This gives us a good evidence base to look at whether firms which benefited from a CCyB release lent more than firms not benefitting from such release, after controlling for other firm- and country-specific factors. The short answer, as the Basel Committee’s work found, is that they did. A regression analysis found a positive and statistically significant coefficient between buffer release and loan growth.13 The effect of the countercyclical buffer release in the UK: using pass-through rates What about the UK evidence? In the UK, the FPC cut the UK CCyB rate to zero in March 2020. It had been increased from 1 percent to 2 percent in December 2019 with firms having one year to implement the increase.14 All firms in the UK got some relief in capital requirements – but the amount of relief varies across firms, driven by their relative exposure to UK credit risk-weighted assets (RWAs).15 By exploiting this cross-sectional variation across firms, colleagues in the Bank16 have examined whether firms that got more benefit from the release maintained lower capital ratios and lent more following the cut to the CCyB, as compared to their peers. The findings, reported in Table 1, support this hypothesis. Firms with higher exposure to the UK CCyB ratecut increased CET1 ratios by less during the pandemic as compared to their peers, and this result is statistically significant.
Due to the use of regulatory data, the effective CET1 surplus takes into account CET1 resources (calculated from the public requirements) used, where applicable, to meet leverage ratio requirements, MREL requirements and lower quality capital requirements (i.e. where AT1 and Tier 2 instruments are allowed but not utilised). 20 We exclude corporate lending supported by government-provided relief schemes during the pandemic given the zero risk-weights attributable to that lending during Covid-19. 11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  Is it stigma or is it uncertainty? One possible challenge to these findings is that they may reflect firms’ concerns about breaching regulatory minimum requirements during the pandemic, and/or about their ability to rebuild depleted buffers going forward; and may have nothing to do with the stigma of breaching regulatory buffers. The arguments go as follows: a firm entering the crisis with lower headroom would naturally be more cautious than a firm with higher headroom and hence, when the uncertainty about the economic environment is large, it would naturally increase its capital ratios by more to prevent it breaching minima. Alternatively or in addition, banks may have entered the crisis with low headroom because they faced profitability challenges, restricting their capacity to grow capital organically. If so, then they may be averse to capital ratios declining, fearful that if conditions subsequently swung around quickly, they could languish inside regulatory buffers for longer than their competitors if their profitability challenges were to persist.