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

• Published in: Finance research letters Vol. 48; p. 102891
• Main Authors: Cao, Yifei, Chou, Jen-Yu
• Format: Journal Article
• Language: English
• 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
• DOI: 10.1016/j.frl.2022.102891
• ISSN: 1544-6123

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.