Doubling down: The synergy of CCyB release and monetary policy easing

Abstract

At the height of the COVID-19 crisis, many countries have reduced their countercyclical capital buffer (CCyB) and cut key policy rates. We exploit this quasi-natural experiment to gauge the combined effects of these two policies on bank lending rates (BLRs). First, we theoretically show that the joint action of CCyB release and monetary policy easing lowers BLRs by more than the sum of their individual effects. We then empirically confirm this synergy by a difference-in-difference analysis. Notably, for one percentage point release of the CCyB, corporate BLRs decreased by around 11 basis points more compared to countries without CCyB relief. The lower the policy rate, the greater this effect, suggesting that the CCyB provided additional room for maneuver to monetary policy. In addition, releasing the CCyB has acted as a catalyst for a better transmission of policy rate cuts.