Macroprudential policy, countercyclical bank capital buffers and credit supply: Evidence from the Spanish dynamic provisioning experiments

Abstract

To study the impact of macroprudential policy on credit supply cycles and real effects, we analyze dynamic provisioning, which implies pro-cyclical bank capital regulation. Introduced in Spain in 2000, revised four times and tested in its counter-cyclicality during the crisis, it affected banks differentially. Accessing an exhaustive credit register, we find that dynamic provisioning smooths credit supply cycles and, in bad times, supports firm performance. A policy-induced one-percentage point (pp) increase in capital buffers extends credit to firms by 9 pp, increasing firm employment (6 pp) and survival (1 pp). Moreover, there are important compositional effects in credit supply related to risk and regulatory arbitrage by non-regulated and regulated-but-less-affected banks.