Caution: Do Not Cross! Capital Buffers and Lending in COVID-19 Times

52 Pages Posted: 17 Feb 2022

See all articles by Cyril Couaillier

Cyril Couaillier

Banque de France; European Central Bank (ECB)

Marco Lo Duca

European Central Bank (ECB)

Alessio Reghezza

European Central Bank (ECB)

Costanza Rodriguez d’Acri

European Central Bank (ECB)

Date Written: February 1, 2022

Abstract

While regulatory capital buffers are expected to be drawn to absorb losses and meet credit demand during crises, this paper shows that banks were unwilling to do so during the pandemic. To the contrary, banks engaged in forms of pro-cyclical behaviour to preserve capital ratios. By employing granular data from the credit register of the European System of Central Banks, we isolate credit supply effects and find that banks with little headroom above regulatory buffers reduced their lending relative to other banks, also when controlling for a broad range of pandemic support measures. Firms’ inability to reallocate their credit needs to less constrained banks had real economic effects, as their headcount went down, although state guarantee schemes acted as partial mitigants. These findings point to some unintended effects of the capital framework which may create incentives for pro-cyclical behaviour by banks during downturns. They also shed light on the interactions between fiscal and prudential policies which took place during the pandemic.

Keywords: bank lending, Buffer usability, coronavirus, credit register, macroprudential policy, MDA distance

JEL Classification: E61, G01, G18, G21

Suggested Citation

Couaillier, Cyril and Lo Duca, Marco and Reghezza, Alessio and d’Acri, Costanza Rodriguez, Caution: Do Not Cross! Capital Buffers and Lending in COVID-19 Times (February 1, 2022). ECB Working Paper No. 2022/2644, Available at SSRN: https://ssrn.com/abstract=4036982 or http://dx.doi.org/10.2139/ssrn.4036982

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marco Lo Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alessio Reghezza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Costanza Rodriguez D’Acri

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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

Paper statistics

Downloads
146
Abstract Views
461
Rank
317,531
PlumX Metrics