Finance: Research, Policy and Anecdotes

There has been an explosion of papers gauging the effect of the pandemic on the financial sector and assessing different policy responses. Some of them have now been published in a special issue of the Journal of Banking and Finance, under the guidance of four outstanding guest editors (Allen Berger, Asli Demirguc-Kunt, Fariborz Moshirian and Anthony Saunders).

As pointed out by the guest editors in their editorial, the pandemic has resulted in the most significant global disruption since the Second World War. While it did not start in the financial system (unlike the Global Financial Crisis), financial sectors across the globe were as much affected as other sectors; at the same time they played an important role as transmission channel for government support programmes.

While the editorial gives a nice overview of the different papers, let me point to some highlights. First, many papers have been written about the US, some about Europe, but the special issue contains several interesting cross-country studies: Gönül Ҫolak and Özde Öztekin show that bank lending is weaker in countries that are more affected by the health crisis, but that there are important interactions with market structure and regulatory framework. Yuejiao Duan and co-authors find that the pandemic has increased systemic risk across countries, but is moderated by bank regulation and higher trust. Iftekhar Hasan and co-authors use global syndicated loan data and find that loan spreads rise by over 11 basis points in response to a one standard deviation increase in the lender's exposure to COVID-19 and over 5 basis points for an equivalent increase in the borrower's exposure.

Second, Erik Feyen and co-authors introduce a new global database (still updated on a regular basis) and a policy classification framework that records the financial sector policy response to the COVID-19 pandemic across 155 jurisdictions and over time and explore what drives cross-country differences in policy implementation.

Third, what has been the role of different types of banks during the crisis?  Chris James and co-authors show for the US that small banks responded faster to Paycheck Protection Program (PPP) loan requests and lent more intensively to small businesses than larger banks, which suggest that community banks remain an important conduit for small business credit particularly during crises when a rapid response is required; a clear indication that relationship lending can be helpful in crisis situations, as shown in my own work for the Global Financial Crisis. And interestingly, Mustafa Karakaplan finds that these loans were not substitutes but rather complements to regular small business lending, with a multiplier effect of one dollar of PPP credit on conventional loans to the smallest firms of about an extra dollar.

I am sure that this will not be the end of the research programme on the effect of the pandemic.  There are lots of more issues to explore, including the exit from the different support programmes and the effect of asset reallocation in a post-Covid world and corporate overindebtedness on banks.  I am sure we will see some of these papers in the JBF!

Overview