2024/02/17 by CYRIL COUAILLIER, Cyril Couaillier, Marco Lo Duca +5
Economics, Econometrics and Finance · Business, Management and Accounting · #Banking stability, regulation, efficiency #Corporate Finance and Governance #Credit Risk and Financial Regulations
paper · doi:10.1111/jmcb.13135
Abstract While banks are expected to draw down regulatory capital buffers in case of need during a crisis, we find that banks kept at a safe distance from regulatory buffers during the pandemic by procyclically reducing corporate lending. By exploiting granular credit register data, we show that banks with little capital headroom above their buffers reduced credit supply and that this behavior was amplified for banks that entered the crisis with larger undrawn credit lines. Affected firms were unable to fully rebalance their borrowing needs with other banks, although public guarantees mitigated banks' procyclical behavior and its real effect at the firm level. These findings raise concerns that the capital buffers introduced by Basel III may not be as countercyclical as intended.