How to Release Capital Requirements During a Pandemic? Evidence from Euro Area Banks

This paper investigates the impact of the first system wide capital relief package adopted to support euro area banks. By leveraging confidential supervisory and credit register data to analyze bank lending at the outbreak of the COVID-19 pandemic, we uncover two main findings. First, capital relief measures support banks' capacity to supply credit to firms. Second, not all measures are equally successful. Banks increase their credit supply in response to capital relief implemented via rule-based processes that reduce binding requirements and affect banks' ability to distribute dividends. By contrast, discretionary relief measures that do not affect dividend policy are met with limited success. Moreover, requirement releases are more effective for banks with lower capital headroom. These findings provide novel insights on how to design effective bank capital requirement releases in crisis times.