Pandemic Lending : The Unintended Effects of Model-based Regulation

Does model-based bank regulation constrain lending when it matters the most? Using an extensive loan-level supervisory dataset on credit exposures of Euro Area banks, we document that during the Covid-19 pandemic, banks using their own (internal-rating based or IRB) models to measure credit risk, decreased their on-balance sheet credit exposures, especially lending, to Non-Financial Corporations more than banks using standard ( fixed risk-weights) models to the same borrower. Lower capitalized IRB banks reduced their exposures more towards borrowers absorbing more regulatory capital and borrowers in the economic sectors most affected by the pandemic