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Banks and Cross-Border Capital Flows: Policy Challengesand Regulatory Responses
Philip R. Lane, Trinity College Dublin
Policy Institute, 27th September 2012
Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 1
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Introduction
CIEPR?
Banks
Financial Globalisation
Analysis
Policy Reforms
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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; smoothsconsumption; risk diversi�cation
(Financial openness opposed by vested interests)
Financial development and �nancial integration highly desirable
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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 procyclicalitymagni�es �nancial instability, macroeconomic instability, �scalinstability
Requires major regulatory reforms to manage ampli�ed risks
Problem: global capital �ows but national regulatory systems
(Euro area?)
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Analytics of Cross-Border Capital Flows and Banking
Gross Flows versus Net Flows
Traditional emphasis on aggregate net �ows (current accountimbalances)
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
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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 globalcommon good
�Second Best�Approach - reform of national regulations; �capital �owmanagement�
Euro area - banking union feasible?
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Euro Area: Special Features
Common central bank
Absence of currency risk, underestimation of national �nancial stabilityrisks: 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
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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?
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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
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Conclusions
Policy challenge: reap bene�ts from cross-border capital �ows, whileguarding against �nancial stability risks
Embed analysis of current account imbalances inside wider perspective onfull 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?
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