The AOCI filter removal and bank lending in times of stress

This study examines the extent to which the regulatory accumulated other comprehensive income filter removal affects banks’ lending behavior in times of stress. Using the Covid-19 crisis as an exogenous shock to the liquidity of banks’ securities holdings in a difference-in-differences framework, we find that banks subject to the AOCI filter removal reduce loan growth more (or increase loan growth less), relative to unaffected banks, during the pandemic. Further results show that the effect is more pronounced among affected banks with relatively higher (lower) ex-ante holdings of held-to-maturity (available-for-sale) securities and those with a higher proportion of the most liquid securities booked in HTM rather than AFS, ex-ante, consistent with banks’ filter-induced HTM securities holdings, the prevailing market frictions in the wake of the crisis, and the binding HTM tainting rules potentially constraining credit growth. We also find that affected banks reduce the growth in repo borrowing more (or increase repo growth less) during the pandemic, in line with the filter removal potentially limiting banks’ ability to obtain repo funding in times of stress and/or dampening their willingness to source such facilities. Overall, our results suggest that marking banks’ regulatory capital to the market could suppress credit supply at a time when it is most needed.