Creditable capital: macroprudential regulation and bank lending in stress

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 13 January 2023

Staff Working Paper No. 1,011

By Aakriti Mathur, Matthew Naylor and Aniruddha Rajan 

Macroprudential policies enhance financial system resilience and dampen credit-led booms, but evidence of their effectiveness in stress is relatively scarce. We examine two such UK policies during Covid-19 – an exogenous shock to credit risk – combining mortgage register data, granular information on bank capital structures, and healthcare data on case rates. We find that expansionary macroprudential policy can mitigate credit crunch dynamics by alleviating capital constraints, supporting lending and risk-taking. However, policy design matters: policies, like cutting the countercyclical capital buffer (CCyB), which address numerous frictions leading to capital constraints (ie supervisory, regulatory and market signalling) are most effective.

This version was updated in December 2023. 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’.