The Countercyclical Capital Cushion and International Bank Lending: Evidence from Canada

The global financial crisis of 2007-08 led to Basel III, a set of new regulatory measures aimed at strengthening the resilience of the global banking system. Among these measures is the counter-cyclical capital buffer (CCyB), a policy tool that links the tightening of capital requirements on banks to the current state of the economy and the financial system. From its introduction in 2013 until 2019, the CCyB has faced gradual tightening in various countries to slow the rapid expansion of credit. Then, in 2020, many countries lowered their CCyBs to reduce the negative impact of the COVID-19 shock on banks’ capital buffers and support lending during the economic recovery.

We examine the impact of the CCyB on the foreign lending activities of Canadian banks between 2013 and 2020. We show that the announcement of a tightening of the CCyB of another country leads to a decrease in the rate of growth of loans. cross-border between Canadian banks and borrowers. in that other country. Most importantly, the CCyB has a unique reciprocity rule that subjects foreign banks to domestic regulation. Accordingly, the direction of the impact of CCyB changes differs from the direction of the impact of changes in other forms of capital regulation. In particular, previous studies show that when a foreign country / jurisdiction tightens its conventional capital regulations — which only apply to its domestic banks — Canadian banks increase their lending to that jurisdiction.

We also show that large banks are better able than small banks to protect their cross-border loans from the impact of foreign CCyB changes. Finally, we show that the different effects for large and small banks also apply to the release of CCyB rates during the COVID-19 episode.

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