Prof. Dr. Paul JJ Welfenswww.eiiw.euUniversity of WuppertalDecember 2016
Additional Aspects on Regulations; Role of International (Gross) Inflows and Current Account Deficit
See (slides): AL-SAFFAR, Y.; RIDINGER, W.; WHITAKER, S. (2013), The Role of External Balances Sheets in the
Financial Crisis, Financial Stability Paper No. 24, October 2013, Bank of England; also see:
IMF (2016), Capital Flows – Review o Experience with the Institutional View, IMF Policy Paper, Washington DC
Some Further References
Bruno, V.; Shim, I., Shin, H. (2015), ComparativeAssessment of Macroprudential Policies, BIS Working Paper 502
Eichengreen, B.; Gupta, P. (2016), Managing Sudden Stops, World Bank, Policy Research Working Paper No. 7639, Washington DC
Fratzscher, M. et al. (2016), Bubble Thy Neighbor: Portofolio Efects and Externalities from Capital Controls, Journal of International Econmoics, 85-104
P.J.J. Welfens www.eiiw.eu (2016) 2
Macroprudential Aspects CA deficit-GDP position; if rather high and
for many years there is a risk of sudden stop
CA deficit zero – does not mean that there isno risk: Thinking about role of gross capital
flows/exposure e.g. of firms with loans fromabroad and risk of currency mismatch
Nominal exchange rate volatility plays a role here(if there is depreciation there will be nervousnessin markets = capital outflows?)
Monetary policy in source country of capital flowscan play a role, higher interest rate = change in international capital flows
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How to Deal with International Shocks?
Flexible Exchange Rates; shock absorber?
Capital controls; capital flow management –fear of volatility of capital inflows
Problem of capital controls is addressed in someinternational investment treaties – capital controlsmay be imposed under specific circumstances (rules-
based system is desired, transparency; see also G20/IMF reports)
Question: if country A adopts controls, what isthe impact on economy B (C as source of capitalflows: CA in surplus...); B gets more inflows thanotherwise, r falls, bubble risk/negative spillover?
P.J.J. Welfens www.eiiw.eu (2016) 4
Banks in an International Perspective
Banks have loans from abroad and give loansto other banks abroad – or firms, governments; linkages, interdependency
Issue of regulation; underregulation = higherprofits= higher stock market price =opportunityto take over foreign banks; regulation in countryB thus under pressure from regulation in A
Minimum equity capital (absorbing losses); how isrestructuring of banks organized
Risk provision/risk management adequate
Is BIS framework (Basel II/III) consistent?P.J.J. Welfens www.eiiw.eu (2016) 5
Global Current Account Imbalances andGross Capital Flows
P.J.J. Welfens www.eiiw.eu (2016) 6
Sources: Bank for International Settlements, IMF, World Economic Outlook and Bank calculations
Evolution of Gross External Dept in Advanced and Emerging Market Economies
P.J.J. Welfens www.eiiw.eu (2016) 7
Sources: Reinhart and Rogoff 2009
Net Foreign Assets and Output Losses
P.J.J. Welfens www.eiiw.eu (2016) 8
Sources: IMF, Lane and Milesi-Ferretti (2010) and QEDS
Gross External Liabilities and Output Losses
P.J.J. Welfens www.eiiw.eu (2016) 9
Sources: IMF, Lane and Milesi-Ferretti (2010) and QEDS
Composition of Gross External Liabilities in 2007
P.J.J. Welfens www.eiiw.eu (2016) 10
Sources: IMF, Lane and Milesi-Ferretti (2010) and QEDS
Gross External Debt by Sectors in 2007
P.J.J. Welfens www.eiiw.eu (2016) 11
Sources: IMF, Lane and Milesi-Ferretti (2010) and QEDS
Gross External Liabilities and Dept
P.J.J. Welfens www.eiiw.eu (2016) 12
Estimated Contributions of Private ExternalDebt to Output Losses
P.J.J. Welfens www.eiiw.eu (2016) 13
Sources: IMF and Bank of England
External Leverage and Output Losses
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Sources: IMF and Gourichas and Obstfeld (2012)
Gross External Dept and Domestic CreditGrowth
P.J.J. Welfens www.eiiw.eu (2016) 15
Foreign Rollover Risk and Output Losses
P.J.J. Welfens www.eiiw.eu (2016) 16
Sources: Cerutti, Claessens and McGuire (2012) and IMF
Growth in Domestic Credit in Economies withCurrent Account Deficits and Surpluses
P.J.J. Welfens www.eiiw.eu (2016) 17
Sources: World Bank World Developtment Indicators
The Interaction between Gross External Deptand Growth in Domestic Product
P.J.J. Welfens www.eiiw.eu (2016) 18
Sources: IMF, World Bank World Development Indicators and QEDS
Schematic Summary of the Transmission Channels
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The thick arrow in the middle represents how domestic credit growth together with
funding stops arising from large gross external liabilities leads to a particularly large fall in GDP
Gross External Dept of Banks and Non-Banks
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Estimated Contribution of Bank and Non-Bank External Dept to Output Losses
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Sources: IMF and Bank of England
Gross External Bank Liabilities to Banks andNon-Banks
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Sources:
Bank Maturity and Currency Mismatches
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International Activity of UK-owned Banks, $ billion, 2007, Q1
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Sources: BIS International Banking Statistics
Changes in Bank CDS Spreads andConsolidated Liabilities of Banking Systems
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Sources: Kamin and DeMarco (2010), Markit Group Ltd., SNL Financial and
McGuire and Von Peter (2009)
Changes in Bank CDS Spreads and Currency Mismatches of Consolidated Banking System
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Sources: Kamin and DeMarco (2010), Markit Group Ltd., SNL Financial and
McGuire and Von Peter (2009)
Summary Equation
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Estimated Contributions to Output Losses
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Sources: IMF and Bank of England