Bank Capital Buffers and Lending in the Euro Area during the Pandemic

Bank capital buffers are supposed to help banks to absorb losses while maintaining the provision of key financial services to the real economy in times of stress. Capital buffers that are usable along these lines should lessen the damaging effects that can arise from credit supply shortages. Making use of buffers entails using the capital space on top of regulatory buffers and minimum requirements and, in case of need, also using regulatory buffers. This special feature analyses bank lending behaviour during the pandemic to gain insights into banks' propensity to use capital buffers and the impact of the regulatory capital relief measures implemented by the authorities. From a macro perspective, the euro area banking system as a whole was able to meet credit demand and withstand stress. However, this aggregate view reflects several factors, including the impact of extraordinary policy measures. A micro perspective thus can help to comprehend how the capital buffer framework and capital releases affected banks' behaviour during the pandemic. The microeconometric analysis performed in this special feature shows that the banks that had limited capital space above regulatory buffers adjusted their balance sheets by reducing lending which could be interpreted as an attempt to defend capital ratios. This suggests that they were unwilling to use capital buffers. The results also show that the regulatory capital relief measures adopted during the pandemic, which added to banks' existing capital space, were associated with higher credit supply. While more research is desirable, also on macro aspects, these findings suggests that more releasable capital could enhance macroprudential authorities' ability to act countercyclically when a crisis occurs.