By Catherine Casanova, Bryan Hardy and Mert Onen
In the wake of the Covid-19 fallout, policymakers enacted a wide range of measures to support the flow of credit. Some measures strengthened banks’ lending capacity by preserving their capital and encouraging flexibility in loss accounting. Others, such as state-backed loan guarantees or funding for lending programmes, incentivised banks to use their available capacity. We find evidence that both types of measures contributed to lending growth. Strong banks with ample balance sheet capacity could accommodate the large drawdown of corporate credit lines in the first months of the pandemic. Policy support appeared to foster further lending. Banks that increased their lending capacity increased their lending more than other banks. More generous guarantee programmes were associated with banks reporting looser lending standards and higher lending growth. Benefitting from such programmes, small and medium-sized enterprises expanded their borrowing, especially those in sectors hit hard by the pandemic.