The Effects of Bank Capital Buffers on Bank Lending and Firm Activity: What Can We Learn from Five Years of Stress-Test Results?

Abstract

We use bank-firm matched data from regulatory filings (FR Y-14) to study how the capital buffers that large U.S. banks must satisfy to "pass" the quantitative component of the Federal Reserve's CCAR stress tests impact banks’ C&I lending and firms' C&I loan volumes, overall debt, investment spending, and employment. We find that larger stress-test capital buffers lead to material reductions in bank C&I lending. A 1 p.p. larger capital buffer results in a 2 p.p. lower (four-quarter) growth rate of utilized loans and a 1½ p.p. lower growth rate of committed loans. The effects on firm loan volumes are larger, when we look at the loans that firms obtain from banks subject to stress tests. A firm that borrows from banks that on a weighted-average basis face a 1 p.p. larger stress-test capital buffer, experiences a 4 p.p. lower rate of growth in utilized loans and a 3 p.p. lower rate of growth of committed credit lines. However, when we consider firms’ overall debt volumes we find no impact of higher stress-test capital buffers, suggesting that firms can find other sources of credit to substitute for the reduction in loans that they face from banks subject to stress tests. We also find that firm investment and employment are largely unaffected by the capital buffers implied by stress tests. Because in the U.S. the consequences for banks of not meeting their stress-test capital buffers are similar to those of not satisfying an activated countercyclical capital buffer (CCyB), our findings are informative for the effects of the CCyB. Our results suggest that activating the CCyB in the U.S. would likely reduce the lending of the banks to which the CCyB applies, but would likely not impact the overall debt volumes, investment, and employment of the firms that borrow from these banks.