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Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity College Dublin Policy Institute, 27th September 2012 Philip R. Lane, Trinity College Dublin () CIEPR Report 2012 Policy Institute, 27th September 2012 1 / 10

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Page 1: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Banks and Cross-Border Capital Flows: Policy Challengesand Regulatory Responses

Philip R. Lane, Trinity College Dublin

Policy Institute, 27th September 2012

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 1

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Page 2: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Introduction

CIEPR?

Banks

Financial Globalisation

Analysis

Policy Reforms

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 2

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Page 3: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 4: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

The �First Best�

Banks play a vital role in modern economies

(But regulation needed, to avoid �runs�)

Financial globalisation - improves e¢ ciency of capital allocation; smoothsconsumption; risk diversi�cation

(Financial openness opposed by vested interests)

Financial development and �nancial integration highly desirable

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Page 5: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Real-World Distortions

Banks behave procyclically - destabilising

Capital in�ows procyclical also

Equity/FDI in�ows - risk transferred to foreign investors

Debt in�ows - risk carried domestically

Banks the major intermediaries of cross-border debt �ows

Interaction of bank procyclicality and debt �ow procyclicalitymagni�es �nancial instability, macroeconomic instability, �scalinstability

Requires major regulatory reforms to manage ampli�ed risks

Problem: global capital �ows but national regulatory systems

(Euro area?)

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Page 6: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Analytics of Cross-Border Capital Flows and Banking

Gross Flows versus Net Flows

Traditional emphasis on aggregate net �ows (current accountimbalances)

Gross �ows matter (especially debt in�ows/out�ows)

Procyclical Behavior of Banks and Asset Price Ampli�cation

Funding Models and Wholesale Funding Markets

Cross-Border Banking Groups: Organizational Structure

Valuation E¤ects, Dollar Funding and Flight to Safety

Capital Flows and the Exhange Rate

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Page 7: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 8: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 9: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 10: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 11: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 12: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 13: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 14: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 15: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 16: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 17: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 18: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 19: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 20: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Global Banking: Regulatory Response

Data sharing

Globally-coordinated �nancial regulation

Globally-coordinated crisis resolution (ex ante loss sharing plan)

[Global monetary policy coordination]

Negotiations on global banking reform - national interests versus globalcommon good

�Second Best�Approach - reform of national regulations; �capital �owmanagement�

Euro area - banking union feasible?

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 6

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Page 21: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Euro Area: Special Features

Common central bank

Absence of currency risk, underestimation of national �nancial stabilityrisks: highly procyclical pattern of cross-border debt �ows

�Diabolic loop�between national banking systems and national sovereigns

Two options:

Banking union - common supervision; common deposit insurance;common resolution fund

Tight national �nancial regulation

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Page 22: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity
Page 23: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Macro-Prudential Regulation of Banks

Systemic View

Countercyclical capital requirements / leverage ratios

�Bail in�bonds

Bank assets

Loan-to-value (LTV) ratio; debt-to-income (DTI) ratio

Credit/GDP ratio

Bank liabilities

Levies on non-core liabilities (short-term wholesale funding)

Subsidiaries versus branches

Controls on capital in�ows? on capital out�ows?

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 8

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Page 24: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Macro-Prudential Regulation of Banks

Systemic View

Countercyclical capital requirements / leverage ratios

�Bail in�bonds

Bank assets

Loan-to-value (LTV) ratio; debt-to-income (DTI) ratio

Credit/GDP ratio

Bank liabilities

Levies on non-core liabilities (short-term wholesale funding)

Subsidiaries versus branches

Controls on capital in�ows? on capital out�ows?

Political economy issues

Tactical controls versus long-term controls

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 9

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Page 25: Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory ... · Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity

Conclusions

Policy challenge: reap bene�ts from cross-border capital �ows, whileguarding against �nancial stability risks

Embed analysis of current account imbalances inside wider perspective onfull matrix of cross-border capital �ows

International balance sheet analysis, as well as �ow analysis

Promote equity �nancing over debt �nancing

Tighter bank regulation at national and international levels

Euro Area: banking union?

Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 10

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