"Financial 'deglobalization'?: Capital Flows, Banks, and the Beatles" -- Kristin Forbes

Forbes:Deglobalisation

FINANCIAL

DEGLOBALISATION?

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www.bankofengland.co.uk/publications/Pages/news/2014/149.aspx

SPEECH BY FORBES, MPC BOE

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www.bankofengland.co.uk/about/Pages/people/biographies/forbes.aspx

http://www.bankofengland.co.uk/about/Pages/people/biographies/forbes.aspx

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www.bankofengland.co.uk/publications/Documents/speeches/2014/speech777.pdf

http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech777.pdf

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T h e m a i n m e s s a g e s o f K r i s t i n ’ s s p e e c h a r e a s f o l l o w s :

K r i s t i n i n t r o d u c e s t h e t o p i c o f g l o b a l f i n a n c i a l f l o w s b y n o t i n g t h a t “ i n t h e 1 9 6 0 s t h e U K w a s a t r i s k o f r u n n i n g o u t o f d o l l a r s a n d … . t h e s a v i o u r w a s t h e B e a t l e s … e a r n i n g w o r l d - r e c o r d d o l l a r c o n c e r t r e c e i p t s ” . S h e n o t e s t h a t “ t h e b a n d ’ s l a s t c o m m e r c i a l c o n c e r t w a s i n t h e s u m m e r o f 1 9 6 6 … . J u s t o n e y e a r l a t e r [ t h e U K ] w a s f o r c e d t o a b a n d o n i t s [ e x c h a n g e r a t e ] p e g , s t e r l i n g w a s d e v a l u e d b y 1 4 % a g a i n s t t h e d o l l a r a n d t h e U K s i g n e d a n e m e r g e n c y I M F l o a n p a c k a g e ” .

T u r n i n g t o m o r e r e c e n t h i s t o r y , K r i s t i n n o t e s t h a t t o d a y “ c o u n t r i e s h a v e b e c o m e m u c h m o r e f i n a n c i a l l y i n t e g r a t e d ” . B u t “ i n t e r n a t i o n a l c a p i t a l f l o w s f e l l s h a r p l y d u r i n g t h e c r i s i s a n d s h o w n o s i g n s o f r e c o v e r i n g … . c r o s s b o r d e r f i n a n c i a l f l o w s … . ( s c a l e d b y t h e s i z e o f t h e i r e c o n o m i e s ) a r e n o w a s ‘ g l o b a l i z e d ’ a s t h e y w e r e i n 1 9 8 3 ” . P u t a n o t h e r w a y “ I n t e r n a t i o n a l c a p i t a l f l o w s a r e n o w o n l y 1 . 6 % o f g l o b a l G D P , t e n t i m e s l e s s t h a n t h e p e a k o f 1 6 % i n 2 0 0 7 ” . K r i s t i n s u g g e s t s t h a t i t i s “ r e m a r k a b l e ” t h a t c a p i t a l f l o w s h a v e r e m a i n e d a t s u c h d e p r e s s e d l e v e l s d e s p i t e t h e b r o a d e r r e c o v e r y i n t h e g l o b a l e c o n o m y .

T h e d a t a s u g g e s t t h a t “ b a n k i n g i s t h e c u l p r i t ” . “ P o r t f o l i o f l o w s , a n d f o r e i g n d i r e c t i n v e s t m e n t h a v e b o t h s i n c e s t a b i l i z e d a t p o s i t i v e ( a l b e i t s o m e w h a t l o w e r ) l e v e l s s i n c e t h e c r i s i s , w h i l e b a n k i n g f l o w s h a v e c o n t i n u e d t o c o n t a c t r e c e n t l y . I n o t h e r w o r d s , b a n k s a r o u n d t h e w o r l d a p p e a r t o c u r r e n t l y b e r e d u c i n g t h e i r f o r e i g n e x p o s u r e s a n d b r i n g i n g m o n e y h o m e ” . A s a r e s u l t t h e r e h a s b e e n a “ m a j o r c o n t r a c t i o n i n t h e g l o b a l b a n k i n g n e t w o r k ” a n d “ t h e c o n t r a c t i o n i n b a n k i n g f l o w s r e l a t e d t o t h e U K i s p a r t i c u l a r l y s t r i k i n g ” .

B a n k i n g f l o w s a r e t y p i c a l l y m o r e v o l a t i l e t h a n o t h e r c r o s s b o r d e r f l o w s , a n d h a v e t e n d e d t o b e s e n s i t i v e t o p e r c e p t i o n s o f r i s k – w h e n r i s k i s p e r c e i v e d t o f a l l , b a n k i n g f l o w s t e n d t o r i s e . B u t K r i s t i n s h o w s t h a t i n t h e y e a r s s i n c e t h e f i n a n c i a l c r i s i s , b a n k i n g f l o w s h a v e n o t r e s p o n d e d t o t h e d e c l i n e i n p e r c e i v e d r i s k .

K r i s t i n c i t e s a v a r i e t y o f p o t e n t i a l r e a s o n s f o r t h i s i n c l u d i n g h i g h e r c o s t s f o r b a n k s o p e r a t i n g a b r o a d ( i n p a r t d u e t o t h e r i s k o f p e n a l t y f i n e s ) , r e d u c e d a c c e s s t o w h o l e s a l e f u n d i n g , w e a k n e s s i n i n d i v i d u a l b a n k b a l a n c e s h e e t s a n d r e g u l a t o r y c h a n g e s .

K r i s t i n d r a w s o u t a w i d e v a r i e t y o f p o s s i b l e i m p l i c a t i o n s o f b a n k i n g l e d d e g l o b a l i z a t i o n f o r t h e U K . T h e i m p a c t o n t o t a l c r e d i t s u p p l y t o t h e U K e c o n o m y i s a m b i g u o u s , b u t d o m e s t i c b a n k s w i l l l i k e l y s u p p l y m o r e c r e d i t w h i l e f o r e i g n b a n k s p r o v i d e l e s s . U K t o t a l c r e d i t s u p p l y “ w i l l b e m o r e t i g h t l y l i n k e d t o t h e d o m e s t i c … b u s i n e s s c y c l e ” b u t l e s s l i n k e d t o f o r e i g n s h o c k s . G l o b a l b a n k i n g i n s t i t u t i o n s s h o u l d b e c o m e m o r e t r a n s p a r e n t . B u t t h e w i t h d r a w a l o f g l o b a l b a n k i n g m a y r e d u c e l i q u i d i t y i n d i f f e r e n t m a r k e t s a n d t h a t c o u l d “ i n c r e a s e v o l a t i l i t i e s a n d t h e r i s k o f s h a r p a n d d i s o r d e r l y p r i c e s w i n g s ” . S h a d o w b a n k i n g ( “ a s s e t b a c k e d s e c u r i t i e s , m o n e y m a r k e t f u n d s , h e d g e f u n d s a m o n g s t o t h e r s ” ) w i l l l i k e l y g r o w i n r e s p o n s e t o a n y f u n d i n g s h o r t f a l l . T h a t “ m a y i n v o l v e r i s k s . C e n t r a l b a n k s a n d i n t e r n a t i o n a l i n s t i t u t i o n s a r e a w a r e o f t h e s e p o t e n t i a l b e n e f i t s a n d r i s k s ” .

" A r e d u c t i o n i n i n t e r n a t i o n a l b a n k f l o w s c o u l d m a k e i t m o r e d i f f i c u l t , a n d p o s s i b l y e v e n m o r e e x p e n s i v e , f o r t h e U K t o f u n d i t s c u r r e n t a c c o u n t d e f i c i t ” . “ A f o r e i g n e x c h a n g e c r i s i s , a s o c c u r r e d i n t h e e r a o f t h e B e a t l e s i s u n l i k e l y h o w e v e r , d u e t o c h a n g e s s u c h a s t h e m o v e t o a f l e x i b l e e x c h a n g e r a t e ” .

F i n a l l y , “ t h i s d e g l o b a l i z a t i o n i n b a n k i n g c o u l d i n f l u e n c e t h e f u n c t i o n i n g o f m o n e t a r y p o l i c y ” . “ G l o b a l b a n k s r e s p o n d t o c h a n g e s i n t h e c o s t o f b o r r o w i n g … b y t r a n s f e r r i n g f u n d s a c r o s s b o r d e r s … . [ w h i c h ] c a n p a r t i a l l y i n s u l a t e g l o b a l b a n k s f r o m c h a n g e s i n d o m e s t i c i n t e r e s t r a t e s ” . “ A s g l o b a l b a n k i n g n e t w o r k s c o n t r a c t , t h e r e m a y b e l e s s r o o m f o r c r o s s b o r d e r b a n k i n g f l o w s t o c o u n t e r a c t t h e l e n d i n g c h a n n e l f o r m o n e t a r y p o l i c y . A s a r e s u l t , t r a d i t i o n a l m o n e t a r y p o l i c y c o u l d b e c o m e m o r e e f f e c t i v e . ”

O v e r a l l , “ i t m a y b e t i m e t o s h i f t f r o m f o c u s s i n g o n t h e i m p l i c a t i o n s o f i n c r e a s i n g l e v e l s o f f i n a n c i a l g l o b a l i z a t i o n , t o a s e r i o u s d i s c u s s i o n o f t h e i m p l i c a t i o n s o f b a n k i n g d e g l o b a l i z a t i o n ” . 5www.bankofengland.co.uk/publications/Pages/news/2014/149.aspx

http://www.bankofengland.co.uk/publications/Pages/news/2014/149.aspx

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Kristin introduces the topic of global financial flows by

noting that “in the 1960s the UK was at risk of running

out of dollars and….the saviour was the

Beatles…earning world -record dollar concert

receipts”. She notes that “the band’s last commercial

concert was in the summer of 1966 …. Just one year

later [the UK] was forced to abandon its [exchange

rate] peg, sterling was devalued by 14% against the

dollar and the UK signed an emergency IMF loan

package”.

6www.bankofengland.co.uk/publications/Pages/news/2014/149.aspx


@macropru Turning to more recent history, Kristin notes that today

“countries have become much more financially

integrated”. But “international capital flows fell

sharply during the crisis and show no signs of

recovering….cross border financial flows ….(scaled by

the size of their economies) are now as ‘globalized’ as

they were in 1983”. Put another way “International

capital flows are now only 1.6% of global GDP, ten

times less than the peak of 16% in 2007”. Kristin

suggests that it is “remarkable” that capital flows have

remained at such depressed levels despite the broader

recovery in the global economy.



@macropru The data suggest that “banking is the culprit”.

“Portfolio flows, and foreign direct investment have

both since stabilized at positive (albeit somewhat

lower) levels since the crisis, while banking flows have

continued to contact recently. In other words, banks

around the world appear to currently be reducing their

foreign exposures and bringing money home”. As a

result there has been a “major contraction in the

global banking network” and “the contraction in

banking flows related to the UK is particularly

striking”.



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Banking flows are typically more volatile than other

cross border flows, and have tended to be sensitive to

perceptions of risk – when risk is perceived to fall,

banking flows tend to rise. But Kristin shows that in

the years since the financial crisis, banking flows have

not responded to the decline in perceived risk.



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Kristin cites a variety of potential reasons for this

including higher costs for banks operating abroad (in

part due to the risk of penalty fines), reduced access

to wholesale funding, weakness in individual bank

balance sheets and regulatory changes.



@macropru Kristin draws out a wide variety of possible

implications of banking led deglobalization for the

UK. The impact on total credit supply to the UK economy is

ambiguous, but domestic banks wil l l ikely supply more credit

while foreign banks provide less. UK total credit supply “wil l be

more t ightly l inked to the domestic … business cycle” but less

l inked to foreign shocks. Global banking institutions should

become more transparent. But the withdrawal of global banking

may reduce l iquidity in dif ferent markets and that could “ increase

volati l i t ies and the risk of sharp and disorderly price

swings”. Shadow banking (“asset backed securit ies, money market

funds, hedge funds amongst others”) wi l l l ikely grow in response

to any funding shor tfal l . That “may involve risks. Central banks

and international institutions are aware of these potential

benefits and risks”.



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"A reduction in international bank flows could make it

more dif ficult, and possibly even more expensive, for

the UK to fund its current account deficit”. “A foreign

exchange crisis, as occurred in the era of the Beatles

is unlikely however, due to changes such as the move

to a flexible exchange rate”.



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Finally, “this deglobalization in banking could

influence the functioning of monetary policy”. “Global

banks respond to changes in the cost of borrowing… by

transferring funds across borders….[which] can

partially insulate global banks from changes in

domestic interest rates”. “As global banking networks

contract, there may be less room for cross border

banking flows to counteract the lending channel for

monetary policy. As a result, traditional monetary

policy could become more effective.”



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Overall, “it may be time to shift from focussing on the

implications of increasing levels of financial

globalization, to a serious discussion of the

implications of banking deglobalization”.



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Advanced Economies United Kingdom


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Advanced Economies


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http://blogs.wsj.com/economics/2014/11/18/boe -

official-says-bank-retrenchment-may-bring-benefits/

http://blogs.wsj.com/economics/2014/11/18/boe-official-says-bank-retrenchment-may-bring-benefits/

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http://www.reuters.com/article/2014/11/18/us -

britain-boe-forbes-idUSKCN0J225T20141118

http://www.reuters.com/article/2014/11/18/us-britain-boe-forbes-idUSKCN0J225T20141118

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"Financial 'deglobalization'?: Capital Flows, Banks, and the Beatles" -- Kristin Forbes

Economy & Finance

Transcript of "Financial 'deglobalization'?: Capital Flows, Banks, and the Beatles" -- Kristin Forbes