Supervisory Forward Guidance: The Effectiveness of the 2020 Supervisory Capital Relief on the Bank Credit Supply Channel
49 Pages Posted: 23 Jul 2021 Last revised: 4 Nov 2021
Date Written: August 9, 2021
We investigate the effectiveness of the Single Supervisory Mechanism’s (SSM) capital relief measures in response to the outbreak of the coronavirus pandemic, in terms of large non-financial corporations’ lending outcomes. Using a granular borrower level dataset and controlling for the policies of other euro area authorities, bank characteristics and demand effects, we find that the Pillar 2 Guidance (P2G) capital relief had a considerable statistically significant impact in preventing a credit crunch. The results are attributed to both, the capital made available and announcement effects. The latter are generated by the communication of supervisory plans and the fact the P2G was not designed to be ex ante “releasable”. The announcement showed the supervisors’ flexibility, reduced uncertainty surrounding forthcoming regulatory responses and acted as a de facto “supervisory forward guidance” supporting bank business decisions. Going forward we propose the creation of a formal supervisory forward guidance strategy, to complement the existing communication channels, to the benefit of banks’ and market participants’ decision making during both normal and distress times. Our work therefore contributes to the literature threefold: i) it introduces a novel granular supervisory dataset at the borrower level, ii) it is the first paper to take a supervisory perspective in analysing the effectiveness of capital relief measures at the onset of the COVID-19 pandemic, and iii) it proposes a new supervisory policy instrument, the “supervisory forward guidance” with the goal of informing and steering banks’ and market participants’ expectations.
Keywords: pandemic support measures, microprudential measures effectiveness, supervisory forward guidance, bank credit supply, large corporates’ lending
JEL Classification: G21, G28, C23, G01
Suggested Citation: Suggested Citation