Bank resilience over the COVID-19 crisis: The role of regulatory capital

Using COVID-19 as an exogenous shock to the banking system, we implement the Difference-in-Differences method to empirically evaluate the role of the regulatory capital in strengthening the resiliency of bank lending activities during the crisis period. Our results suggest that banks with a higher level of regulatory capital ratio prior to the COVID-19 shock lend more resiliently to the real economy during the crisis than those with lower regulatory capital ratios ex-ante. It implies that the recent reforms on bank regulatory capital have effectively built up bank strength which in turn helped banks continue lending to the real economy during the COVID-19 crisis.