Global crisis

Reint Gropp, Steven Ongena, Jörg Rocholl, Vahid Saadi, 07 August 2020

Recessions are periods of low opportunity costs for time and resources, and hence can facilitate a productivity-enhancing reallocation of resources and improve productivity growth. However, recessions can also slow productivity growth by intensifying credit frictions, for instance, through the accumulation of legacy assets in the banking sector. This column investigates the interaction between these two channels in the recent banking crisis and shows that US regions with more restructuring of inefficient banks during the post-Global Crisis recession experienced higher productivity growth in the real sector in subsequent years.

Robin Greenwood, Samuel G. Hanson, Andrei Shleifer, Jakob Ahm Sørensen, 15 July 2020

There is a long-standing debate on whether financial crises can be predicted. This column draws on a chronology of past financial crises and data on credit and asset prices for a panel of 42 countries between 1950-2016 and finds that if there is a large credit expansion with an asset price boom, then financial crises are highly predictable. These results are used to motivate a simple indicator that identifies periods of potential credit-market overheating. The indicator is shown to predict past crises in advance, suggesting that policymakers have time to act and take prophylactic policy interventions.

Marco Buti, 13 July 2020

Both the severity of the recession in Europe in 2020 and the subsequent bounce back of economies are likely to differ markedly across member states. Avoiding that the current crisis risks will be remembered as the Great Fragmentation is a key goal of the EU strategy. This column looks at the lessons learned during the financial crisis, and argues that a more consensual narrative, the lower risks of moral hazard and the rising political awareness that Europe has to count on ‘indigenous’ growth drivers provide a better chance of adopting an ambitious EU policy response. Whether it will also lead to deeper political integration, will depend on finalising long-lasting open institutional 'chantiers' such as Banking Union and Capital Markets Union.  

Martin Götz, Luc Laeven, Ross Levine, 07 July 2020

Banks with more equity tend to lend more, create more liquidity, have higher probabilities of surviving crises and if they do, they tend to recover faster. The degree to which a bank issues new stock to replenish bank equity in response to a crisis is therefore crucial. This column shows that ownership structure is an important determinant of a bank’s new stock issuance during a crisis. US banks with greater insider ownership are found to have had significantly less common stock sales following the onset of the 2008 Global Crisis.

Simeon Djankov, Dorina Georgieva, Hibret Maemir, 03 July 2020

Countries reform when their neighbours have reformed too, especially in the aftermath of economic crises. This column examines business regulatory reforms during 2004–2019. Previous crisis episodes have generated improvements in the law and administration of registering property, trading across borders, protecting investors and resolving bankruptcy. The current period of post-COVID-19 recovery is propitious for regulatory reform.

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