Do better capitalized and bigger banks recover faster from a pandemic-led shock? Evidence from US Banks’ lending behavior

This paper examines the impact of the COVID-19 pandemic (and vaccination rollout) on banks’ lending behaviour. Using a theoretical model and an empirical study based on data from 4,995 US banks between 2019Q2 and 2022Q1, we find that mortality rates and new infections significantly reduce mortgage and commercial lending, albeit to a different degree. Nevertheless, we show empirically, for the first time in the literature on health shocks, that post-vaccination recovery from pandemic-induced shocks is faster for large size banks and better capital buffers. These results provide key insights for policy makers and financial institutions, highlighting that the specific characteristics of banks play an important role in shaping responses to the pandemic. • In this article, we assess the relationship between COVID-19 and lending incentives. • Our results show that the pandemic hurt banks’ supply of credit. • However, the roll-out of vaccination improves banks’ incentives to lend. • We also show that these effects differ according to banks’ specific characteristics (capital and size).