Weathering the Storm: Who Can Access Credit in a Pandemic?
Credit enables firms to weather temporary disruptions in their business that may impair their cash flow and limit their ability to meet commitments to suppliers and employees. The onset of the COVID recession sparked a massive increase in bank credit, largely driven by firms drawing on pre-committed credit lines. In this post, which is based on a recent Staff Report, we investigate which firms were able to tap into bank credit to help sustain their business over the ensuing downturn.
Tracking the COVID-19 Economy with the Weekly Economic Index (WEI)
At the end of March, we launched the Weekly Economic Index (WEI) as a tool to monitor changes in real activity during the pandemic. The rapid deterioration in economic conditions made it important to assess developments as soon as possible, rather than waiting for monthly and quarterly data to be released. In this post, we describe how the WEI has measured the effects of COVID-19. So far in 2020, the WEI has synthesized daily and weekly data to measure GDP growth remarkably well. We document this performance, and we offer some guidance on evaluating the WEI’s forecasting abilities based on 2020 data and interpreting WEI updates and revisions.
The Commercial Paper Funding Facility
This post documents dislocations in the commercial paper market following the COVID-19 outbreak that motivated the Fed to create the Commercial Paper Funding Facility, and tracks the subsequent improvement in market conditions.
Treasury Market Liquidity during the COVID-19 Crisis
A key objective of recent Federal Reserve policy actions is to address the deterioration in financial market functioning. The U.S. Treasury securities market, in particular, has been the subject of Fed and market participants’ concerns, and the venue for some of the Fed’s initiatives. In this post, we evaluate a basic metric of market functioning for Treasury securities—market liquidity—through the first month of the Fed’s extraordinary actions. Our particular focus is on how liquidity in March 2020 compares to that observed over the past fifteen years, a period that includes the 2007-09 financial crisis.
Is There Too Much Business Debt?
Anna Kovner and Brandon Zborowski By many measures nonfinancial corporate debt has been increasing as a share of GDP and assets since 2010. As the May Federal Reserve Financial Stability Report explained, high business debt can be a financial stability risk because heavily indebted corporations may need to cut back spending more sharply when shocks […]
Tax Reform and U.S. Effective Profit Taxes: From Low to Lower
The Tax Cut and Jobs Act (TCJA) reduced the federal corporate profit tax rate from 35 percent to 21 percent. Adding in state profit taxes, the overall U.S. tax rate went from 39 percent, one of the highest rates in the world, to 26 percent, about the average rate abroad. The implications of the new law for U.S. competitiveness depend on how these statutory tax rates compare with the actual rates faced by U.S. and foreign companies. To address this question, this post presents new evidence on tax payments as a share of profits, as well as analytical measures of tax impacts on profitability. We find that the U.S. effective tax rate was already below the average rate abroad prior to the enactment of the TCJA, and that it is now well below the rate in most countries.
Regulatory Changes and the Cost of Capital for Banks
In response to the financial crisis nearly a decade ago, a number of regulations were passed to improve the safety and soundness of the financial system. In this post and our related staff report, we provide a new perspective on the effect of these regulations by estimating the cost of capital for banks over the past two decades. We find that, while banks’ cost of capital soared during the financial crisis, after the passage of the Dodd-Frank Act (DFA), banks experienced a greater decrease in their cost of capital than nonbanks and nonbank financial intermediaries (NBFI).
Did Investor Sentiment Affect Credit Risk around the 2016 Election?
Immediately following the presidential election of 2016, both consumer and investor sentiments were buoyant and financial markets boomed. That these sentiments affect financial asset prices is not so surprising, given past stock market evidence and episodes such as the dot-com bubble. Perhaps more surprising, the risk of corporate default—which is driven mainly by firms’ financial health but also by bond liquidity—also fell following the election, as indicated by lower yield spreads. In this post, I show that, although expectations of better corporate and macroeconomic conditions were the primary drivers of lower credit risk, improved investor sentiment also contributed.
Performance Bonds for Bankers: Taking Aim at Misconduct
Given the long list of problems that have emerged in banks over the past several years, it is time to consider performance bonds for bankers. Performance bonds are used to ensure that appropriate actions are taken by a party when monitoring or enforcement is expensive. A simple example is a security deposit on an apartment rental. The risk of losing the deposit motivates renters to take care of the apartment, relieving the landlord of the need to monitor the premises. Although not quite as simple as a security deposit, performance bonds for bankers could provide more incentive for bankers to take better care of our financial system.
Let the Light In: How Financial Reporting and Transparency Improve Corporate Governance
Financial reporting is valuable because corporate governance—which we view as the set of contracts that help align managers’ interests with those of shareholders—can be more efficient when the parties commit themselves to a more transparent information environment. This is a key theme in our article The Role of Financial Reporting and Transparency in Corporate Governance, which reviews recent literature on the part played by financial reporting in resolving agency conflicts among managers, directors, and shareholders. In this post, we highlight some of the governance issues and recommendations discussed in the article, and we focus on how information asymmetries can create agency conflicts.