The literature on the drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A concise portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. An analysis of a rich dataset of European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.

This paper assesses the role of bank and nonbank financial institutions’ balance sheet foreign exposures and risk management practices in driving capital flow responses to global risk. Using a unique and previously unexplored dataset on domestic and cross border balance sheet positions of financial institutions collected by the IMF, we show that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. A possible interpretation is that risk-averse and dynamically optimizing nonbanks reduce their foreign risk exposure when global risk perceptions increase, leading to capital flows, while banks tend to be hedged against these risks off balance sheet. In advanced countries, the findings suggest that nonbank portfolio adjustment to changing risk conditions may take place through derivatives transactions with banks, the hedging practices of which trigger bank related capital flows rather than portfolio flows.

This paper examines how exchange rate volatility and Korean banks’ foreign exchange liquidity mismatches interacted with each other during the Global Financial Crisis, and whether the vulnerability stemming from this interaction has been reduced since then. Structural and cyclical changes after the crisis, including decreasing demand for currency hedges and the diversifying investor base for bonds, point to a possible weakening of the interaction mechanism; and we find evidences are strongly supportive of this.

The literature on the drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A concise portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. An analysis of a rich dataset of European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.

This update of the guidelines published in 2001 sets forth the underlying framework for the Reserves Data Template and provides operational advice for its use. The updated version also includes three new appendices aimed at assisting member countries in reporting the required data.

The case studies document the regulatory and supervisory dimension of episodes during the recent crisis involving capital flows that generated systemic stress. Source country regulation and supervision is the main focus, although recipient country policies also were important in some cases and are thus covered as well. Three of the case studies are motivated by systemic stress that arose from flows between advanced economies. Strong demand by foreign investors for U.S. financial products helped drive gross flows between the United States and other countries, especially Europe, and induced the U.S. financial sector to develop products that transformed their risky assets into highly-rated securities. In turn, large European banks came to depend on short-term liquidity provided from the U.S. These two-way capital flows created a complex web among markets and institutions, some regulated and some not. Against this background, case studies were prepared for European banks and U.S. money market mutual funds (MMMFs) and for German banks and U.S. mortgage-backed securities (MBSs). Another important case is that of the near failure of the American International Group (AIG), which turned out to have complex and systemically cross-border linkages with other global institutions and markets.

The current report finds that, despite an improvement in economic prospects in some key advanced economies, new challenges to global financial stability have arisen. The global financial system is being buffeted by a series of changes, including lower oil prices and, in some cases, diverging growth patterns and monetary policies. Expectations for rising U.S. policy rates sparked a significant appreciation of the U.S. dollar, while long term bond yields in many advanced economies have decreased—and have turned negative for almost a third of euro area sovereign bonds—on disinflation concerns and the prospect of continued monetary accommodation. Emerging markets are caught in these global cross currents, with some oil exporters and other facing new stability challenges, while others have gained more policy space as a result of lower fuel prices and reduced inflationary pressures. The report also examines changes in international banking since the global financial crisis and finds that these changes are likely to promote more stable bank lending in host countries. Finally, the report finds that the asset management industry needs to strengthen its oversight framework to address financial stability risks from incentive problems between end-investors and portfolio managers and the risk of runs due to liquidity mismatches.