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New research on financial crisis from Harvard Business School faculty on issues including what companies should not do in the next banking crisis, how financial brands can start to rebuild consumer trust, and how companies can survive financial crisis by identifying and exploiting innovation will serve as economic growth engines in the future.
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After High-Profile Failures, Can Investors Still Trust Credit Ratings?

by Ben Rand

Rating agencies, such as Standard & Poor’s and Moody's, have been criticized for not warning investors of risks that led to major financial catastrophes. But an analysis of thousands of ratings by Anywhere Sikochi and colleagues suggests that agencies have learned from past mistakes.

How Should US Bank Regulators Respond to the COVID-19 Crisis?

by Michael Blank, Samuel G. Hanson, Jeremy C. Stein, and Adi Sunderam

Instead of the "watchful waiting" approach taken by US bank regulators to the pandemic crisis, they should use their prudential authorities to encourage banks to increase their equity capital. This is effectively a way of buying low-cost insurance against adverse scenarios that have become more likely.

Predictable Financial Crises

by Robin Greenwood, Samuel G. Hanson, Andrei Shleifer, and Jakob Ahm Sørensen

One central issue in the study of macroeconomic stability is financial crisis predictability. This paper estimates the probability of financial crises as a function of past credit and asset price growth.

This Crisis Loan Program Preserved Jobs—and Made Money

by Rachel Layne

Following the 2008 financial crisis, France offered a business loan program that helped firms, employees, and even the government, says Boris Vallee. Open for comment; 0 Comments.

Has COVID-19 Broken the Global Value Chain?

by Sean Silverthorne

4Questions Companies and consumers depend on the global value chain to create and distribute products around the world. What happens when the chain breaks? Insights from Laura Alfaro and Ester Faia. Open for comment; 0 Comments.

Turbulence, Firm Decentralization and Growth in Bad Times

by Philippe Aghion, Nicholas Bloom, Brian Lucking, Raffaella Sadun, and John Van Reenen

What makes some firms more resilient than others to large negative macro shocks? This paper finds that the internal organization of firms—specifically, the extent to which decision-making is decentralized from headquarters to plant managers—is an important mediating factor through which macroeconomic shocks affect firm performance and, ultimately, growth.

The Probability of Rare Disasters: Estimation and Implications

by Emil N. Siriwardane

Emil Siriwardane analyzes the probability for risk of large-scale financial disasters.

What Companies Should Not Do in the Next Banking Crisis

by Michael Blanding

Following the banking meltdown of 2008, many struggling companies in Spain did what they shouldn’t have: sacrificed their future for short-term gain. Professor Claudia Steinwender calls it the Groucho Marx Criterion. Open for comment; 0 Comments.

HBS Faculty on 2010’s Biggest Business Developments

by Staff

Three Harvard Business School professors—former Medtronic chairman and CEO Bill George, economist and entrepreneurship expert William Sahlman, and innovation and strategy authority Rosabeth Moss Kanter—offer their thoughts on the most significant business and economic developments of 2010. Key concepts include: Social networking is the most significant business development of 2010, says Bill George, noting that some 600 million people are now active on Facebook—and half of them spend at least an hour per day on the site. The problems of the Great Recession continued to dominate the economy in 2010, according to Bill Sahlman, who says that the popular media have grossly underestimated both the current deficit and level of debt in the United States. Rosabeth Kanter points out that new technology shined in 2010, in spite of the world's economic anxieties. She gives kudos to the Apple iPad, which accelerated the trend toward digital content. Closed for comment; 0 Comments.

Sharpening Your Skills: Managing the Economic Crisis

by Staff

The economic crisis is tapping the inner reserves of experienced leaders and introducing a new generation of managers to crisis management. These previous WK articles explore leadership, the role of the Board, the emotional needs of managers, and the risk to corporate giving programs. Closed for comment; 0 Comments.

Excessive Executive Pay: What’s the Solution?

by Roger Thompson

Now that the worst fears about economic meltdown are receding, what should be done about lingering issues such as over-the-top executive compensation? Does government have a role? Is it time we rethink corporate governance? HBS faculty weigh in. From the HBS Alumni Bulletin. Key concepts include: With White House support, congressional leaders are intent on shifting the balance of power in the boardroom away from management. Skeptics say more than two decades of well-meaning attempts to constrain ever-soaring corporate pay and to reform governance through legislation, regulation, and shareholder pressure have, for the most part, failed or even backfired. According to Professor Brian Hall, it is not a given that executive pay practices had a role in creating the financial crisis. Director independence on boards is a mixed blessing. Independence has a downside when directors don't understand the business, says Professor Jay Lorsch. We need to rethink corporate governance structure in fundamental ways for the 21st century, according to Professor Rakesh Khurana. Closed for comment; 0 Comments.

Don’t Just Survive—Thrive: Leading Innovation in Good Times and Bad

by Lynda M. Applegate & J. Bruce Harreld

The financial crisis provides a sobering reminder of what happens when innovation fails to drive productive economic growth. For over a decade, money from around the world poured into the United States seeking innovation. Despite these massive investments, when adjusted for inflation, U.S. GDP grew slowly with much of the growth coming from government, professional, and business services, including real estate and outsourcing. What's more, inflation adjusted wages stalled for many, even as consumer spending increased. This paper argues that innovation is not a side business to a real business: rather, innovation is the foundation of a successful business. Key concepts include: Entrepreneurs can be found and a culture of entrepreneurship can be developed in companies of any size and age. Entrepreneurial leaders must relentlessly—but not recklessly—pursue opportunity. They must look beyond the resources currently controlled to harness the power, resources, and reach of their organizations and networks. Breakthrough innovations that change people's lives and the very structure and power dynamics of industries cannot be managed as "silos," tucked away in corporate, university, or government research labs, in incubators, or within venture capital funded entrepreneurial start-ups. Access to the marketplace is needed to help speed commercialization and adoption. Emerging opportunities must be nurtured and the transition to high growth must be managed. Once breakthrough innovations catch hold, growth must be funded and managed to exploit the full value of the opportunity. Incremental innovations must ensure that businesses that have passed through the high-growth stage can continue to deliver the resources, capabilities, and platforms needed to fuel the emerging opportunities of the future. Different organizational structures, cultures, governance and risk management systems, and leadership styles are needed to manage the business innovation lifecycle from an initial idea to a sustainable business that leverages entry position and capabilities to exploit the full potential for growth and evolution over time. Closed for comment; 0 Comments.

What’s Next for the Big Financial Brands

by John Quelch

Some of the great financial brands such as Merrill Lynch built trust with customers over decades—but lost it in a matter of months. Harvard Business School marketing professor John Quelch explains where they went wrong, and what comes next. Key concepts include: Turmoil and distrust in the financial services sector is an open invitation to non-financial companies to exploit the brand vacuum created by the demise of the likes of Merrill Lynch and the Royal Bank of Scotland. Financial brands today must address the most basic of consumer concerns: Will my money be safe with this company? Financial brands should continue to advertise but with messages that help customers with recession-relevant product and service offerings. Closed for comment; 0 Comments.

Building Businesses in Turbulent Times

by Staff

An economic crisis is a charter for business leaders to rewrite and rethink how they do business, says Harvard Business School professor Lynda M. Applegate. The key: Don't think retrenchment; think growth. Key concepts include: Companies that survive the financial crisis by identifying and exploiting innovation will serve as economic growth engines in the future—and will be the industry leaders of tomorrow. This is a time of unprecedented opportunity to rethink offerings, markets, business processes, and organizational structure—and to improve them to achieve growth. Success will depend on leaders who are able to stabilize the company as they identify and exploit opportunities, find new market niches, create innovative new offerings, and restructure and reposition. Closed for comment; 0 Comments.

Risky Business with Structured Finance

by Julia Hanna

How did the process of securitization transform trillions of dollars of risky assets into securities that many considered to be a safe bet? HBS professors Joshua D. Coval and Erik Stafford, with Princeton colleague Jakub Jurek, authors of a new paper, have ideas. Key concepts include: Over the past decade, risks have been repackaged to create triple-A-rated securities. Even modest imprecision in estimating underlying risks is magnified disproportionately when securities are pooled and tranched, as shown in a modeling exercise. Ratings of structured finance products, which make no distinction between the different sources of default risk, are particularly useless for determining prices and fair rates of compensation for these risks. Going forward, it would be best to eliminate any sanction of ratings as a guide to investment policy and capital requirements. It is important to focus on measuring and judging the system's aggregate amount of leverage and to understand the exposures that financial institutions actually have. Closed for comment; 0 Comments.

The Next Marketing Challenge: Selling to ’Simplifiers’

by John Quelch

The mass consumption of the 1990s is fast fading in the rearview mirror. Now a growing number of people want to declutter their lives and invest in experiences rather than things. What's a marketer to do, asks professor John Quelch. Key concepts include: As the world economy slumps, one consumer segment will grow faster than ever: The Simplifiers. Simplifiers present a challenge to marketers. These are well-off people who value quality over quantity and who do not buy proportionately more goods as their net worth increases. Dining out, foreign travel, and learning a new sport will all prove more resilient than expected in the face of recession. Closed for comment; 0 Comments.

Financial Crisis Caution Urged by Faculty Panel

by Martha Lagace

Dean Jay O. Light and a group of Harvard Business School faculty explored the origins and possible outcomes of the U.S. financial crisis at a recent "Turmoil on the Street" panel. Closed for comment; 0 Comments.

Building Sandcastles: The Subprime Adventure

by Nicolas P. Retsinas

The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why. Closed for comment; 0 Comments.