Economics in the Time of COVID-19
In summary, in the most adverse scenario, COVID-19 could have quite important
repercussions for the financial system. Immediate attention should obviously be
focused on the public health aspects of the virus and on avoiding a global pandemic,
if still possible. Adverse solvency effects in the financial system will most likely not
be immediate, so appropriate responses can be prepared. Panic and spillover effects
in markets, on the other hand, might come much more rapidly, so complacency over
short-term effects might be mistaken as well. The experiences and regulatory upgrades
of the past decade will come in useful for regulatory and monetary policy authorities;
however, there seems to have been as little preparation as before for a tail-risk event.
If I had to make one humble recommendation to regulatory authorities, it would be to
(1) focus on possible operational disruptions in the financial system, (2) strengthen
confidence in financial markets by clearly signalling that they stand ready to intervene,
and (3) prepare for possible interventions in and resolution of failing banks, without
ignoring tail-risk events.
References
Beck, T, H Degryse and N Van Horen (2018), “When arm’s length is too far: Relationship
banking over the credit cycle”, Journal of Financial Economics 127(1): 174-196.
Bolton, P, X Freixas, L Gambacorta and P E Mistrulli (2016), “Relationship and
Transaction Lending in a Crisis”, Review of Financial Studies 29(10): 2643-2676.
About the author
Thorsten Beck is Professor of Banking and Finance at Cass Business School in
London. He is also (Co)-Managing Editor of Economic Policy and Co-editor of the
Review of Finance. He was Professor of Economics and founding Chair of the European
Banking Center at Tilburg University from 2008 to 2013. Previously he worked in the
research department of the World Bank and has also worked as a Consultant for –
among others - the ECB, EIB, IMF, the European Commission, ADB, and the German
Development Corporation.His research and policy work has focused on international
banking and corporate finance and has been published in Journal of Finance, Journal
of Financial Economics, Journal of Monetary Economics and Journal of Economic
Growth. His research and policy work has focused on Eastern, Central and Western
Europe, Sub-Saharan Africa and Latin America. He is also Research Fellow in the
Centre for Economic Policy Research (CEPR) in London and a Fellow in CESifo. He
studied at Tübingen University, Universidad de Costa Rica, University of Kansas and
University of Virginia.