The economy is a complex system because market participants do not act independently but adjust their behavior to other agents and to the outcome which emerges from their joint actions (Arthur, 2014). Dependencies among participants can impede policy makers capabilities to influence or steer the course of the economy. Kambhu et al. (2007) argue that to influence developments in financial markets, for instance to prevent crises from spreading, there are only “coarse or indirect options” available for policy makers. Similar to crises which propagate through a complex system, interventions might result in unintended side effects which can also disseminate through the system. Thus, in a complex system, unintended consequences of policy efforts may well be the rule. Policy makers try to ward off or mitigate negative consequences for the economy and society during periods of crisis. For instance, during the Covid crisis large scale support programs for firms in Western economies were set up to avoid bankruptcies. Similarly, during the sovereign debt crisis in the Eurozone, the European Central Bank (ECB) set up large scale asset purchase programs as well as additionally longer-term refinancing operations (LTRO) which provided immediate support to financial market participants’ liquidity positions and thereby prevented a melt-down of the financial system. During these periods, immediate and abundant liquidity supply is of utmost importance. Meanwhile, crisis measures, due to their massive scale and non-specific target group, may entail unknown or unintended side effects for instance on competition among market participants, firms’ investment behavior, or changes in lending strategies and risk taking behavior of banks. Likewise, new regulatory frameworks such as the introduction of new markets can have consequences previously not thought of. For policy makers it is important to know direct effects of policy interventions but also to be aware of the possibility and impact of indirect or unexpected side effects in order to evaluate measures taken and to learn for future design of regulation or intervention.

By computing a volatility index (CVX) from cryptocurrency option prices, we analyze this market’s expectation of future volatility. Our method addresses the challenging liquidity environment of this young asset class and allows us to extract stable market implied volatilities. Two alternative methods are considered to compute volatilities from granular intra-day cryptocurrency options data, which spans over the COVID-19 pandemic period. CVX data therefore capture ‘normal’ market dynamics as well as distress and recovery periods. The methods yield two cointegrated index series, where the corresponding error correction model can be used as an indicator for market implied tail-risk. Comparing our CVX to existing volatility benchmarks for traditional asset classes, such as VIX (equity) or GVX (gold), confirms that cryptocurrency volatility dynamics are often disconnected from traditional markets, yet, share common shocks.

We use administrative and supervisory data at the bank and loan level to investigate the impact of the introduction of covered bonds on the composition of bank balance sheets and bank risk. Covered bonds, despite being collateralized by mortgages, lead to a shift in bank lending from mortgages to corporate loans. Young and low-rated firms in particular receive more credit, suggesting that overall credit risk increases. At the same time, we find that total balance sheet liquidity increases. We identify the channel in a theoretical model and provide empirical evidence: Banks with low initial liquidity and banks with sufficiently high risk-adjusted return on firm lending drive the results.

Between 2010 and 2012, the European Central Bank absorbed €218 billion worth of government securities from five EMU countries under the Securities Markets Programme (SMP). Detailed security holdings data at the bank level affirms an effective lending stimulus due to the SMP. Exposed banks contract household lending, but increase commercial lending substantially. Holding non-SMP securities from stressed EMU countries amplifies the commercial lending response. The SMP also improved liquidity buffers and profitability without compromising credit quality.

We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.

We employ a unique identification strategy linking survey data on household consumption expenditure to bank‐level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low‐income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.

Previous studies report a robust positive relationship between cash endowments and asset prices in experimental asset markets. Higher cash endowments generally increase the proportion of riskless versus risky wealth at the individual and aggregate level as well as the capacity of market participants to seize investment opportunities, i.e., their transactional liquidity. In this study, we vary the size and composition of riskless endowments in order to analyze the impact of different types of “cash” on trading behavior in experimental asset markets with randomly fluctuating fundamental values. In all treatments except the baseline, we allow subjects to control the liquidity of their cash endowment endogenously by providing some proportion of their riskless endowment in a physical store of value, which can be converted into experimental currency for trading. We observe that most subjects retain a large proportion of their wealth in the physical store of value. Inconsistent with rational choice theory, average trading prices and trading volumes are lower when “cash” is provided in a convertible store of value rather than experimental currency. Surprisingly, the price effect manifests asymmetrically on the buy side but not the sell side. Moreover, we control for potential changes in risk appetite resulting from higher riskless endowments. Our results suggest that transactional liquidity not a risky demand shift drives the relationship between cash endowments and asset prices.

We employ a unique identification strategy linking survey data on household consumption expenditure to bank-level data to estimate the effects of bank funding stress on consumer credit and consumption expenditures. We show that households whose banks were more exposed to funding shocks report lower levels of nonmortgage liabilities. This, however, only translates into lower levels of consumption for low income households. Hence, adverse credit supply shocks are associated with significant heterogeneous effects.

This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that the long-run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users and in areas with low access to finance. These findings suggest that when search frictions are large, liquidation can lead to inefficient allocation of assets in bankruptcy.

This paper shows that global banks transmit liquidity shocks via their network of foreign affiliates. We use the (unexpected) access of German banks' affiliates located in the United States to the Federal Reserve's Term Auction Facility. We condition on the parent banks' U.S. dollar funding needs in order to examine how affiliates located outside the United States adjusted their balance sheets when the U.S. affiliate of the same parent tapped into TAF liquidity. Our research has three main findings. First, affiliates tied to parents with higher U.S. dollar funding needs expanded their foreign assets during periods of active TAF borrowing. Second, the overall effects are driven by affiliates located in financial centers. Third, U.S.- dollar-denominated lending particularly increased in response to the TAF program.