Do Sounder Banks Make Calmer Waters? The Link between Bank Regulations and Capital Flow Waves
Name
pandp.20201094.pdf
Description
Published version
Size
487.06 KB
Format
Unknown
Checksum (MD5)
5ef157b25e7a5cb980a243da4a61fb3d
Author(s)
Forbes, Kristin
Date Issued
May 2020
Journal
American Economic Association Papers and Proceedings
Publisher
American Economic Association
Citation
2020. "Do Sounder Banks Make Calmer Waters? The Link between Bank Regulations and Capital Flow Waves." American Economic Association Papers and Proceedings, 110.
Version
Final published version
Abstract
This paper tests if prudential and macroprudential regulations have meaningfully reduced the incidence of capital flow “waves,” that is, of sudden stops and surges of capital flows from abroad. The results support other work documenting changes since 2008 in how global factors affect capital flows but provide mixed evidence on how regulations have affected the incidence of sharp capital flow movements. Regulations that strengthen banks (such as higher capital-asset ratios) meaningfully reduce the incidence of surges, but tighter macroprudential regulations appear to have done little to reduce the incidence of capital flow waves--and are even correlated with an increased risk of sudden stops. This may reflect their limited use to date, or how they interact with different types of capital flows. Macroprudential regulations may have reduced the volume and volatility of bank flows but shifted financial intermediation outside the regulated sector and thereby increased the volatility of debt and equity flows. These reforms could still provide important benefits, however, in terms of building the resilience of banks and thereby mitigating the negative effects of capital flow waves on the broader economy. Even if the waters are not much calmer, the waves should do less damage.
MIT Department
Sloan School of Management
Terms of Use
Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1257/PANDP.20201094
