Funding frictions are tensions in financial markets that can preclude institutions from borrowing money or rolling over debt. In extreme situations, such as the 2007-2009 global financial crisis (GFC) or the market turmoil in March 2020 during the Covid-19 pandemic, funding frictions can destabilize the entire financial system. While earlier research (pre-GFC) tends to disregard funding frictions, the enormous risk associated with these market tensions highlights that a deeper understanding of funding frictions is crucial – it can guide policy makers to determine their optimal responses to future crises and help institutions to reduce their funding risk.
In this project, I investigate how funding frictions affect financing conditions for banks, companies, countries, and pension plans. While funding frictions can, in the most extreme cases, lead to the bankruptcy of otherwise healthy entities, they usually first manifest through elevated costs for external financing, shorter debt maturities, or a lack of access to certain credit markets. Focusing on these aspects, I investigate the following question: How did the market developments since the GFC affect funding frictions for countries, banks, pension funds, and insurance companies? More specifically, I examine four post-crisis changes in financial markets – (i) tighter bank regulation (as implemented in the Basel III capital accords), (ii) more stringent regulation of Money Market Mutual funds, (iii) ballooning deficits in most developed economies, (iv) pension risk transfers with firms transferring their defined benefit (DB) pension plans to life insurance companies – and study their impact on funding costs and access to credit markets. The results can inform policy makers about the (potentially unintended) consequences of regulatory changes and help sovereigns with managing their increasing debt levels.
