Countercyclical Capital Buffers and Credit Supply: Evidence from the COVID-19 Crisis

This paper examines how European banks adjusted their lending subsequent to the release of the countercyclical capital buffers (CCyB) during the COVID-19 pandemic. At its onset in 2020Q1, being exposed to a higher ex-ante countercyclical capital buffer led to a reduction in banks' lending. Yet the relief of the CCyBs removed this negative effect from 2020Q2 onwards. We find that the reduction in CCyBs led to a significant relative increase in the average bank's lending by about 5.6 percentage points of their total assets. This increase happened mainly in retail mortgage loans and was stronger for poorly-capitalized banks. These results imply that the release of the CCyBs was effective in promoting bank lending during the pandemic.

Keywords: Countercyclical capital buffers; Bank lending; European banks; Bank capitalization

JEL Classification: G21, E51

Suggested Citation: Suggested Citation

Dursun-de Neef, H. Özlem and Schandlbauer, Alexander and Wittig, Colin, Countercyclical Capital Buffers and Credit Supply: Evidence from the COVID-19 Crisis (May 17, 2023). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4052573 or http://dx.doi.org/10.2139/ssrn.4052573