The August 2020 Financial Stability Report (FSR) showed that the cumulative loss of UK economic output associated with the outbreak of Covid-19 would need to be around twice as big as the Monetary Policy Committee’s central projection. 21  12  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  12  The post-crisis capital framework has proved resilient so far and we need to wait out the Covid stress before we can complete our evaluation. In the meantime, it is imperative that Basel jurisdictions implement the last part of the post-crisis reforms – what in the UK we call Basel 3.1 and elsewhere is sometimes referred to as ‘endgame Basel 3’. These reforms have nothing to do with the design of regulatory buffers and the overall Basel 3 capital resource framework built in the aftermath of the Global Financial Crisis, which was in large part all about the numerator of the capital ratio. By contrast, Basel 3.1 is about how to ensure risk weights, especially internally-modelled risk weights, are measured robustly – it’s about the robustness of measuring the denominator of the capital ratio. We should be getting on to implementing these measures consistent with the agreements we made when sitting around the Basel table. At the same time, we should not ignore the evidence that points towards issues with the original Basel 3 vision on buffer usability.
The team’s analysis shows lower lending growth for low headroom firms on average, though statistical significance across specifications is mixed. They analyse possible effects on mortgage lending, credit card lending and non-government guaranteed corporate lending separately.20 They find statistically significant evidence that low surplus banks constrained nonguaranteed corporate lending and credit card lending more than their peers during Covid-19, though the latter is based on a small number of observations. The effects on credit card and non-guaranteed corporate lending strike me as an important result. Table 2 shows the full results. Chart 4: Evolution of effective surpluses  Notes: The graph plots the growth of effective CET1 capital surpluses, calculated from public requirements. The series are indexed to 100 in 2019 Q4. The sample is divided into different quartiles based on banks’ 2019 average effective surpluses. There are 40 “low surplus” banks (i.e. those in the bottom quartile), and 79 “high surplus” banks, (i.e. those in the second and third quartiles). Banks in the top quartile are excluded for comparability purposes. In the rest of the analysis, the “pre-pandemic” period is defined as that from 2019 Q1 to 2019 Q4, and the “post-pandemic” period is from 2020 Q1 till 2020 Q4. 19 This was based on a difference-in-differences econometric strategy. With more detailed data available to them for our domestic banks, the calculation of headroom was based on granular information on surpluses to the full range of regulatory requirements – their effective surplus. They took banks at their highest level of consolidation.