Staff Working Paper No. 1,011
By Aakriti Mathur, Matthew Naylor and Aniruddha Rajan
Macroprudential policies aim to enhance financial system resilience, yet evidence on their effectiveness during stress remains limited. Stress episodes typically prompt banks to conserve capital by tightening credit, especially to riskier borrowers – behaviour that looser macroprudential policy is designed to mitigate. Against this backdrop, we examine the impact of the UK’s countercyclical capital buffer (CCyB) release during the Covid-19 pandemic. Leveraging confidential regulatory data, we exploit cross-sectional variation in how the CCyB reduction translated into changes in individual banks’ capital requirements. We combine this with granular mortgage-level data and local infection rates to study lending behaviour and risk‑taking. We find that the CCyB release enabled banks to sustain lending – maintaining higher loan values and lower prices – and to preserve credit availability for riskier borrower segments. Our results point to the presence of buffer usability frictions, and provide robust evidence that looser macroprudential policy can mitigate credit-crunch dynamics during systemic stress.
The Staff Working Paper was first published on 13 January 2023 under the title ‘Useful, usable, and used? Buffer usability during the Covid-19 crisis’.
Creditable capital: macroprudential regulation and bank lending in stress