The COVID-19 induced ‘Great Lockdown’ has cast doubt on the efficacy of bank buffers in supporting the real economy in times of crisis. Despite accommodative regulatory and supervisory action, banks remain hesitant to draw on their buffers to maintain credit provision. Recognising the difficulty in judging the demand for credit in the midst of the COVID-19 crisis, this column focuses on the potential supply of credit and explores the obstacles to ‘usability’ of bank capital. It concludes that the current capital framework falls short: there is not enough ‘usable capital’, and the disincentives to actually draw it down are too strong. Finally, it recommends improvements in current capital framework to overcome these issues.
Kleinnijenhuis, A., Kodres, L. & Wetzer, T. (2020). 'Usable bank capital'. VoxEU Column, 30 June 2020. Retrieved from: https://voxeu.org/article/usable-bank-capital