Firms often argue that disclosure and reporting regulations such as the EU Accounting Directive require them to reveal proprietary information, which discourages innovation. This column explores the effects of disclosure requirements on corporate innovation in the EU, and finds that forcing firms to publicly disclose their financial statements does indeed discourage innovative activities. At the industry level, positive information spillovers to competitors, suppliers, and customers appear insufficient to compensate for the negative direct effect on innovation. Indeed, the spillovers seem to concentrate innovation within a few large firms in a given industry.
Financial regulation and banking
Facing acute strains in the offshore dollar funding markets during Covid-19, the Federal Reserve implemented measures to provide US dollar liquidity. This column examines how the Fed reinforced swap arrangements and established a ‘financial institutions and monetary authorities’ repo facility in response to the crisis. Closer pre-existing ties with the US helped economies access the liquidity arrangements. Further, the announcements of the liquidity expansion facilities led to appreciation of partner currencies against the dollar, as did US dollar auctions by foreign central banks.
Once moratoria and other Covid-19 support measures are unwound, European banks will likely be confronted by a wave of non-performing loans. This column provides empirical insights on the current levels of such loans in Europe and draws lessons from previous financial crises for their effective treatment. It highlights the importance of early and realistic assessment of loan losses to avoid adverse incentives for banks. Secondary loan markets would help in this process and further facilitate bank resolution as laid down in the Bank Recovery and Resolution Directive, which should be upheld even in extreme scenarios.
US banks currently hold almost $4 trillion in Fed deposits, as a result of the ongoing balance sheet expansion by the Federal Reserve. Meanwhile, a year-long exclusion of Fed deposits and US Treasuries from bank capital rules is set to expire on 31 March. This column proposes a simple, feasible, and mandate-consistent strategy to replace $3 trillion in deposits with Treasury bills. These Treasuries could be held not only by banks, but also by mutual funds and non-residents, and this substitution could also save taxpayers money.
In sub-Saharan Africa, the government is one of the biggest purchasers of works and services in the economy. Countries in sub-Saharan Africa are also the least efficient when it comes to paying outstanding invoices. This column estimates that the size of government arrears in sub-Saharan Africa was 4.26% of GDP in 2019, and likely increased by an average of 1.92 percentage points of GDP across the region in 2020. Financing the COVID relief and recovery programmes by delaying payments is negatively affecting suppliers and contractors at a time when liquidity is crucial for firm survival, which in turn burdens the banking sector and increases the likelihood of a banking crisis.
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