Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses Philip R. Lane, Trinity College Dublin Policy Institute, 27th September 2012 Philip R. Lane, Trinity College Dublin () CIEPR Report 2012 Policy Institute, 27th September 2012 1 / 10
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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
/ 10
Introduction
CIEPR?
Banks
Financial Globalisation
Analysis
Policy Reforms
Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 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; smoothsconsumption; risk diversi�cation
(Financial openness opposed by vested interests)
Financial development and �nancial integration highly desirable
Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 3
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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?)
Philip R. Lane, Trinity College Dublin () CIEPR Report 2012Policy Institute, 27th September 2012 4
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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)