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Financial Globalisation and the CrisisBIS Annual Conference
Philip R. LaneTrinity College Dublin
June 2012
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 1 / 24
Introduction
Financial Globalisation: Pre-Crisis (1999-2007)
Advanced economies: boom in cross-border asset trade (especially2003-2007)Emerging economies: cautious approachResearch/Policy Literature: parallel Advanced/Emerging split
2008+ Crisis
Financial Globalisation and Crisis Origins?Financial Globalisation and Crisis Dynamics (Ampli�ers/Bu¤ers)Financial Globalisation and Crisis Management
Financial Globalisation After the Crisis: Policy Reforms
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 2 / 24
Dynamics of Financial Globalisation
Boom among advanced economies
Financial liberalisation; �nancial innovation; Europe; euroCentral role of international banking system�Short debt, long equity�
Limited, asymmetric strategy among emerging economies
Improvement in NIIP; shift from FC debt to equity-type liabilities;O¢ cial reserve assets (liquid)Tighter regulation of banks�Long debt, short equity�
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 3 / 24
AD
V
IFI RatioAdvanced Group
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 201050
100
150
200
250
300
350
400
450
Figure: IFI Ratio: Advanced Economies. Source: Author�s calculations, based onupdated version of dataset developed by Lane and Milesi-Ferretti (2007).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 4 / 24
EM
IFI RatioEM Group
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 201030
35
40
45
50
55
60
65
70
75
Figure: IFI Ratio: Emerging Economies. Source: Author�s calculations, based onupdated version of dataset developed by Lane and Milesi-Ferretti (2007).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 5 / 24
IFI Ratios
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20100
50
100
150
200
250
300
350
400
450
500
550 Euro Area
United States
Japan
Figure: IFI Ratios (Euro Area, United States, Japan). Note: Euro Area is sum ofcross-border positions of individual member countries. Source: Author�scalculations, based on updated version of dataset reported in Lane andMilesi-Ferretti (2007).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 6 / 24
Year
CrossBorder Capital Flows, 20022010
2002 2003 2004 2005 2006 2007 2008 2009 20100
3
6
9
12
15
18
21
24
27FLOWA(ADV)FLOWL(ADV)FLOWA(EM)FLOWL(EM)
Figure: Gross International Financial Flows, 2002-2010. Source: Author�scalculations, based on IMF BOPS data.
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 7 / 24
Financial Account Liberalisation Index(ChinnIto Index)
1980 1984 1988 1992 1996 2000 2004 20080
1
2
3
4
5
6
7
8
9
10KLIB_ADVKLIB_EM
Figure: Financial Account Liberalisation Index. Note: Chinn-Ito index, rescaled.
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 8 / 24
International DebtEquity Ratios(Advanced Economies)
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20101.2
1.5
1.8
2.1
2.4
2.7
3
3.3
3.6
DEQA
DEQL
Figure: International Debt-Equity Ratios (Advanced Economies). Note: DEQA isratio of foreign debt assets to foreign equity assets; DEQL is ratio of foreign debtliabilities to foreign equity liabilities. Source: Author�s calculations based onupdated version of dataset reported in Lane and Milesi-Ferretti (2007).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 9 / 24
International DebtEquity Ratios(Emerging Economies)
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20100
0.5
1
1.5
2
2.5
3
3.5
4
4.5
DEQA
DEQL
Figure: International Debt-Equity Ratios (Emerging Economies). Note: DEQA isratio of foreign debt assets to foreign equity assets; DEQL is ratio of foreign debtliabilities to foreign equity liabilities. Source: Author�s calculations based onupdated version of dataset reported in Lane and Milesi-Ferretti (2007).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 10 / 24
Financial Globalisation and the Crisis
Financial Globalisation and Crisis Origins?
Financial Globalisation and Crisis Dynamics (Ampli�ers/Bu¤ers)
Financial Globalisation and Crisis Management
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 11 / 24
Financial Globalisation and Crisis Origins I
Foreign investors and expansion of ABS markets in the US (esp.European banks)
Acharya/Schnabl (2009), Bernanke et al (2011), Shin (2012)
Balance sheet expansion in banking systems
Global banks (CGFS 2010)Local banks and international wholesale funding
General-equilibrium impact of rising demand for safe assets by EMo¢ cial investors
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 12 / 24
Financial Globalisation and Crisis Origins II
Financial Globalisation and Domestic Credit Growth
Financial Globalisation and External Imbalances
Domestic Credit Growth and External Imbalances key correlates ofseverity of crisis
Lane and Milesi-Ferretti (2011, 2012); Lane and McQuade (2012);Lane and Pels (2012)
Counterfactual - �nancial autarky / limited �nancial integration
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 13 / 24
NET FOREIGN DEBT FLOWS
CR
EDIT
GR
OW
TH
Domestic Credit Growth and International Capital Flows
24 21 18 15 12 9 6 3 0 3 625
50
75
100
125
150
175
200
225
Figure: Domestic Credit Growth and International Debt Flows, 2003-2008.Source: Based on Lane and McQuade (2012).
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 14 / 24
CA
_STD
EV
CrossCountry Standard Deviation of Current Account Balances
1995 1997 1999 2001 2003 2005 2007 20094
6
8
10
12
14
16
Figure: Cross-Country Standard Deviation of Current Account Balances,1995-2010. Source: Author�s calculations based on WEO data.
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 15 / 24
Financial Globalisation and Crisis Dynamics
Mechanisms: crisis ampli�ers versus crisis bu¤ers
Dynamics of international capital �ows
�International Balance Sheet� channels
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 16 / 24
Crisis Dynamics: International Capital Flows
Great retrenchment
Procyclicality/volatility of international capital �owsInter-bank �ows
cross-border liquidity issuesmultiple equilibria (?)
Not uniform - gravity factors (De Haas and Van Horen 2011, Galstyanand Lane 2011)
Asset price adjustment and capital in�ows
Less force for non-portfolio positionsBanks: asymmetric information and regulatory problems
Repatriation of foreign assets
Diversi�cation versus concentrationRegulatory pressures
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 17 / 24
Crisis Dynamics: International Balance Sheet Channels
Valuation channel - size of gross positions
Stabilising or destabilising?Quanti�cation issues
Global decline in equity markets in 2008: ADV group losers
Losses in ABS markets: ADV group losers
Exchange rate movements: US loses in 2008; EM group gains;UK/AUS/NZ also gain
Interest rate movements: ADV group gains; EM group loses; (Europeriphery)
Debt writedowns
Greek sovereign debt; Iceland; Ireland: bank subordinated debtMore to come!
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 18 / 24
Financial Globalisation and Crisis Management
Scale of cross-border �nancial positions much greater than in previouscrisis episodes
Financial Stability
Fiscal Stability
Macroeconomic Stability
Domestic versus International Targets
(Europe as a case study)
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 19 / 24
Crisis Management: Financial Stability I
Banking - global banks (G-SIFIs); European banks
Home-Host tensions in regulation/resolution of multi-country banks
Liquidity provision
Dollar shortage (central bank currency swaps)Cross-border within euro area
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 20 / 24
Crisis Management: Financial Stability II
Bank Deleveraging
�Fire sale� risksDomestic assets; foreign assets
core versus non-core (CGFS 2010)
Multiple regulators in common markets
Recapitalisation
New private equity (domestic, foreign)Subordinated debt (domestic, foreign)Senior bonds (domestic, foreign)Taxpayers (domestic, foreign)International externalities
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 21 / 24
Crisis Management: Europe
Europe: case study of high level of international �nancial integration
bank/sovereign �diabolic�loopEuropean-level bank regulation/resolutionEuropean-level �scal union (degree? )
banking backstop; uni�ed bond market (ESBies, Eurobonds);European-level revenues and expenditures
�Excessive�imbalances (prevention?; correction? )Common Currency: bu¤er or ampli�er?
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 22 / 24
Financial Globalisation After the Crisis: Policy Reforms
International Reforms
Regulation of international banking system (data; models)International bank resolution regimesStronger international safety nets (global/regional)International bankruptcy court?
Domestic Reforms
Safe level of public debtBroader concept of counter-cyclical �scal policy (output cycle; �nancialcycle)International liquidityGradualist approach to �nancial liberalisation (but trade o¤ remains)Debt/equity balanceInternational externalities
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 23 / 24
Conclusions
Financial globalisation: ampli�es costs of policy and regulatory failures
crisis prevention; crisis dynamics; crisis management
Divergent experiences of Advanced and Emerging economies
Lessons from European experience with cross-border �nancialintegration
International banking system and international �nancial system
Required: institutional reforms at domestic, regional and global levels
Prospects?
Philip R. Lane Trinity College Dublin () Financial Globalisation and the Crisis June 2012 24 / 24