The Effects of COVID-19 Support Measures on Bank Lending : Lessons from the Release of the Countercyclical Capital Buffer and Loan Guarantee Schemes in Hong Kong

This working paper is written by Eric Wong (Hong Kong Monetary Authority), Kelvin Ho (Hong Kong Monetary Authority), Andrew Wong (Hong Kong Monetary Authority) and Vincent Lo (Hong Kong Monetary Authority).While banks in Hong Kong in general have strong capital and liquidity positions by international standards, we found that banks with a relatively thin capital buffer and liquidity before the pandemic may constrain their post-pandemic loan growth. We further found strong evidence that the release of Counter-cyclical Capital Buffer (CCyB) requirements amid the pandemic mitigated the capital constraint to support continued provision of bank credit to the real economy, but mainly to non-hard hit economic sectors. Nevertheless, the credit flow to hard-hit economic sectors is found to be well supported by the SME Financing Guarantee Scheme (SFGS). The findings together have three policy implications. First, the release of the CCyB is found to be effective in supporting bank lending in times of stress, thus achieving its policy objective as a countercyclical tool. Secondly, Hong Kong’s experience highlights the benefit of maintaining an adequate level of releasable capital buffer to withstand unexpected system-wide shocks. This suggests that there may be a need to consider a positive neutral rate of CCyB even in periods without excessive credit growth. Finally, the findings show the complementary roles between broad-based (e.g. CCyB) and targeted measures (e.g. SFGS) in enhancing the overall effectiveness of policy measures, echoing the growing view that a combination of different policy measures should be considered to maintain stable flows of credit in times of stress