AEA Papers and Proceedings
ISSN 2574-0768 (Print) | ISSN 2574-0776 (Online)
Do Sounder Banks Make Calmer Waters? The Link between Bank Regulations and Capital Flow Waves
AEA Papers and Proceedings
vol. 110,
May 2020
(pp. 516–22)
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.Citation
Forbes, Kristin J. 2020. "Do Sounder Banks Make Calmer Waters? The Link between Bank Regulations and Capital Flow Waves." AEA Papers and Proceedings, 110: 516–22. DOI: 10.1257/pandp.20201094Additional Materials
JEL Classification
- E52 Monetary Policy
- G01 Financial Crises
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill