Description

Policymakers and financial regulators have launched financial relief and rescue programs to promote the recovery of the corporate economy and alleviate household suffering during the Covid-19 pandemic. In doing so, prudential regulation for banks has significantly been adjusted and it remains uncertain if such suspensions are temporary or entail longer-term effects. Further, relief and rescue programs are heavily shifted in favor of debt expansion, which is a double-edged sword for highly leveraged households and corporations in the US, UK and EU.

We argue that policymakers are too focused on the temporality of relief and rescue measures, and need to engage with the potential longer-term adverse consequences of debt expansion. Further, the deployment of regulatory suspensions need to be considered more carefully within the institutional framework so that policy thinking for such suspensions as a tool in crisis management can be more generally developed. We draw upon the legal theory of finance to observe that regulatory suspensions and the substantive effects of the reforms on household and corporate indebtedness are not temporary in nature. We explore longer-term substantive solutions for mitigating the adverse effects of over-indebtedness, and also in doing so articulate how legal elasticity can be enriched in its theorisation and provide practical support for advancing policy choice sets for policymakers in addressing post-Covid-19 implications from debt expansion.