers and Credit Supply Shocks at SMEs During the Pandemic

38 Pages Posted: 20 Jul 2021 Last revised: 7 Sep 2021

See all articles by Jose M. Berrospide

Jose M. Berrospide

Board of Governors of the Federal Reserve System

Arun Gupta

Board of Governors of the Federal Reserve System

Matthew P. Seay

Board of Governors of the Federal Reserve System

Date Written: July, 2021

Abstract

Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying the effects of the pandemic on SME firms.

JEL Classification: G20, G21, G28

Suggested Citation

Berrospide, Jose M. and Gupta, Arun and Seay, Matthew P., Un-Used Bank Capital Buffers and Credit Supply Shocks at SMEs During the Pandemic (July, 2021). FEDS Working Paper No. 2021-43, Available at SSRN: https://ssrn.com/abstract=3888875 or http://dx.doi.org/10.17016/FEDS.2021.043

Jose M. Berrospide (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3590 (Phone)

Arun Gupta

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matthew P. Seay

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
134
Abstract Views
520
Rank
318,852
PlumX Metrics