CAPITAL BUFFERS AND LENDING DURING A CRISIS: CASE OF SERBIA
Keywords:
capital buffers, lending activity, monetary policy, macroprudential policy
Abstract
Capital buffers ensure that banks will have the capacity to absorb any losses in the event of a financial crisis. Maintaining capital buffers at a high level enables banks to continue lending during times of crisis, protecting the stability of the financial system. On the other hand, banks may decrease lending activity in order to maintain capital adequacy if capital buffers are established at a low level, which could exacerbate the economic downturn. To guarantee economic recovery, it is therefore essential to find a balance between establishing and maintaining financial stability and credit activity during times of crisis. The capital buffers that banks in the Republic of Serbia have been required to set aside since Basel III was implemented will be analyzed in this paper along with an examination of the lending activity trend during times of crisis, including the coronavirus pandemic, the energy crisis, high inflation, and significant geopolitical tensions. As loan activity recovered, the research revealed that the Republic of Serbia's banking sector kept adequate capitalization during periods of severe crisis.
References
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2. Author (2022)
3. Bahaj, S., Bridges, J., Malherbe, F. and O’Neill, C. (2016). What determines how banks respond to changes in capital requirements?, Bank of England, Working Paper No. 593, pp. 1-35.
4. Behn, M. and Hannes Lang, J. (2023). Implications for macroprudential policy as the financial cycle turns. European Centrtal Bank, Macroprudential Bulletin, 2023, Volume 22, https://www.ecb.europa.eu/press/financial-stability-publications/macroprudential-bulletin/html/ecb.mpbu202307_01~ef3b5994fb.en.html#toc3
5. Behn, M., Rancoita, E. and Rodriguez d’Acri, C. (2020). Macroprudential capital buffers – objectives and usability. European Centrtal Bank, Macroprudential Bulletin, 2020, Volume 11, https://www.ecb.europa.eu/press/financial-stability-publications/macroprudential-bulletin/html/ecb.mpbu202010_1~01c4f1a5f4.en.html
6. Benbouzid, N., Kumar, A., Mallick, S., Sousa, R. and Stojanovic, A. (2022). Bank credit risk and macro-prudential policies: Role of counter-cyclical capital buffer. Journal of Financial Stability, Volume 63 (2022), pp. 1-19.
7. Berrospide, J. and Edge, R. (2019). The Effects of Bank Capital Buffers on Bank Lending and Firm Activity: What Can We Learn from Five Years of Stress-Test Results? Finance and Economics Discussion Series 2019-050. Washington: Board of Governors of the Federal Reserve System, pp. 1-47, https://doi.org/10.17016/FEDS.2019.050.
8. Bridges, J., Gregory, D., Nielsen, M., Pezzini, S., Radia, A. and Spaltro, M. (2014). The impact of capital requirements on bank lending. Bank of England, Working Paper No. 486, pp. 1-36.
9. Bui, C., Scheule, H. and Wu, E. (2017). The value of bank capital buffers in maintaining financial system resilience. Journal of Financial Stability, Volume 33, December 2017, pp. 23-40.
10. Cappelletti, G., Ponte Marques, A., Varraso, P., Budrys, Ž. and Peeters, J. (2019). Impact of higher capital buffers on banks’ lending and risk-taking: evidence from the euro area experiments. European Central Bank, Working Paper Series No 2292, pp. 1-39.
11. Caruana, J. (2012). Building a resilient financial system. Bank of International Settlements, keynote speech at the 2012 ADB Financial Sector Forum on “Enhancing financial stability – issues and challenges” in Manila, pp. 1-12.
12. Couaillier, C., Lo Duca, M., Reghezza, A. and Rodriguez d’Acri, C. (2022). Caution: do not cross! Capital buffers and lending in Covid-19 times. European Central Bank, Working Paper Series No 2644, pp. 1-52.
13. Decision on Capital Adequacy of Banks (RS Official Gazette, Nos 103/2016, 103/2018, 88/2019, 67/2020, 98/2020, 137/2020, 59/2021, 67/2022, 137/2022, 48/2023 and 110/2023)
14. Decision on Temporary Measures for Banks Relating to Natural Persons' Housing Loans (RS Official Gazette, No 78/2023)
15. Decision on Temporary Measures for Banks to Facilitate Access to Financing for Natural Persons (RS Official Gazette, Nos 108/2020, 119/2021, 137/2022 and 110/2023)
16. Decision on the Rate and Manner of Maintaining the Systemic Risk Buffer (RS Official Gazette, No. 58/2017 and 3/2018)
17. Drehmann, M., Farag, M., Tarashev, N. and Tsatsaronis, K. (2020). Buffering Covid-19 losses – the role of prudential policy. Bank for International Settlements, BIS Bulletin Number 9, pp.1-9.
18. Dursun-de Neef, O. Schandlbauer, A. and Wittig, C. (2023). Countercyclical capital buffers and credit supply: Evidence from the COVID-19 crisis. Journal of Banking and Finance, Volume 154, pp. 1-16.
19. European Investment Bank (2024), Central, Eastern and South-Eastern Europe (CESEE) Bank Lending Survey, First half of 2024, (https://www.eib.org/en/)
20. Gambacorta, L. and Song Shin, H. (2016). Why bank capital matters for monetary policy? Bank for International Settlement, BIS Working Papers No 558, pp. 1-34.
21. Jonsson, M. and Moran, K. (2014). The linkages between monetary and macroprudential policies. Sveriges Riksbank Economic Review 2014:1, pp. 1-21.
22. Lewrick, U., Schmieder, C., Sobrun, J. and Takáts, E. (2020). Releasing bank buffers to cushion the crisis – a quantitative assessment. BIS Bulletin Number 11, pp. 1-9.
23. Maurin, L. and Toivanen, M. (2015). Risk, capital buffers and bank lending: The adjustment of euro area banks. Journal of Banking and Financial Economics, 1(3), pp. 113–129.
24. Milojević, N. (2011). Перспективе промене захтева за капиталом банака услед примене базелских стандарда, Business Economics, Volume V, Numer 2, pp. 171-191.
25. National Bank of Serbia (2024), Financial stability indicators - Chart Pack, (www.nbs.rs)
26. National Bank of Serbia (2024), Report on the results of the bank lending survey, (www.nbs.rs)
27. Reghezza, A., Rodríguez d’Acri, C., Spaggiari, M. and Cappelletti, G. (2020). Compositional effects of O-SII capital buffers and the role of monetary policy, European Central Bank, Working Paper Series No 2440, pp. 1-38.
28. Rubio, M. and Carrasco-Gallego, J. (2015). The New Financial Regulation in Basel III and Monetary Policy: A Macroprudential Approach. Journal of Financial Stability, Elsevier, Volume 26, pp. 1-31.
29. Sivec, V. and Volk, M. (2023). Empirical Evidence on the Effectiveness of Capital Buffer Release. International Journal of Central Banking, International Journal of Central Banking, Volume 19(3), pp. 139-173.
30. Vuković, V. and Domazet, I. (2015). Кредитно тржиште Србије: посустајање или колапс. Business Economics, Volume IX, Numer 1, pp. 159-176.
31. Windischbauer, U. (2016). Strengthening the role of local currencies in EU candidate and potential candidate countries. European Central Bank, Occasional Paper Series No 170, pp. 1-51.
Published
2025/08/29
Section
Original Scientific Paper