How Do Non-Performing Loans Evolve along the Economic Cycle? The Role of Macroeconomic Conditions and Legal Efficiency

The reports about increased insolvency risk during the recent COVID-19 pandemic highlight the importance of banks’ balance sheet resilience. In times of crisis, regulators are most concerned about the build-up of non-performing loans (NPLs) – many historical examples show that excessive levels of NPLs can seriously endanger financial stability (e.g., in Japan, Italy, Mexico, or Asia). Evidence from the […]

When Companies Don’t Die: Analyzing Zombie and Distressed Firms in a Low Interest Rate Environment

Last September, The Economist published an article titled “Why Covid-19 will make killing off zombie firms harder.” The article fueled an already widely debated topic and expresses general concerns that schemes put in place to help pandemic-stricken businesses to survive might exacerbate therise of the corporate undead. The ongoing crisis highlights the necessity of analyzing the ”zombification” phenomenon; a constellation in which public support schemes and bank lending activities could keep non-viable firms afloat for longer. There are several examples […]

The Pandemic Crisis Shows that the World Remains Trapped in a “Global Doom Loop” of Financial Instability, Rising Debt Levels, and Escalating Bailouts

In January 2020, I completed a book analyzing the financial crises that triggered the Great Depression of the 1930s and the recent Great Recession.  In that book, I argued that the world’s financial system was caught in a “global doom loop” at the beginning of 2020.  Bailouts and economic stimulus programs during and after the global financial crisis of […]

Hedge Fund Trading and Funding During the March 2020 US Treasury Market Dislocation

The role of hedge funds in U.S. Treasury (UST) markets is thought to have increased in importance since the global financial crisis (GFC) as bank-affiliated broker-dealers ceded some of their traditional activities in UST market arbitrage and liquidity provision to non-bank financial institutions. While UST securities play a vital role in the global financial system, […]

Mutual Fund Liquidity Management, Stock Liquidity, and Corporate Disclosure

“Lessons from COVID-19: Liquidity Risk Management is Central to Open-Ended Funds.” —BlackRock (2020) “Liquidity risk management programs (LRMPs) will be a focus area for the Division.” —SEC (2021) Mutual fund liquidity management has become increasingly important since the financial crisis of 2007–2009, during which regulators and practitioners raised concerns about whether mutual fund portfolios had […]

Cruel and Unusual Circumstances: The Fed’s Use and Misuse of Penalty Rates

After a political and legislative showdown at the end of 2020, Congress closed the Fed’s most novel Section 13(3) emergency lending facilities—the ones aimed most directly at Main Street. These facilities—supported by Treasury funds allocated by the Coronavirus Aid, Relief, and Economic Security (CARES) Act—lent only a fraction of their stated maximum lending limits, leaving many criticizing the programs’ overly punitive […]

Duke Eviction Prevention Working Group Follow-up Letter to North Carolina Leaders

The following is a copy of a letter was recently sent to North Carolina Governor, Roy Cooper; North Carolina Senate President Pro Tempore, Phil Berger; and North Carolina House Speaker, Tim Moore. This letter is written to you on behalf of the Eviction Prevention Working Group.  The Working Group was formed under the sponsorship of the […]

Refinancing Inequality during the COVID 19 Pandemic

Mortgage refinancing is one of the main channels through which monetary policy affects the pocketbooks of everyday Americans. When interest rates are sufficiently low, homeowners can refinance their loans, reducing their monthly payment and realizing a substantial reduction in borrowing costs over the life of the loan. The logic behind expansionary monetary policy in this context […]

Financial Regulatory Suspensions and Debt Provision during the Covid-19 crisis

Policymakers and regulators have launched financial relief and rescue programs to promote economic recovery and alleviate household suffering during the COVID-19 pandemic. In doing so, prudential regulation for banks has been adjusted and it remains uncertain if such suspensions are temporary or entail longer-term effects. In our paper ‘Debt Expansion as “Relief and Rescue” at the Time of […]

Unsecured to the Satisfaction

When engaging in 13(3) lending, the Federal Reserve must be “secured to [its] satisfaction,” which it has generally (and reasonably) taken to mean that its ex ante expectation should be that it will be fully repaid.i However, the Fed also interprets the legislative history of 13(3) as suggesting that this standard cannot be met with an entirely unsecured loan—a loan in which the Fed takes no collateral, third-party guarantee, or […]