Geoscience Reference
In-Depth Information
Fig. 9.5
Capital Inflows and Outflows.
Note
: Based on a 4-quarter moving sum. For inflows,
refers to bank flows from other investments in the liabilities side (assigned a positive value); for
outflows, in the asset side (assigned a negative value).
Source
: Processed from
Balance of
Payments Statistics (both BPM5 and BPM6)
, International Monetary Fund
change in investor sentiment, for example, reverses the direction of capital flows.
Loans can be disrupted, and the economy suffers a credit crunch. This occurred
recently when European banks deleveraged by bringing back funds to strengthen
their capital position.
16
On the other hand, a rising share in non-core liabilities can
also alter bank behavior toward more risk-taking—for example by investing in
securities and other risky financial assets. Indeed, data show this has already
happened in some countries. Either way, increased bank-led inflows creates greater
vulnerability. Only when recipient banks prudently manage and use new funds will
the overall outcome be favorable.
The trend of gross capital flows in selected emerging Asian economies point to
one common feature: the size and volatility of flows have increased since 2007/
2008, more than that prior to the 1997/1998 Asian financial crisis (Figs.
9.5
and
9.6
). While rising capital flows can be beneficial to recipient countries, their
volatility and procyclicality can increase financial risks and imbalances.
Not all flows pose the same risks. It is useful to break them down into categories:
(1) “equities” flows consisting of direct investment and equity portfolios; (2) “debt”
flows comprising debt securities and others including derivatives; and (3) “bank”
16
For example, in the Republic of Korea, each 1 % decline in external funding due to European
bank deleveraging following the global financial crisis led to a 0.01 % decline in domestic credit
by domestic banks [see Jain-Chandra et al. (
2013
)]. This occurred despite the country's relatively
healthy foreign reserves, government efforts to provide foreign currency liquidity through bilateral
and multilateral currency swap arrangements, and macroprudential measures that lowered domes-
tic banks' reliance on short-term wholesale funding.
