Kieran Dent, Sinem Hacioglu Hoke and Apostolos Panagiotopoulos
The Great Financial Crisis demonstrated an important feedback loop between banks’ capitalisation and funding costs. As banks’ capitalisation declined, banks’ wholesale creditors responded by demanding higher interest rates to lend to them. In turn, higher funding costs dented banks’ profitability, further weakening their capitalisation. Quantifying the relationship between funding costs and market-based measures of leverage – a proxy for bank solvency – is key to understand how banks might fare in a future stress situation – for instance as part of regulatory stress tests.
Marcus Buckmann, Paula Gallego Marquez, Mariana Gimpelewicz and Sujit Kapadia
Bank failures are very costly for society. Following the 2007/2008 global financial crisis, international regulators introduced a package of new banking regulations, known as Basel III. This includes a wider range of capital and liquidity requirements to protect banks from different risks. But could the additional complexity be unnecessary or even increase risks, as some have argued? In a recent staff working paper, we assess the value of multiple regulatory requirements by examining how different combinations of metrics might have helped prior to the 2007/2008 crisis in gauging banks that subsequently failed. Our results generally support the case for a small portfolio of different regulatory metrics: having belts and braces (or suspenders) can strengthen the resilience of the banking system.
Faced with unprecedented declines in corporate revenue, the Covid-19 shock represents a loss of cash flow of indeterminate duration for many firms. It is too early to tell how exactly firms will be affected by this crisis and how scarring it will be, but the crisis will likely have a significant impact on most corporates. This post reviews the literature on factors affecting firms’ ability to withstand the Covid-19 shock and what large corporates did to shore up their finances.
Following the financial crisis, net corporate financing has exhibited a similar overall pattern in the UK and the US. But the composition of that financing has been very different – with the net debt stock of UK non-financial corporates falling by more than 20% of nominal GDP. By contrast, in the US the fall was only 10%, and around half of this has since been regained. Why did the two countries’ experiences diverge so much after the crisis? In this post, I argue that the root cause of this divergence was a fall in UK corporates’ demand for debt, rather than a hit to credit supply. Business cycles, and credit conditions appear to be similar in both countries, but in the UK there has been lower demand for corporate gearing from firms, a weaker recovery in M&A activity, and fewer share buybacks than in the US.