The Usability of Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic

Were banks reluctant to use Basel III regulatory capital buffers to support lending to creditworthy SMEs during the that banks starting the pandemic with "low capital headroom" above the Basel III regulatory buffers (i) reduced SME loan commitments by 10 percent more and (ii) were 11 percent more likely to result in borrower exits, controlling for a host of demand factors. We find credit effects across a variety of industries (comprising up to 21 percent of aggregate SME credit) as well as suggestive evidence of real effects on local employment growth during the pandemic (2 percent slower annually). This study is the first to test the usability of Basel III regulatory buffers in a downturn and contribute a bank capital-based transmission channel to the SME-pandemic literature.