Olivier Darmouni, Kerry Siani, 29 October 2020

With the spread of COVID-19 and its economic consequences, many firms were in need of increased liquidity. This column documents that instead of relying on bank loans, firms preferred to issue corporate bonds on capital markets. Over 40% of bond issuers left their credit line untouched, and a large share of bond issuance was used to repay existing bank loans. Bond issuance was also used to increase holdings of liquid assets rather than for real investment. This suggests that the V-shaped recovery of bond markets is unlikely to lead to a V-shaped recovery in real activity.

Marcin Wolski, Patricia Wruuck, 05 August 2020

The COVID-19 crisis has had a substantial impact on labour markets throughout Europe. This column uses new data sources based on Google Trends reports in order to investigate the speed of transmission of the crisis into individuals’ concerns about becoming unemployed. The results indicate that this transmission is linked to corporate resilience. A stronger financial position of firms to withstand liquidity shortfalls may have helped to cushion the deterioration in job market sentiment during the outbreak of the pandemic, suggesting the importance of bolstering liquidity as a way of sheltering jobs. 

Fabiano Schivardi, Guido Romano, 18 July 2020

The COVID-19 crisis has induced a sharp drop in cash flow for many firms, possibly pushing solvent but illiquid firms into bankruptcy. This column presents a simple method to determine the number of firms that could become illiquid, and when. The authors apply this method to the population of Italian businesses and find that at the peak, around 200,000 companies (employing 3.3 million workers) could become illiquid due to a total liquidity shortfall of €72 billion euros. It is essential that policymakers shelter businesses by acting quickly, especially if there is a ‘second peak’ after the summer.

Thorsten Beck, Robin Döttling, Thomas Lambert, Mathijs van Dijk, 02 July 2020

Banks fulfil several key functions in the economy, from improving the allocation of capital by extending credit to facilitating consumption smoothing through saving and borrowing. The creation of liquidity lies at the centre of much of a bank’s operations. This column provides evidence that banks' liquidity creation is associated with higher economic growth across countries and industries, with important non-linear effects. Results suggest that in the new ‘knowledge economy’ banks will have a more limited role, compared to other types of financial intermediaries and markets.

Çağatay Bircan, Ralph De Haas, Helena Schweiger, Alexander Stepanov, 03 June 2020

As lockdown measures continue, or are relaxed only gradually, many small businesses continue to experience significantly reduced turnover. This column reports on a firm-level analysis across 16 emerging markets, and three Western European comparator countries, in order to gauge the potential risks associated with debt-driven COVID-19 support. The overall goal is to prevent a wave of bankruptcies that could break valuable relationships between firms and their suppliers and employees. However, liquidity support in the form of additional bank lending may create debt-overhang problems in the future and therefore requires careful targeting.

Erica Bosio, Simeon Djankov, 06 May 2020

With lockdown measures in place almost worldwide now, cash-flow represents a significant concern for firms across multiple sectors. It remains to be seen exactly which types of business will be able to weather the coming storm. This column estimates the survival time of nearly 7,000 firms in a dozen Southern European and emerging market economies. Under the assumptions that firms have no incoming revenues, the median survival time across industries ranges from 8 to 19 weeks. Once collapsed export demand is taken into account, the median survival time falls to between 8 and 14 weeks.

Mike Harmon, Victoria Ivashina, 29 April 2020

Over the past decade, low interest rates attracted borrowers to leveraged credit markets, which have since reached an unprecedented size and risk. The collision of a highly leveraged corporate sector with the severe economic shock from COVID-19 has created unique financial problems. This column analyses the main vulnerabilities in the loan market and evaluates the current US government response. Although the current stimulus programmes are significant, they can be improved to better target at-risk businesses, mitigate moral hazard, and optimise the level of direct government funding.

Antonio De Vito, Juan-Pedro Gomez, 29 March 2020

The coronavirus pandemic has endangered the liquidity position of not only SME firms, but also large listed firms. This column uses firm-level data from 26 countries to study how long it may take for these listed firms to become cash constrained, and what kind of interventions would be most effective. It concludes that while bridge loans would cost governments almost twice as much as a six-month tax deferral, the policy seems justified given the higher efficacy in preventing a global cash crunch. 

Pontus Rendahl, Lukas B. Freund, 14 December 2019

In recent years, some have claimed that banks create money ‘ex nihilo’. This column explains that banks do not create money out of thin air. From an economic viewpoint, commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise. In addition to bank solvency representing a constraint on private money creation, banks require access to liquid reserves in order to be able to engage in money creation. 

Daragh Clancy, Peter G Dunne, Pasquale Filiani, 04 November 2019

Stable sovereign bond markets are crucial to a well-functioning economy and financial system. But despite the importance of amplifications of sovereign bond market tensions related to flights-to-safety and sudden liquidity contractions, there is little direct empirical evidence of the transmission channels through which such catalysts for amplification operate. This column documents significant own- and cross-market interdependencies between liquidity and tail risks that amplify shocks likely attributable to economic fundamentals. The findings demonstrate the potential for the provision of liquidity across sovereign markets to be vulnerable to sudden fractures, with possible implications for euro area economic and financial stability.

Anne-Laure Delatte, Pranav Garg, Jean Imbs, 21 May 2019

The ECB's unconventional monetary policy package implemented in February 2012 changed collateral requirements. This column examines the effects in the French credit market, using data on corporate loans. Credit indeed increased after the liquidity injection, exclusively driven by supply. There was also strategic risk-taking by a group of banks, an unintentional implication of the policy.

Gaston Gelos, Federico Grinberg, Shujaat Khan, Tommaso Mancini-Griffoli, Machiko Narita, Umang Rawat, 28 February 2019

There is little evidence on whether deteriorating household balance sheets in advanced economies have made monetary policy less effective since the Global Crisis. Using US household-level data, this column shows that the responsiveness of household consumption to monetary policy has in fact diminished since the crisis, and that households with the highest indebtedness responded the most to monetary policy shocks. Since the distribution of debt did not change after the crisis, this suggests that household debt did not contribute to lessening the effects of monetary policy over time. 

Vítor Constâncio, 28 December 2018

Vítor Constâncio, Former Vice-President of the European Central Bank, talks about euro area performance to date and suggests what should come next for the area.

Tobias Adrian, John Kiff, 01 December 2018

The financial system has undergone far-reaching changes since the 2008 Global Crisis. This column casts those changes in terms of shifts in the way financial intermediaries manage their balance sheets, and also discusses the regulatory reform agenda and reviews the impact of regulations on market liquidity and credit availability. The current evidence suggests that the financial system has become safer, at limited unintended cost.

Vincent Legroux, Imène Rahmouni-Rousseau, Urszula Szczerbowicz, Natacha Valla, 05 October 2018

Among the tools used by central banks to tame the financial crisis, some – such as haircuts applied by the central bank to the collateral posted at its provision of central liquidity to the banking system – have gone largely unnoticed. This column introduces a liquidity mismatch index to quantify the extent to which central banks effectively supported bank liquidity. The analysis suggests that in the case of French banks, the ECB alleviated banks’ liquidity mismatch significantly between 2011 and 2015.

Vesa Vihriälä, 13 April 2018

The smooth functioning of the EMU requires risk sharing. This column, which joins VoxEU's Euro Area Reform debate, argues, however, that its best use is not in the support of fiscal expansion in recession countries, but in ensuring the liquidity of solvent sovereigns under market pressure. Giving the ESM/EMF access to central bank financing should be explored as a means to facilitate it.

Gene Amromin, Mariacristina De Nardi, Karl Schulze, 04 January 2018

A widening gap between rich and poor has been extensively documented for many countries and economies. This column explores how the wealth gap affects output and consumption changes in response to aggregate shocks. Lower- and higher-wealth households face different borrowing constraints, and have different marginal propensities to consume. Different levels of access to financial liquidity thus play a major role in the overall consumption dynamics during an economic downturn.


Instructors: Christos Gortsos (National and Kapodistrian University of Athens and EUI – Fernand Braudel Senior Fellow), Seraina Grünewald (University of Zurich)
Area: Bank Regulation, Supervision and Resolution
Level: Introductory/Intermediate

This course introduces the concept of bank resolution and its main attributes. Then, it presents the EU framework governing resolution of credit institutions, the provisions on the Single Resolution Fund under the SRM Regulation and the related Intergovernmental Agreement.

At the end of this course, which is open to non-economists, participants will have acquired thorough knowledge on:
- The main elements of the international and the EU regulatory framework on resolution.
- The sale of business, bridge institution, asset separation, bail-in.
- The conditions for resolution.
- The alternative forms of permissible state aid under the new framework.

Yener Altunbaş, Simone Manganelli, David Marques-Ibanez, 14 November 2017

Prudential supervision of banks has increasingly relied on capital requirements. But bank capital played a relatively minor role in predicting bank solvency during the Global Crisis, except for scarcely capitalised banks. This column argues that while capital is a helpful tool to support bank financial stability, it is complex for supervisors to calibrate it precisely. Macroprudential authorities should be able to complement capital-based tools with additional, borrower-based prudential instruments.

Tobias Adrian, Michael J. Fleming, Or Shachar, 14 September 2017

The potential adverse effects of regulation on market liquidity in the post-crisis period continue to receive significant attention. This column shows that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, there is little evidence of a wide-spread deterioration in market liquidity. Liquidity remained resilient even during stress events like the 2013 ‘temper tantrum’.



CEPR Policy Research