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In-Depth Information
factors (slow growth in advanced economies) are substantial. What most countries
can do and have done is to refocus their policy on the asset and liability side of bank
balance sheet.
27
When external shocks strike, as in the case of European bank
deleveraging during the Eurozone crisis, bank credit flows can be disrupted.
Theoretically, outflows can be matched by retrenchment—returning foreign assets
owned by domestic investors. The size of these assets, however, can only rise if
capital outflows are encouraged. On the preventive side, some sort of capital
controls can also help—in the form of direct quantitative controls such as imposing
a levy on bank-led flows. In the context of regional integration and cooperation, the
risk of integration-led contagion can be mitigated by complementing domestic
financial safety nets with collective safety nets regionally.
28
The question is,
which policy works best?
Three policy options are considered: (1) promote direct investment abroad,
labeled “Encourage Outflows” (Fig.
9.10
); (2) “Assign Levy” to non-core bank
liabilities; and (3) strengthen regional financial safety nets, “Reg Safety Nets.” The
logic of regional financial safety nets is to support domestic safety nets, as these are
far too inadequate given the potential damage caused by the unprecedented size and
volatility of capital flows. The rationale for assigning a levy is to restrain rather than
stop capital flows. Encouraging capital outflows helps maintain stability of net
flows. In times of crisis, when capital tends to flow out during the boom-and-bust
cycle, assets held abroad by domestic investors can act as a safeguard. They can
provide a foreign asset buffer when markets become volatile. Indeed, the size of
these ready-to-use foreign assets was important in some emerging market
economies during the global financial crisis; the Republic of Korea is one example
(Jain-Chandra et al.
2013
).
I use the Analytic Network Process (ANP) to structure the model and quantify
the weight of each model element [see Saaty and Vargas (
2005
)] for a detailed
explanation about ANP). Achieving a balanced outcome of MACRO STABILITY,
FINANCIAL STABILITY and improved SOCIAL ISSUES, depicted at the top of
Fig.
9.10
, is the strategic comparative goal. Each policy is weighted in terms of its
relevance and contribution to BENEFIT, OPPORTUNITY, COST, and RISK
(BOCR) that can be generated by increased bank-led flows. In the BENEFIT
cluster, two sets of components are considered: (1) strengthen LIQUIDITY (the
first box on the left of Fig.
9.10
), through enhanced short-term securities and equity
markets, along with boosted financial income; and (2) allow investment, consump-
tion, financial income, and imported intermediate inputs to EXPAND (the second
box on the left of Fig.
9.10
). Some beneficial impacts of increased bank-led flows,
such as improved CAPITAL MARKET, and enhanced RESILIENCE may emerge
27
On the asset side, other than reducing loan-to-value ratio, efforts to contain excessive credit
expansion and other risky investments are also made. On the liability side, mitigating the increase
of non-core liabilities through bank-led flows is critical because they can heighten risky bank
behavior and increase leverage. See Azis and Shin (
2013
) and Forbes and Warnock (
2012
).
28
For the status of Asia's regional financial safety nets, see Azis (
2012
).
