Banking System Vulnerability through the COVID-19 Pandemic
More than a year into the COVID-19 pandemic, the U.S. banking system has remained stable and seems to have weathered the crisis well, in part because of effects of the policy actions undertaken during the early stages of the pandemic. In this post, we provide an update of four analytical models that aim to capture different aspects of banking system vulnerability and discuss their perspective on the COVID pandemic. The four models, introduced in a Liberty Street Economics post in November 2018 and updated annually since then, monitor vulnerabilities of U.S. banking firms and the way in which these vulnerabilities interact to amplify negative shocks.
Insurance Companies and the Growth of Corporate Loan Securitization
Collateralized loan obligation (CLO) issuances in the United States increased by a factor of thirteen between 2009 and 2019, with the volume of outstanding CLOs more than doubling to approach $647 billion by the end of that period. While researchers and policy makers have been investigating the impact of this growth on the cost and riskiness of corporate loans and the potential implications for financial stability, less attention has been paid to the drivers of this phenomenon. In this post, which is based on our recent paper, we shed light on the role that insurance companies have played in the growth of corporate loans’ securitization and identify the key factors behind that role.
Credit, Income, and Inequality
Access to credit plays a central role in shaping economic opportunities of households and businesses. Access to credit also plays a crucial role in helping an economy successfully exit from the pandemic doldrums. The ability to get a loan may allow individuals to purchase a home, invest in education and training, or start and then expand a business. Hence access to credit has important implications for upward mobility and potentially also for inequality. Adverse selection and moral hazard problems due to asymmetric information between lenders and borrowers affect credit availability. Because of these information issues, lenders may limit credit or post higher lending rates and often require borrowers to pledge collateral. Consequently, relatively poor individuals with limited capital endowment may experience credit denial, irrespective of the quality of their investment ideas. As a result, their exclusion from credit access can hinder economic mobility and entrench income inequality. In this post, we describe the results of our recent paper which contributes to the understanding of this mechanism.