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Stress Relief? Funding Structures and Resilience to the Covid Shock

Kristin Forbes, Christian Friedrich and Dennis Reinhardt

Staff Working Papers from Bank of Canada

Abstract: This paper explores whether different funding structures—including the source, instrument, currency, and counterparty location of funding—affected the extent of financial stress experienced in various countries and sectors during the Covid-19 spread in early 2020. 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 if these different funding structures mitigated—or amplified—the impact of this risk-off shock. A higher share of funding from non-bank financial institutions (NBFI) 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 domestic) did not significantly impact resilience. The results suggest that macroprudential regulations should broaden their current focus to take into account exposures to NBFI and dollar funding, giving less priority to 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 policies 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.

Keywords: Coronavirus disease (COVID-19); Exchange rates; Financial institutions; Financial stability; Financial system regulation and policies; International topics (search for similar items in EconPapers)
JEL-codes: E44 E65 F31 F36 F42 G18 G23 G38 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ifn and nep-opm
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https://www.bankofcanada.ca/wp-content/uploads/2023/01/swp2023-7.pdf Full text (application/pdf)

Related works:
Journal Article: Stress relief? Funding structures and resilience to the covid shock (2023) Downloads
Working Paper: Stress Relief? Funding Structures and Resilience to the Covid Shock (2023) Downloads
Working Paper: Stress Relief?: Funding Structures and Resilience to the Covid Shock (2023) Downloads
Working Paper: Stress relief? Funding structures and resilience to the Covid Shock (2022) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-7

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