CEPR News In focus this week: 11 May 11 May 2023 This weekly press briefing highlights some of the latest research reports, discussion papers and other publications from CEPR. It also features some of the latest columns on VoxEU, as well as new blogs/reviews, audio interviews and short films.
LESSONS FROM SILICON VALLEY BANK’S UNINSURED DEPOSIT RUN The public bailout for cash-rich companies holding large deposits in the failed Silicon Valley Bank has made clear that society is still at the mercy of uninsured demandable claims. Writing at VoxEU, Enrico Perotti proposes that a combination of gating (i.e. temporary or partial suspension of redemptions) and swing pricing when outflows become large be applied to any uninsured demandable claim. Businesses would thus be ensured access to liquidity as required without creating escalation and avoiding a guarantee of their absolute safety.
CREDIT SUISSE: Too big to manage, too big to resolve? Writing at VoxEU, Anat Admati, Martin Hellwig and Richard Portes analyse the details of the run on Credit Suisse and its eventual takeover by UBS. The research highlights multiple discrepancies between official statements and implemented measures, both by Credit Suisse and Swiss authorities. The authors argue that the reforms adopted after the 2007-2009 crisis are still insufficient for resolving systemic institutions. Going forward, authorities must be able to act promptly and implement correction actions before risks of failure become too severe.
RISING CARBON COSTS DO NOT DEPRESS PERFORMANCE OF FIRMS Firms seem to have responded to rising carbon costs by adapting rather than relocating their business operations, according to research by Arjan Trinks and Erik Hille. The authors use a comprehensive measure of carbon costs and data on over 3 million firms from 32 countries from 2000 to 2019 to show that carbon costs hardly depressed the performance of an average industrial firm. While limited employment reductions are observed, a large number of firms ramped up their investments in response to higher carbon costs, and losses and exit probabilities have not noticeably increased.
FINANCIAL REGULATION CAN HELP ADDRESS CLIMATE POLICY UNCERTAINTY AND REDUCE RISK FOR MARKETS Climate risk has become a major concern for financial institutions and financial markets. Yet, climate policy is still in its infancy and contributes to increased uncertainty. For example, the lack of a sufficiently high carbon price and the variety of definitions for green activities lower the value of existing and new capital, and complicate risk management. Writing at VoxEU, Tobias Berg et al. argue that it would be welfare-enhancing if climate policy changes were to follow a predictable longer-term path and suggest a role for financial regulation in the transition.
GERMAN MONETARY POLICY SPILLOVERS WERE LARGER IN THE EUROPEAN MONETARY SYSTEM THAN OUTSIDE New research sheds light on the debate surrounding the international transmission of monetary policy and the role of central banks in the global cycle. Focusing on the European Monetary System between 1979 and 1998, a study by James Cloyne, Patrick Hürtgen and Alan Taylor found that Bundesbank policy spillovers were stronger in major economies within the system with Deutschmark pegs compared to those outside with floating exchange rates. The study also found that German spillovers were comparable or even larger in magnitude than monetary spillovers from the US for both pegs and floats.
TRADE FRAGMENTATION MATTERS FOR BANK CREDIT SUPPLY Geopolitical events are causing market fragmentation and trade uncertainty. This may have consequences for financial intermediation, as banks may reduce lending after being affected by adverse trade events. Studies conducted by the International Banking Research Network show fragmentation shocks may reallocate and reduce credit supply through banks, which can amplify the initial shock on the real economy. This reallocation may also reinforce fragmentation and alter the effects of trade disruptions.
EUROPEAN FIRMS SUFFER PERSISTENT DAMAGES FROM FLOODS, BUT FREQUENT EVENTS LEAD TO ADAPTATION There is little evidence on the short- and medium-term microeconomic impact of floods in Europe, despite the increase in frequency and severity. New research by Serena Fatica, Gabor Katay and Michela Rancan show that water damages have a significant and persistent adverse effect on firm performance and may even lead to firm exit. However, frequent floods do not significantly worsen firm performance, suggesting that firms adapt in flood-prone areas. In such regions, economic activity may be reallocated from firms exposed to water damage to unaffected firms.
DOES POLITICS SELL NEWSPAPERS? When the political debate hots up in the world’s largest democracy, is this good for newspaper circulation? Guilhem Cassan talks to Tim Phillips about how to make a causal link from Indian politics to how many newspapers are sold, and what sort of papers they are.