Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/261178
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2644
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
Coronavirus
Macroprudential policy
MDA distance
Bank lending
Bufferusability
Credit register
JEL: 
E61
G01
G18
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4977-4
Document Type: 
Working Paper

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