Prepared by Heedon Kang, Roberto Piazza, Tahsin Saadi Sedik, Manmohan Singh, and Mark Stone (IMF).
See Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin, 2011, “International Capital Flows and the Returns to Safe Assets in the United States, 2003–2007,” Board of Governors of the Federal Reserve System International Finance Discussion Papers Number 1014; and Tamim Bayoumi and Trung Bui, 2011, “Apocalypse Then: The Evolution of the North Atlantic Economy and the Global Crisis,” IMF Working Paper 11/212 (Washington: International Monetary Fund)
EME case studies are discussed in more depth in the companion background forthcoming paper “Cross- Cutting Themes in Advanced Economies with Emerging Market Banking Links.” Conclusions from that paper, which examines the linkages between home and host countries, and draws lessons for mitigating the transmission of macro-financial turbulence, are also reflected in this paper.
This case study draws on the U.S. Financial Stability Assessments Program (FSAP), various Global Financial Stability Reports; Report of the President’s Working Group on Financial Markets Money Market Fund Reform Options, October 2010; Bank for International Settlements (BIS) Quarterly Review, March 2009; various Fitch Ratings reports; and other published Fund documents.
Under this rule, MMMFs are not permitted to hold more than 5 percent of investments in second tier paper, or to hold more than a 5 percent exposure to any single issuer (other than the government and agencies).
The run started with the Reserve Primary Fund which “broke the buck”—the value of the assets of an MMMF drops to below the value of its liabilities, or the net asset value (NAV) turns negative—due to the decline in the value of its Lehman holdings. This exacerbated redemptions, which totaled more than $40 billion (approximately 67 percent of the Reserve Primary Fund’s net assets) in the following days.
See Baba, Naohiko, Robert N. McCauley, and Ramaswamy Srichander, 2009, “U.S. Dollar Money Market Funds and Non-U.S. Banks,” BIS Quarterly Review.
This case study draws on U.S. FSAP Documents: Financial System Stability Assessment (FSSA); Technical Note on Consolidated Regulation and Supervision; Technical Note on Regulatory Reform: OTC Derivatives; Detailed Assessment of Observance of IAIS Insurance Core Principles; various Global Financial Stability Reports (GFSRs); and other published Fund documents.
As long as AIG and AIGFP were assigned top ratings by credit rating agencies, the terms and conditions of their contracts did not oblige them to post collateral against their positions. However, after the first downgrade to AA+ in March 2005, they had to start posting collateral. As the crisis unfolded in 2008 and AIG’s credit rating was downgraded, collateral calls were triggered by the insurer’s counterparties, and their mounting collateral posting requirements eventually became unsustainable.
See International Monetary Fund, 2010, United States: Publication of Financial Sector Assessment Program Documentation—Financial System Stability Assessment, IMF Country Report 10/247 (Washington: International Monetary Fund).
This case study draws on the United States and Germany Staff Reports for the 2007–2011 Article IV consultations; the United States FSAP; Germany FSAP Update; various GFSRs; and other published Fund documents.
See Fitch Ratings, 2007, “European Bank Exposure to Subprime Risk,” Special Report, August 31.
See GFSR, 2009, Chapter 2, Restarting Securitization Markets: Policy Proposals and Pitfalls, October.
See Bayoumi and Bui (op. cit.).
Hypo Real Estate received liquidity support with a package worth €3 5 billion from the Federal government, banks, and financial sector firms to prevent collapse. The package was subsequently increased to €50 billion.
International Monetary Fund, 2010, United States: Publication of Financial Sector Assessment Program Documentation—Financial System Stability Assessment, IMF Country Report 11/247 (Washington: International Monetary Fund).
See International Monetary Fund, 2008, Germany: 2007 Article IV Consultation; Staff Report; Staff Supplement; Public Information Notice; and Statement by the Executive Director for Germany, IMF Country Report 08/80 (Washington: International Monetary Fund).
See Germany FSAP Update—Technical Note on “Crisis Management Arrangements.”
This case study draws on staff reports for the 2008–2011 Article IV consultations, program reviews, and FSAP Updates for Austria, Czech Republic, Germany, Hungary, Italy, Poland, Romania, and Slovak Republic.
The CESE region comprises the following countries: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovak Republic, Turkey, Ukraine, Albania, Belarus, Bosnia and Herzegovina, Cyprus, Macedonia, Malta, Moldova, Montenegro, and Serbia.
The data are from the BIS foreign claims from consolidated international banking statistics.
The activities of Austrian Banks in the CESE region are documented in Financial Stability Report 21, Oesterreichische Nationalbank, and Focus on European Economic Integration Special Issue 2009, Oesterreichische Nationalbank.
Maechler, Andrea M. and Li Lian Ong, 2009, “Foreign Banks in the CESE Countries: In for a Penny, in for a Pound,“ IMF Working Paper 09/54 (Washington: International Monetary Fund).
For the Czech Republic, the credit is mainly funded by local sources and is included in the BIS data because the Austrian Erste Bank owns one of the biggest banks in the Czech Republic, Ceska Sporitelna.
International Monetary Fund, 2009, Regional Economic Outlook: Europe, October 2009, Box 3.
In Croatia, while foreign currency lending was small, a large part was foreign currency indexed.
International Monetary Fund, 2010, Regional Economic Outlook: Europe, May 2010, Chapter 2 (Washington); International Monetary Fund, 2010, Regional Economic Outlook: Europe, October 2010, Chapter 3 (Washington); and Bakker, Bas B. and Anne-Marie Gulde, 2010, “The Credit Boom in the EU New Member States: Bad Luck or Bad Policies?” IMF Working Paper 10/130 (Washington: International Monetary Fund).
This case study draws on staff reports for the 2008–2011 Article IV consultations and FSAP updates for Sweden and Baltic countries; Financial Stability Reports of Sveriges Riksbank and Latvijas Banka; Financial Stability Reviews of Eesti Pank and Lietuvos Bankas; several published papers and speeches from IMF and other relevant organizations: IMF, 2010, Regional Economic Outlook: Europe, October; Bas B. Bakker and Anne-Marie Gulde, 2010, “The Credit Boom in the EU New Member States: Bad Luck or Bad Policies? IMF Working Paper 10/130; May 1, 2010”: “Adjustment under a Currency Peg: Estonia, Latvia and Lithuania during the Global Financial Crisis 2008–09; IMF Working Paper 10/213; September 1, 2010”; European Commission, 2010, Cross-country Study: Economic Policy Challenges in the Baltics, Occasional Papers No. 58 (Brussels: European Commission, February); Riksrevisionen, 2011, Maintaining Financial Stability in Sweden: Experiences from the Swedish Banks’ Expansion in the Baltics, RiR 2011:9 (Stockholm: Riksrevisionen); Lars Nyberg, 2009, “The Baltic Region in the Shadow of the Financial Crisis,” speech at the Intervalor and Baltic Property Trust (Stockholm: Sveriges Riksbank, September 9); and Stefan Ingves, 2010, “The Crisis in the Baltic—The Riksbank’s Measures, Assessments, and Lessons Learned,” speech at the Rikdag Committee of Finance, Stockholm (Stockholm: Sveriges Riksbank, February 10).
The experience of the affiliates of Spanish banks in Latin America offers a useful contrast: they rely more on local financing, and thus were relatively immune to the global liquidity shock. See Kamil, Herman and Kulwant Rai, 2010, “The Global Credit Crunch and Foreign Banks’ Lending to Emerging Markets: Why Did Latin America Fare Better?” IMF Working Paper 10/102 (Washington: International Monetary Fund); and the background paper to International Monetary Fund, 2011, “Cross-Cutting Themes in Advanced Economies with Emerging Market Banking Links,“ IMF Policy Paper (Washington).
The Baltic authorities had implemented various measures to contain instability from 2006. The changes in prudential regulation were focused on increasing the capital base of the banks. The risk weight for residential mortgage loans in Estonia was increased from 50 percent to 100 percent in 2006. In Lithuania, restrictions on the capital base calculation limiting the inclusion of the current year profit were introduced. In Estonia, the banks’ reserve requirement was raised from 13 percent to 15 percent in 2006. In Latvia, the minimum reserve requirement was increased from 4 percent in 2004 to 8 percent by the end of 2008. In Estonia, the tax deducibility of interest rate payments on mortgages was reduced, and in Lithuania restrictions were adopted to limit tax relief on residents’ mortgage loans. In Latvia, the authorities in 2007 required banks to grant loans only on the basis of legally reported income, required a 10 percent minimum down payment, and strengthened loan- to-value and debt-to-income ratio requirements.
See Riksrevisionen, Maintaining Financial Stability in Sweden: Experiences from the Swedish Banks’ Expansion in the Baltics.
In March 2011, the Swedish supervisor announced higher capital requirements, including the conservation capital buffer and the countercyclical capital buffer, for the Swedish banks according to the proposals by the Basel Committee on Banking Supervision. The Swedish supervisor said that the major Swedish banks should prepare for a faster implementation of the regulations in Sweden than what was proposed by the Basel Committee.
This section draws on Regional Economic Outlook: Europe (May and October 2010); Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,’ IMF Policy Paper (Washington: International Monetary Fund); Ötker-Robe, Inci, “Coping with Capital Inflows: Experiences of Selected European Countries:’ IMF Working Paper 07/190 (Washington: International Monetary Fund); Ostry, Jonathan D., and others, 2011 .”Managing Capital Inflows: What Tools to Use?” IMF SDN/11/06 (Washington: International Monetary Fund).
However, there are a number of practical considerations that may preclude implementing residency-based CFMs, including constraints for OECD members from its Code of Liberalization of Capital Movements and for members of the EU subject to the Treaty on the Functioning of the European Union.
See Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” IMF Policy Paper (Washington: International Monetary Fund).
Prepared by Alvaro Piris, Narayanan Raman, and Sarah Oludamilola Sanya (IMF).
See Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” IMF Policy Paper (Washington: International Monetary Fund).
International Monetary Fund, 2010, Understanding Financial Interconnectedness; IMF Policy Paper (Washington).
Also, see the U.S. and U.K. spillover reports (International Monetary Fund, 2011, The United States: Spillover Report for the 2011 Article IV consultation; IMF Country Report 11/203 (Washington) and International Monetary Fund, 2011, United Kingdom: Spillover Report for the 2011 Article IV Consultation and Supplementary Information, IMF Country Report 11/225 (Washington).
The shaded areas show surge episodes for EMEs, based on the methodology discussed in Policy Note B. Each horizontal bar represents a surge episode for a country.
Cetorelli, Nicola and Linda S. Goldberg, 2010, Global Banks and International Shock Transmission: Evidence from the Crisis, NBER Working Paper No. 15974.
Goyal, Rishi, and others, 2011, Financial Deepening and International Monetary Stability, IMF SDN/11/16 (Washington: International Monetary Fund).
See International Monetary Fund, 2010, “How Did Emerging Markets Cope in the Crisis?” IMF Policy Paper (Washington) and Frankel, Jeffrey, Carkis A. Vegh and Guillermo Vuletin, 2011, “Fiscal Policy in Developing Countries: Escape from Procyclicality” VoxEU, (available at http://www.voxeu.org/index.php?q=node/6677).
Also, see Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” IMF Policy Paper (Washington: International Monetary Fund).
Prepared by Mahvash Saeed Qureshi (IMF).
To identify capital inflow surges in EMEs, a common threshold of the top 30th percentile of (annual) net private capital flow to GDP is taken for individual countries. However, to ensure that the identified surges are truly global in nature, only those observations are included as surges for which the net private capital flow to GDP ratio falls in the top 30th percentile for the entire EME sample as well (where the sample comprises 52 EMEs). Thus, observations of excessive net inflows that are large by historical standards are marked as surges under this approach.
A large body of literature has investigated the determinants of capital flows to EMEs (for example, E. Fernandez-Arias, 1996, “The New Wave of Private Capital Inflows: Push or Pull?” Journal of Development Economics, Vol. 38(2), pp. 389–418; M. Taylor and L. Sarno, 1997, “Capital Flows to Developing Countries: Long- and Short-Term Determinants,” World Bank Economic Review, Vo. 11(3), pp. 451–470; and IMF, 2011, World Economic Outlook: April 2011 (Washington DC: International Monetary Fund), but the determinants of capital inflow surges remain largely unexplored. C. M. Reinhart, and V. R. Reinhart, 2008, “Capital Flow Bonanzas: An Encompassing View of the Past and Present,” NBER Working Paper 14321 (Cambridge, MA: National Bureau of Economic Research); and Cardarelli, Roberto, Selim Elekdag, and Ayhan Kose, 2009, “Capital Inflows: Macroeconomic Implications and Policy Responses; IMF Working Paper 09/40; March 1, 2009,” (Washington: International Monetary Fund) focus on large net capital inflow episodes, but mostly identify key stylized facts associated with these episodes, while K. Forbes and F. Warnock, 2011, “Capital Flow Waves: Surges, Stops, Flight and Retrenchment,” NBER Working Paper 17351 (Cambridge, MA: National Bureau of Economic Research) use data on gross inflows to investigate the causes of the surge episodes but their sample comprises advanced economies as well as EMEs.
Other measures to reflect the global macroeconomic environment such as world oil prices, and the annual percentage change in the S&P 500 index, support this result, where an increase in both variables is estimated to raise the likelihood of a surge occurrence. These measures, however, tend to be correlated with real U.S. interest rates and the world real GDP growth rate, and their statistical significance weakens when included jointly. They are therefore included as alternate proxies for global push factors.
To identify the post-surge abrupt reversals, we use a three-year window with a negative net flow larger than 1 percent of GDP occurring in the first, second, or third year after the end of the surge episode. Using a window ensures that any post-surge sudden stops are not missed, while the threshold of negative net flow of 1 percent of GDP ensures that we do not include routine outflows. Together, these criteria are intended to ensure that the well-established cases of sudden stops after excessive inflows are included in the sample.
Prepared by Heedon Kang, Manmohan Singh, and Mark Stone (IMF).
Basel III is a new international regulatory standard on bank capital adequacy and liquidity agreed by the members of the BCBS. It was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis in order to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and bank leverage. For detailed information, see Basel Committee on Banking Supervision, 2011, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (Basel: BIS, June).
Basel Committee on Banking Supervision, 2011, Progress Report on Basel III Implementation (Basel: BIS, October).
G-SIBs comprise banks whose disorderly failure would cause significant disruption to the global financial system and economic activity due to their size, complexity, and interconnectedness. G-SIFIs encompass global systemically important banks and non-banks.
Basel Committee on Banking Supervision, 2011, Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement, Consultative Document (Basel: Bank for International Settlements, July).
Financial Stability Board, 2011, OTC Derivatives Market Reforms: Progress Report on Implementation, (Basel: Bank for International Settlements, April).
Financial Stability Board, 2010, Intensity and Effectiveness of SIFI Supervision: Recommendations for Enhanced Supervision (Basel: Bank for International Settlements, November).
As of September 2011, four peer reviews were completed under the FSB’s “Framework for Strengthening Adherence to International Standards.”
Prepared by Roberto Piazza and Mark Stone (IMF).
Joel F. Houston, Chen Lin, and Yue Ma, 2009, Regulatory Arbitrage and International Bank Flows.
Giovanni Dell’Ariccia and Robert Marquez, 2005, Competition Among Regulators and Credit Market Integration, Journal of Financial Economics 79, 401–430.
Alan D. Morrison and Lucy White, 2009, Level Playing Fields in International Financial Regulation, Journal of Finance 64, 1099–1142.
Varapat Chensavasdijai, Mali Chivakul, and Sarah Oludamilola Sanya (IMF).
Bayoumi, Tamim and Trung Bui, 2011, “Unforeseen Events Wait Lurking: Estimating Policy Spillovers From U.S. To Foreign Asset Prices,” IMF Working Paper 11/183 (Washington: International Monetary Fund).
Exchange rate data were all measured at the end of the U.S. trading day.
High frequency data were obtained from EPFR Global. The assets under management (AUM) by dedicated country equity funds reported to EPFR on a daily basis represent between 2 percent to 5 percent of total equity liabilities (according to IMF’s International Investment Position data) of each EME of interest.
Note that a negative sign means that the effect on the neighboring country is in the opposite direction as in the country implementing the CFM, and hence is consistent with diversion of flows to the neighboring country.
Roberto Piazza and Mark Stone (IMF).
For an overview on optimal trade policies, see Gene M. Grossman and Kenneth Rogoff, 1995, Handbook of International Economics, vol. III, Elsevier Science.
James Brander and Barbara Spencer, 1985, Export Subsidies and International Market Rivalry, Journal of International Economics, 18, pp. 83–100.
Alwyn Young, 1991, Learning by Doing and the Dynamic Effects of International Trade, Quarterly Journal of Economics, pp. 369–405.
Gene M. Grossman and Elhanan Helpman (1994), Protection for Sale, American Economic Review 84, pp. 833–850.
Paul Krugman, 1993, The Narrow and Broad Arguments for Free Trade, American Economic Review 83, pp. 362–366.
Mario J. Crucini and James Kahn, Tariffs and Aggregate Economic Activity: Lessons from the Great Depression, Journal of Monetary Economics 38, 427–467.
Some authors dismiss the importance of the trade war in causing the Great Depression. See for instance Dornsbush, Rudiger, and Stanley Fischer, 1984, The Open Economy: Implications for Monetary and Fiscal Policies, NBER Working Paper 1422.
Raymond Riezman, 1991, Dynamic Tariffs with Asymmetric Information, Journal of International Economics 30, pp. 267–283.