Bank resilience over the COVID-19 crisis: The role of regulatory capital

Using COVID-19 as an exogenous shock to the banking system, we implement the Difference-in-Differences method to empirically evaluate the role of the regulatory capital in strengthening the resiliency of bank lending activities during the crisis period. Our results suggest that banks with a higher l...

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Bibliographic Details
Published inFinance research letters Vol. 48; p. 102891
Main Authors Cao, Yifei, Chou, Jen-Yu
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.08.2022
Subjects
Bank resilience
Basel III
Capital regulation
COVID-19
Credit supply
Financial stability
COVID-19
Credit supply
G20
Capital regulation
G21
Financial stability
G01
Basel III
G38
Bank resilience
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Summary:Using COVID-19 as an exogenous shock to the banking system, we implement the Difference-in-Differences method to empirically evaluate the role of the regulatory capital in strengthening the resiliency of bank lending activities during the crisis period. Our results suggest that banks with a higher level of regulatory capital ratio prior to the COVID-19 shock lend more resiliently to the real economy during the crisis than those with lower regulatory capital ratios ex-ante. It implies that the recent reforms on bank regulatory capital have effectively built up bank strength which in turn helped banks continue lending to the real economy during the COVID-19 crisis. •We examine the effectiveness of the recent regulatory reform on bank capital.•The DID method is implemented using COVID-19 as an exogenous shock.•Coarsened exact matching and dynamic DID methods are performed as robustness checks.•Banks with higher capital ratios ex-ante lend more resiliently during the crisis.•Risk-weighted capital ratios are more informative than the equity-to-assets ratio.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2022.102891