ECB paper looks at Covid-19 emergency supervisory measures

Two measures implemented by eurozone supervisors in the Covid-19 pandemic had different effects on lending, a working paper published by the European Central Bank finds.

The paper, How to release capital requirements during a pandemic? Evidence from euro area banks, uses supervisory and credit registry data on eurozone lenders. Cyril Couaillier, Alessio Reghezza, Costanza Rodriguez d’Acri and Alessandro Scopelliti look at two measures introduced in the eurozone response to the Covid-19 pandemic.

The ECB and national supervisory authorities in the eurozone relaxed Common Equity Tier 1 (CET1) capital requirements for banks – temporarily for some and permanently for others. They also allowed some banks to operate below the “Pillar 2 guidance” for capital during the pandemic.

The authors find the second measure “had no significant impact on banks’ lending behaviour during the pandemic”. But the first measure did support lending by banks without causing any “unwarranted risk-taking”, they say.

The effect of relaxing the CET1 requirements were more effective for those banks with lower capital levels, the authors add.

Emergency measures like this “must successfully convince banks to use the freed capital”. This means, they argue, that “clarity and predictability with regards to future replenishment paths are key”.

The authors say lenders seemed reluctant to draw on their capital buffers. This implies that “the positive effect of capital relief on lending is stronger for those banks with an ex ante smaller capital space”.