Do countercyclical capital buffer policy decisions affect the bank credit response to economic conditions?

Do countercyclical capital buffer policy decisions affect the bank credit response to economic conditions?

Do countercyclical capital buffer policy decisions affect the bank credit response to economic conditions?

Stephanie LEE YOU VOON

Dr. Samuel Obeng

Economic downturns can be amplified when weakening conditions lead banks to restrict lending, hence transmitting shocks to households, businesses and the wider economy. Countercyclical capital buffers (CCyBs) thus seek to strengthen the banking system resilience by requiring banks to accumulate additional capital which can then provide greater capacity to absorb losses during periods of stress. Yet, whether having a stronger buffer already in place translates into a more resilient credit provision in the next period remains an important empirical question. This research therefore analyses whether bank credit responds differently to economic conditions depending on the CCyB already in force when a quarter begins. To investigate this, I constructed a quarterly cross-country panel covering the years between 2014 to 2024, combining data from the Bank for International Settlements, the World Bank and the International Monetary Fund. Using fixed-effects panel regressions in R-programming, I examined the relationship between real GDP growth and real bank credit growth and tested whether it is moderated by the pre-quarter CCyB rate. Robustness analyses also compared positive versus zero buffers, focused on countries that actively changed their CCyBs, incorporated unemployment, and explored heterogeneity by financial institution development. Across the main and robustness specifications, the analyses show no statistically significant evidence that higher pre-existing CCyB rates attenuate the contemporaneous relationship between GDP growth and bank credit growth. Another key result is that there is no statistically detectable evidence that this moderation varies with financial institution development. These findings do not imply that CCyBs are ineffective. They however suggest that capital availability alone may not determine lending resilience. Credit demand, borrower creditworthiness, uncertainty, expected losses, timing and policy implementation are other important considerations in the credit transmission. By combining the econometric findings with insights from interviews with economists and policymakers, the research therefore contributes towards a better understanding of when, how and under what conditions CCyBs can most effectively support financial resilience.

Financial stability, Macroprudential policies, Economics, Policymaking