Not a financial crisis, but a pandemic outbreak – what happened to Norwegian banks’ willingness to lend?

This study contributes to the existing empirical studies regarding the effects of the countercyclical capital buffer (CCyB), by extending the analysis due to the COVID-19 situation where the CCyB was reduced for the first time in Norwegian history. We will investigate the impact of a reduction in the countercyclical capital buffer towards Norwegian banks’ lending activity, by using data collected from Norges Bank at the bank- and loan-level. We ask as the main question: “Has a reduction in the countercyclical capital buffer affected the Norwegian banks’ willingness to lend?”. Because the countercyclical capital buffer is risk-based, we will answer this question by looking at the risk-perspective buffer. The theoretical framework for analyzing the impact of a reduction in the countercyclical capital buffer on bank lending is based on Cao (2021) discussion towards the implementation of a countercyclical capital buffer, and the leverage cycle from Geanakoplos (2010) discussing how macro shocks affects the banks’ balance sheet. An empirical study of Arbatli-Saxegaard & Juelsrud (2020), and Jiménez et al. (2012) is also provided to support empirical results of a cut in the countercyclical capital buffer. The data collected from Norges Bank is used in two separate difference-in-difference analysis, where all of the economic methods and calculations were conducted using STATA. By comparing the results from the two different analysis, we see that banks will react differently to a CCyB cut based on their risk decisions both before and after the CCyB cut. A bank that has chosen to expose themselves for a higher risk share before a cut in the CCyB is made, will reduce their exposure to risk by cutting back on lending. While a bank that has been more capital constrained before a CCyB cut will expose themselves to a higher share of risk after the CCyB cut is made by expanding lending