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Pandemic lending: micro and macro effects of model-based regulation

Author

Listed:
  • Fiordelisi, Franco
  • Fusi, Giulia
  • Maddaloni, Angela
  • Marqués-Ibáñez, David
Abstract
When the Covid-19 crisis struck, banks using internal-rating based (IRB) models quickly recognized the increase in risk and reduced lending more than banks using a standardized approach. This effect is not driven by borrowers’ quality or by banks in countries with credit booms before the pandemic. The higher risk sensitivity of IRB models does not always result in lower credit provision when risk intensifies. Certain features of the IRB models – the use of a downturn Loss Given Default parameter –can increase banks’ resilience and preserve their intermediation capacity also during downturns. Affected borrowers were not able to fully insulate and decreased corporate investments. JEL Classification: G21, G28

Suggested Citation

  • Fiordelisi, Franco & Fusi, Giulia & Maddaloni, Angela & Marqués-Ibáñez, David, 2022. "Pandemic lending: micro and macro effects of model-based regulation," Working Paper Series 2760, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222760
    Note: 282957
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    References listed on IDEAS

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    2. Borsuk, Marcin & Kowalewski, Oskar & Qi, Jianping, 2023. "The dark side of bank taxes," Journal of Banking & Finance, Elsevier, vol. 157(C).

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    More about this item

    Keywords

    banks; Covid-19; lending; model-based regulation; supervision;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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