The Countercyclical Capital Buffer and International Bank Lending: Evidence from Canada

The 2007–08 global financial crisis led to Basel III, a set of new regulatory measures to strengthen the resilience of the global banking system. Among these measures is the countercyclical capital buffer (CCyB), a policy tool that links the tightness of capital requirements imposed on banks to the current state of the economy and the financial system. From its introduction in 2013 until 2019, the CCyB faced a gradual tightening in various countries to slow down the rapid expansion of credit. Then, in 2020, many countries have lowered their CCyBs to reduce the negative impact of the COVID‑19 shock on banks’ capital cushions and support lending during the economic recovery.

We examine the impact of the CCyB on the foreign lending activities of Canadian banks between 2013 and 2020. We show that the announcement of a tightening in another country’s CCyB leads to a decrease in the growth rate of cross-border lending between Canadian banks and borrowers in that other country. Most importantly, the CCyB has a unique reciprocity rule that subjects foreign banks to domestic regulation. As a result, the direction of the impact of CCyB changes differs from the direction of the impact of changes in other forms of capital regulation. In particular, previous studies show that when a foreign country/jurisdiction tightens its conventional capital regulation—which applies only to its domestic banks—Canadian banks increase their lending to that jurisdiction.

We also show that large banks are better able than small banks to shield their cross-border lending from the impact of foreign CCyB changes. Finally, we show that the different effects for large and small banks also apply to the loosening in CCyB rates during the COVID-19 episode.