Stress Relief?: Funding Structures and Resilience to the Covid Shock

Kristin Forbes, Christian Friedrich and Dennis Reinhardt

No 31255, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E44 E65 F31 F36 F42 G18 G23 G38 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-cba and nep-opm
Note: IFM ME
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Citations: View citations in EconPapers (4)

Published as Kristin Forbes & Christian Friedrich & Dennis Reinhardt, 2023. "Stress Relief? Funding Structures and Resilience to the Covid Shock," Journal of Monetary Economics, .

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Related works:
Journal Article: Stress relief? Funding structures and resilience to the covid shock (2023)
Working Paper: Stress Relief? Funding Structures and Resilience to the Covid Shock (2023)
Working Paper: Stress Relief? Funding Structures and Resilience to the Covid Shock (2023)
Working Paper: Stress relief? Funding structures and resilience to the Covid Shock (2022)
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