Have currency-based capital flow management measures curbed international banking flows?

Abstract

The international investment working paper seriesincluding policies and trends and the broader implications of multinational enterpriseis designed to make available to a wide readership selected studies undertaken under the aegis of the OECD Investment Committee, by OECD staff, or by outside consultants working on OECD Investment Committee projects. The papers are generally available only in their original language English or French with a summary in the other if available. OECD WORKING PAPERS ON INTERNATIONAL INVESTMENT are published on www.oecd.org/investment/working-papers.htm.This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. This paper analyses the impact of a specific type of banking regulation on operations in foreign currency, defined as currency-based capital flow management measures (CB-CFMs), on cross-border banking flows in a sample of 18 countries over the period 2005 to 2013. The results show that the introduction and tightening of these measures in the post-crisis period contributed to a reduction of the external debt of banks, controlling for capital flow management measures, domestic macro-prudential regulation, and a large set of push and pull factors. The examination of external debt by maturity and instruments suggests that these measures are more effective in curbing short-term debt and interbank borrowing, which are also the components that contracted more sharply in the aftermath of the 2008 crisis. Further analysis could look at the benefits these measures bring in terms of financial stability, and evaluate the costs of capital account openness against the risks that CB-CFMs aim to address.

Capital flow deflection under the magnifying glass

“…These policies can make them more stable and resilient to adverse spillovers. Against this background, since the global financial crisis, countries have used an increasing variety of financial policies, including capital flow management measures, as a way to stem the effect of abrupt changes in international financial flows on the domestic economy (de Crescenzio et al, 2017;Lepers and Mehigan, 2019).…”