Stress Relief?: Funding Structures and Resilience to the Covid Shock / Kristin Forbes, Christian Friedrich, Dennis Reinhardt.

Format:

Book

Author/Creator:

Forbes, Kristin.

Contributor:

National Bureau of Economic Research.

Friedrich, Christian.

Reinhardt, Dennis.

Series:

Working Paper Series (National Bureau of Economic Research) no. w31255.

NBER working paper series no. w31255

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2023.

Summary:

This paper explores the relationship between different funding structures--including the source, instrument, currency, and counterparty location of funding--and the extent of financial stress experienced in different countries and sectors during the sharp risk-off shock in early 2020 when Covid-19 spread globally. We measure financial stress using a new dataset on changes in credit default swap spreads for sovereigns, banks, and corporates. Then we use country-sector and country-sector-time panels to assess how different funding structures are related to financial stress. A higher share of funding from non-bank financial institutions (NBFIs) or in US dollars was correlated with significantly greater stress, while a higher share of funding in debt instruments (instead of loans) or cross-border (instead of domestically) was not significantly related to financial stress. The results suggest that macroprudential regulations should broaden their current focus to take into account exposures to NBFI and dollar funding, with less priority for regulations focused on residency (i.e., capital controls). After the sharp increase in financial stress in early 2020, policy responses targeting these structural vulnerabilities (i.e., US$ swap lines and focused on NBFIs) were more effective at mitigating stress related to these funding structures than policies supporting banks, even after controlling for macroeconomic policy responses.

Notes:

Print version record

May 2023.