financial globalisation and the crisis - bank for · pdf file · 2012-06-19severity...

Financial Globalisation and the CrisisBIS Annual Conference

Philip R. LaneTrinity College Dublin

June 2012

Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 1 / 24

Introduction

Financial Globalisation: Pre-Crisis (1999-2007)

Advanced economies: boom in cross-border asset trade (especially2003-2007)Emerging economies: cautious approachResearch/Policy Literature: parallel Advanced/Emerging split

2008+ Crisis

Financial Globalisation and Crisis Origins?Financial Globalisation and Crisis Dynamics (Ampli�ers/Bu¤ers)Financial Globalisation and Crisis Management

Financial Globalisation After the Crisis: Policy Reforms


Dynamics of Financial Globalisation

Boom among advanced economies

Financial liberalisation; �nancial innovation; Europe; euroCentral role of international banking system�Short debt, long equity�

Limited, asymmetric strategy among emerging economies

Improvement in NIIP; shift from FC debt to equity-type liabilities;O¢ cial reserve assets (liquid)Tighter regulation of banks�Long debt, short equity�


AD

V

IFI RatioAdvanced Group

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 201050

100

150

200

250

300

350

400

450

Figure: IFI Ratio: Advanced Economies. Source: Author�s calculations, based onupdated version of dataset developed by Lane and Milesi-Ferretti (2007).


EM

IFI RatioEM Group

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 201030

35

40

45

50

55

60

65

70

75

Figure: IFI Ratio: Emerging Economies. Source: Author�s calculations, based onupdated version of dataset developed by Lane and Milesi-Ferretti (2007).


IFI Ratios

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20100

50

100

150

200

250

300

350

400

450

500

550 Euro Area

United States

Japan

Figure: IFI Ratios (Euro Area, United States, Japan). Note: Euro Area is sum ofcross-border positions of individual member countries. Source: Author�scalculations, based on updated version of dataset reported in Lane andMilesi-Ferretti (2007).


Year

CrossBorder Capital Flows, 20022010

2002 2003 2004 2005 2006 2007 2008 2009 20100

3

6

9

12

15

18

21

24

27FLOWA(ADV)FLOWL(ADV)FLOWA(EM)FLOWL(EM)

Figure: Gross International Financial Flows, 2002-2010. Source: Author�scalculations, based on IMF BOPS data.


Financial Account Liberalisation Index(ChinnIto Index)

1980 1984 1988 1992 1996 2000 2004 20080

1

2

3

4

5

6

7

8

9

10KLIB_ADVKLIB_EM

Figure: Financial Account Liberalisation Index. Note: Chinn-Ito index, rescaled.


International DebtEquity Ratios(Advanced Economies)

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20101.2

1.5

1.8

2.1

2.4

2.7

3

3.3

3.6

DEQA

DEQL

Figure: International Debt-Equity Ratios (Advanced Economies). Note: DEQA isratio of foreign debt assets to foreign equity assets; DEQL is ratio of foreign debtliabilities to foreign equity liabilities. Source: Author�s calculations based onupdated version of dataset reported in Lane and Milesi-Ferretti (2007).


International DebtEquity Ratios(Emerging Economies)

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20100

0.5

1

1.5

2

2.5

3

3.5

4

4.5

DEQA

DEQL

Figure: International Debt-Equity Ratios (Emerging Economies). Note: DEQA isratio of foreign debt assets to foreign equity assets; DEQL is ratio of foreign debtliabilities to foreign equity liabilities. Source: Author�s calculations based onupdated version of dataset reported in Lane and Milesi-Ferretti (2007).


Financial Globalisation and the Crisis

Financial Globalisation and Crisis Origins?

Financial Globalisation and Crisis Dynamics (Ampli�ers/Bu¤ers)

Financial Globalisation and Crisis Management


Financial Globalisation and Crisis Origins I

Foreign investors and expansion of ABS markets in the US (esp.European banks)

Acharya/Schnabl (2009), Bernanke et al (2011), Shin (2012)

Balance sheet expansion in banking systems

Global banks (CGFS 2010)Local banks and international wholesale funding

General-equilibrium impact of rising demand for safe assets by EMo¢ cial investors


Financial Globalisation and Crisis Origins II

Financial Globalisation and Domestic Credit Growth

Financial Globalisation and External Imbalances

Domestic Credit Growth and External Imbalances key correlates ofseverity of crisis

Lane and Milesi-Ferretti (2011, 2012); Lane and McQuade (2012);Lane and Pels (2012)

Counterfactual - �nancial autarky / limited �nancial integration


NET FOREIGN DEBT FLOWS

CR

EDIT

GR

OW

TH

Domestic Credit Growth and International Capital Flows

24 21 18 15 12 9 6 3 0 3 625

50

75

100

125

150

175

200

225

Figure: Domestic Credit Growth and International Debt Flows, 2003-2008.Source: Based on Lane and McQuade (2012).


CA

_STD

EV

CrossCountry Standard Deviation of Current Account Balances

1995 1997 1999 2001 2003 2005 2007 20094

6

8

10

12

14

16

Figure: Cross-Country Standard Deviation of Current Account Balances,1995-2010. Source: Author�s calculations based on WEO data.


Financial Globalisation and Crisis Dynamics

Mechanisms: crisis ampli�ers versus crisis bu¤ers

Dynamics of international capital �ows

�International Balance Sheet� channels


Crisis Dynamics: International Capital Flows

Great retrenchment

Procyclicality/volatility of international capital �owsInter-bank �ows

cross-border liquidity issuesmultiple equilibria (?)

Not uniform - gravity factors (De Haas and Van Horen 2011, Galstyanand Lane 2011)

Asset price adjustment and capital in�ows

Less force for non-portfolio positionsBanks: asymmetric information and regulatory problems

Repatriation of foreign assets

Diversi�cation versus concentrationRegulatory pressures


Crisis Dynamics: International Balance Sheet Channels

Valuation channel - size of gross positions

Stabilising or destabilising?Quanti�cation issues

Global decline in equity markets in 2008: ADV group losers

Losses in ABS markets: ADV group losers

Exchange rate movements: US loses in 2008; EM group gains;UK/AUS/NZ also gain

Interest rate movements: ADV group gains; EM group loses; (Europeriphery)

Debt writedowns

Greek sovereign debt; Iceland; Ireland: bank subordinated debtMore to come!


Financial Globalisation and Crisis Management

Scale of cross-border �nancial positions much greater than in previouscrisis episodes

Financial Stability

Fiscal Stability

Macroeconomic Stability

Domestic versus International Targets

(Europe as a case study)


Crisis Management: Financial Stability I

Banking - global banks (G-SIFIs); European banks

Home-Host tensions in regulation/resolution of multi-country banks

Liquidity provision

Dollar shortage (central bank currency swaps)Cross-border within euro area


Crisis Management: Financial Stability II

Bank Deleveraging

�Fire sale� risksDomestic assets; foreign assets

core versus non-core (CGFS 2010)

Multiple regulators in common markets

Recapitalisation

New private equity (domestic, foreign)Subordinated debt (domestic, foreign)Senior bonds (domestic, foreign)Taxpayers (domestic, foreign)International externalities


Crisis Management: Europe

Europe: case study of high level of international �nancial integration

bank/sovereign �diabolic�loopEuropean-level bank regulation/resolutionEuropean-level �scal union (degree? )

banking backstop; uni�ed bond market (ESBies, Eurobonds);European-level revenues and expenditures

�Excessive�imbalances (prevention?; correction? )Common Currency: bu¤er or ampli�er?


Financial Globalisation After the Crisis: Policy Reforms

International Reforms

Regulation of international banking system (data; models)International bank resolution regimesStronger international safety nets (global/regional)International bankruptcy court?

Domestic Reforms

Safe level of public debtBroader concept of counter-cyclical �scal policy (output cycle; �nancialcycle)International liquidityGradualist approach to �nancial liberalisation (but trade o¤ remains)Debt/equity balanceInternational externalities


Conclusions

Financial globalisation: ampli�es costs of policy and regulatory failures

crisis prevention; crisis dynamics; crisis management

Divergent experiences of Advanced and Emerging economies

Lessons from European experience with cross-border �nancialintegration

International banking system and international �nancial system

Required: institutional reforms at domestic, regional and global levels

Prospects?


financial globalisation and the crisis - bank for · pdf file · 2012-06-19severity...

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