Research

The failure of Silicon Valley Bank on March 10, 2023 brought attention to significant weaknesses across the banking system, leading to a panic that spread to other vulnerable banks. With subsequent failures of Signature Bank and First Republic Bank, the United States had three of the four largest bank failures in its history occur over a two-month period. Several features of the Silicon Valley Bank failure make it an ideal teaching case for explaining the underlying economics of banking (in general) and banking crises (specifically). This paper tries to do that.

More than two million U.S. households have an eviction case filed against them each year. Policymakers at the federal, state, and local levels are increasingly pursuing policies to reduce the number of evictions, citing harm to tenants and high public expenditures related to homelessness. We study the consequences of eviction for tenants using newly linked administrative data from two major urban areas: Cook County (which includes Chicago) and New York City. We document that prior to housing court, tenants experience declines in earnings and employment and increases in financial distress and hospital visits. These pre-trends pose a challenge for disentangling correlation and causation. To address this problem, we use an instrumental variables approach based on cases randomly assigned to judges of varying leniency. We find that an eviction order increases homelessness and hospital visits and reduces earnings, durable goods consumption, and access to credit in the first two years. Effects on housing and labor market outcomes are driven by impacts for female and Black tenants. In the longer run, eviction increases indebtedness and reduces credit scores.

Enthusiasm for “greening the financial system” is welcome, but a fundamental challenge remains: financial decision makers lack the necessary information. It is not enough to know that climate change is bad. Markets need credible, digestible information on how climate change translates into material risks. To bridge the gap between climate science and real-world financial indicators, we simulate the effect of climate change on sovereign credit ratings for 109 countries, creating the world’s first climate-adjusted sovereign credit rating. Under various warming scenarios, we find evidence of climate-induced sovereign downgrades as early as 2030, increasing in intensity and across more countries over the century. We find strong evidence that stringent climate policy consistent with limiting warming to below 2 °C, honoring the Paris Climate Agreement and following representative concentration pathway (RCP) 2.6, could nearly eliminate the effect of climate change on ratings. In contrast, under higher emissions scenarios (i.e., RCP 8.5), 59 sovereigns experience climate-induced downgrades by 2030, with an average reduction of 0.68 notches, rising to 81 sovereigns facing an average downgrade of 2.18 notches by 2100. We calculate the effect of climate-induced sovereign downgrades on the cost of corporate and sovereign debt. Across the sample, climate change could increase the annual interest payments on sovereign debt by US$45–$67 billion under RCP 2.6, rising to US$135–$203 billion under RCP 8.5. The additional cost to corporations is US$10–$17 billion under RCP 2.6 and US$35–$61 billion under RCP 8.5.