The Combined Effect of CCyB Release and Monetary Policy Easing Theory and Evidence Based on the COVID-19 Crisis

At the height of the COVID-19 crisis, many countries have reduced their countercyclical capital buffer (CCyB) for the first time since its implementation, while also easing monetary policy. In this paper, we exploit this quasi-natural experiment to gauge the combined effects of these two policies on bank lending rates (BLRs). Our analysis first relies on a dynamic macroeconomic model embedding a banking sector with financial frictions. We theoretically show that the joint action of CCyB release and monetary easing lowers BLRs by more than the sum of their individual effects. We then empirically confirm this finding by a difference-in-difference analysis comparing countries that released their CCyB with countries that did not. On average, for one percentage point release of the CCyB, corporate BLRs decreased by around 11 basis points more in countries with a CCyB release. The effect is stronger for economies close to their effective lower bound. Mortgage rates also reacted to CCyB release, but to a much smaller extent. Finally, the CCyB relief also improved the pass-through of monetary policy to lending rates.