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Stress Relief? Funding Structures and Resilience to the Covid Shock

Author

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  • Kristin Forbes
  • Christian Friedrich
  • Dennis Reinhardt
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.

Suggested Citation

  • Kristin Forbes & Christian Friedrich & Dennis Reinhardt, 2023. "Stress Relief? Funding Structures and Resilience to the Covid Shock," Staff Working Papers 23-7, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-7
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    Cited by:

    1. Elliott, David & Meisenzahl, Ralf R. & Peydró, José-Luis, 2024. "Nonbank lenders as global shock absorbers: Evidence from US monetary policy spillovers," Journal of International Economics, Elsevier, vol. 149(C).
    2. Viral V. Acharya & Nicola Cetorelli & Bruce Tuckman, 2024. "Where Do Banks End and NBFIs Begin?," Staff Reports 1119, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    Coronavirus disease (COVID-19); Exchange rates; Financial institutions; Financial stability; Financial system regulation and policies; International topics;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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