Compositional effects of bank capital buffers and interactions with monetary policy

We investigate the impact of capital requirements on bank lending across institutional sectors, focusing on their transmission channel and the interaction with monetary policy. By employing confidential loan-level data for the euro area, we find that the reaction of banks to capital surcharges for Other Systemically Important Institutions (O-SII) depends on the level of the required buffer and the institutional sector of the borrowing counterpart. Tighter requirements correspond to stronger lending contractions with targeted banks curtailing their lending mostly towards credit institutions. Loan supply to non-financial corporations is almost unchanged, mainly as a result of the incentives embedded in the ECB's targeted long-term refinancing operations. Our results provide evidence on the interaction between macroprudential and monetary policy, and the positive effects of combining two different sets of incentives to support the resilience of the banking system and credit supply to the real economy.