Download Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses

Banks and Cross-Border Capital Flows: Policy Challenges
and Regulatory Responses
Philip R. Lane, Trinity College Dublin
Policy Institute, 27th September 2012
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
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Introduction
CIEPR?
Banks
Financial Globalisation
Analysis
Policy Reforms
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
2
/ 10
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; smooths
consumption; risk diversi…cation
(Financial openness opposed by vested interests)
Financial development and …nancial integration highly desirable
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
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/ 10
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 procyclicality
magni…es …nancial instability, macroeconomic instability, …scal
instability
Requires major regulatory reforms to manage ampli…ed risks
Problem: global capital ‡ows but national regulatory systems
(Euro area?)
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
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Analytics of Cross-Border Capital Flows and Banking
Gross Flows versus Net Flows
Traditional emphasis on aggregate net ‡ows (current account
imbalances)
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
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
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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 global
common good
‘Second Best’Approach - reform of national regulations; “capital ‡ow
management”
Euro area - banking union feasible?
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
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Euro Area: Special Features
Common central bank
Absence of currency risk, underestimation of national …nancial stability
risks: 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
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
7
/ 10
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?
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
8
/ 10
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
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
9
/ 10
Conclusions
Policy challenge: reap bene…ts from cross-border capital ‡ows, while
guarding against …nancial stability risks
Embed analysis of current account imbalances inside wider perspective on
full 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?
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin ()
CIEPR Report 2012
10
/ 10