Abstract
This paper studies the effects of a reduction in the countercyclical capital buffer requirements on interest rate growth in Norway. For the first time since the implementation of Basel III framework the new macroprudential tools were put to a test by an exogenous shock in the form of the pandemic. Using bank-level data we disentangle the effects of such a cut on interest rate growth in four different sectors. We find that banks following the policy shock significantly reduced their interest rates and exhibited negative interest rate growth. On average capital constrained banks had a relatively smaller negative interest rate growth than better capitalized banks. The robust evidence suggests an effect of 0.54 percent smaller negative mortgage interest rate growth and 0.91 percent smaller negative corporate interest rate growth. Above mean capitalized banks exhibit a more sensitive response to countercyclical capital buffer cut. The results are highly significant but opposite of what previous literature finds.