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.
This concern was at the forefront of UK and international prudential regulators’ minds and motivated the various interventions they made at the time to make clear that regulatory buffers could and should be used.6 So today and in the spirit of John Dewey, I want to reflect on the lessons from the Covid stress so far for the prudential framework for banks and in particular for the regulatory buffers within it. What we worried about during the early Covid stress With hindsight, this banking system resilience is evident. But during the stress of March and April 2020, we were concerned that it was, to use the words of the Chair of Financial Stability Board, Randal Quarles, “a close run thing”.7 One concern was a potential decline in capital ratios at the time. There were two effects in play. First, banks were increasing provisions as their expectations about the state of economy and credit quality declined. This affected capital resources. Second, capital requirements were increasing. This was because risk weights in some parts of the capital framework are sensitive to current market conditions, which had worsened; and total assets were increasing, as firms drew down pre-existing credit facilities. Third, liquidity requirements and resources were sensitive to market conditions too. Mechanisms designed to capture potential liquidity needs related to derivatives activity produced estimates that were too low going into the shock and then increased rapidly after the shock had crystallised.