September 10, 2017

STICKING TO THEIR KNITTING:

Financial Globalization 2.0 (HANS-HELMUT KOTZ ,  SUSAN LUND, 9/05/17, Project Syndicate)

As the financial crisis evolved, private-sector involvement - through "haircuts" and "bailing in" - became a threatening option. From a risk perspective, domestic markets - where banks had the advantage of scale and market knowledge - became comparatively more attractive. In Germany, for example, the ratio of foreign to total assets at the three largest banks flipped, from 65% in 2007 to 33% in 2016. This was not simply a matter of shrinking the overall balance sheet; domestic assets grew by 70% during the same period.

What has emerged in the eurozone and beyond is a potentially more stable financial system, at least where banking is concerned. Banks have been required to rebuild their capital, and new rules on liquidity have reduced leverage and vulnerability. Stress testing and resolution preparedness - the sector's so-called living wills - have created significant disincentives to complexity. All of this has made foreign operations less attractive as well.

A more diverse mix of cross-border capital flows also indicates greater stability. While total annual flows of cross-border lending have fallen by two thirds, foreign direct investment has held up better. FDI is by far the most stable type of capital flow, reflecting long-term strategic decisions by companies. Equity-related positions (FDI plus portfolio investments) now account for 69% of cross-border capital flows, up from 36% in 2007.

One final measure of stability is that global imbalances, including aggregate capital- and financial-account balances, are shrinking. In 2016, these imbalances had fallen to 1.7% of global GDP, from 2.5% in 2007. Moreover, the remaining deficits and surpluses are spread over a larger number of countries than before the crisis. In 2005, the US absorbed 67% of global net capital flows. By 2016, that share had fallen by half. China, meanwhile, accounted for 16% of the world's net capital surplus in 2005; last year it was only 1%. And, with only a few exceptions, like Germany and the Netherlands, imbalances have also declined within the eurozone. Today, developing countries have become capital importers once more.

Posted by at September 10, 2017 8:25 AM

  

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