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  4. Preliminary Program
  5. New Lessons In Financial Fragility
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New Lessons In Financial Fragility

Paper Session

Sunday, Jan. 9, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Anna Paulson, Federal Reserve Bank of Chicago

Global Life Insurers During a Low-Interest Environment

Ralph S.J. Koijen
,
University of Chicago
Motohiro Yogo
,
Princeton University

Abstract

We provide new evidence on the fragility of US and European life insurers in relation to minimum return guarantees during a low-interest environment. First, European life insurers' equity returns are highly exposed to interest risk after the European sovereign debt crisis, similar to the evidence for US life insurers after the global financial crisis. Second, equity returns are highly correlated across crises in the cross section of insurers. Third, the decline in equity prices during the COVID-19 crisis is highly correlated with the share of liabilities with minimum return guarantees in the cross section of insurers.

Shadow Bank Distress and Household Debt Relief: Evidence from CARES Act 

Susan Cherry
,
Stanford University
Erica Jiang
,
University of Southern California
Gregor Matvos
,
Northwestern University
Tomasz Piskorski
,
Columbia University
Amit Seru
,
Stanford University

Abstract

Over the last decade, shadow banks have serviced a substantial portion of household debt in the US. These intermediaries were also responsible for funding and implementing household debt relief following the CARES Act. We measure the amount of private funding that such intermediaries had to provide. We then study the effect of this government program on their capital structure and financial distress, evaluating the fragility of the shadow banking sector. We conclude by discussing implications of these findings for future regulatory design to alleviate fragility of the shadow banking system.

Corporate Bankruptcy Rules and Zombie Lending

Bo Becker
,
Stockholm School of Economics
Victoria Ivashina
,
Harvard University

Abstract

Zombie credit—that is, lending to otherwise insolvent firms—has been shown to slow economic growth through misallocation of credit and the suppression of normal competitive forces. The prevailing view of drivers of zombie lending puts banks and government assistance administered through banks at the heart of the problem. This paper puts the bankruptcy system—and, relatedly, the development of the alternative credit market that can facilitate out-of-court restructuring—at the center of the zombie credit issue. We postulate that substantial costs of the resolution of insolvent cases narrows borrower’s and banks’ choices and fosters lending to insolvent firms. We use cross-country variation, to explore prevalence of zombie lending in the context of Covid crisis, as well as in the GFC aftermath as a function of restructuring options available to the firm. In sum, this study draws attention to the importance of bankruptcy reforms, and the standardization in bankruptcy procedures across countries as a way of dealing with the zombie problem and its impact on long-term growth.

Discussant(s)
Robert McDonald
,
Northwestern University
Christopher Palmer
,
Massachusetts Institute of Technology
Anil K. Kashyap
,
University of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services
  • E4 - Money and Interest Rates