Integración Financiera Internacional y Crisis Financieras

Integración Financiera Internacional y Crisis Financieras

Internacionales

Octubre 2011

Emilio Ontiveros

Integración Financiera Internacional y Crisis Financieras Internacionales. Emilio Ontiveros Baeza

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Contents

1. The New International Financial Landscape

2. Measures and Drivers of the IFI

3. Effects: opportunities and risks

4. New Risks

5. Looking to the future. Requirements


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1. The New International Financial Landscape

a)Financial Deepening

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b) International mobility of financial assets and liabilities

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INTERNATIONAL FINANCIAL INTEGRATION (IFI):

Financial Globalization


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1. The Changing Financial Landscape. Financial Deepening


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1. The Changing Financial Landscape. Financial Deepening


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1. The Changing Financial Landscape. International Capital Mobility

Source: Obstfeld and Taylor ( 2002)


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2. Measures of IFI

• De jure measures: restrictions on capital account a) IMF b) Mody and Murshid (2002).

• Capital Account Openness Index [Quinn and Toyoda 2001)] • Equity Market Openness [Bekaert and Harvey (2005)] • De facto measures: a) Stock of Assets and Liabilities: Lane and Milesi-Ferretti (2001). Edison

and Warnock ( 2001) , Chanda (2000 ), O’ Donnell ( 2001) b) Saving-investment correlations and various interest parity conditions

(Frankel, 1992) c) Discount rate: Robert P. Flood and Andrew K. Rose ( 2004)

•


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2. Measures of IFI. The Net External Position

• 5 categories of external liabilities:

• Foreign Direct Investment

• Portfolio equity investment

• Portfolio debt investment

• Other investment: bank loans, trade credits, and

currency deposits,…

• Financial Derivatives

• 6 categories of assets:

• the same 5 as liabilities + official reserves


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1. The Changing Financial Landscape. IFI Trends 1970–2003 (Percent of GDP)


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1. The Changing Financial Landscape. IFI Trends 1970–2003 (Percent of GDP)


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1. The Changing Financial Landscape. IFI Trends.

Real Interest Rate Convergence

Long-Term Real Interest Differentials : ˜rt = rt − rUS


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2. Drivers of IFI

Liberalization and deregulation:

• Opening the capital account

• Removing “financial repression” policies

• Removing restriction to foreign ownership

Financial Privatization

• Privatization of Institutions

• Instruments: private debt + equity

Financial Innovation

Technological Innovation

Real Globalization

More Markets, Less Intermediation


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2. Drivers of IFI : Liberalization/Deregulation


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2. Drivers of IFI : Financial Liberalization by Income Group, 1973-96

Source: ABIAD AND MODY( 2005)


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2. Drivers of IFI : Financial Innovation

Informational Efficiency New Instruments

New Agents

New Technologies

Atomization of risk and Rise of modern risk

management


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2. Drivers of IFI : IT

1 cost of a three-minute phone call from NY to London


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2. Drivers of IFI : Financial Innovation. Instruments


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Rapid growth of derivatives markets


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Surge in transactions and payments


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2. Drivers of IFI : Financial Innovation. Agents


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2. Drivers of IFI : Financial Innovation. Agents


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3. Effects

Opportunities: “ AN ENGINE OF GROWTH”

Incentives to diversification: decline of the home bias.

Risks: ” A SOURCE OF INSTABILITY”

Financial crises


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3. Effects on developing economies. The Theory

Financial integration potentially allows:

1) Risk sharing.

2) To ease the capital scarcity constraint a developing

economy might face.

3) To bring foreign direct investments (FDI) into the country.

“The good cholesterol” : To boost productivity

4) The main potential benefit of financial globalization for

developing countries is the development of their financial system: more complete, deeper and more stable financial markets.

Literature on benefits of financial integration for LDCs: McKinnon (1973), Shaw (1973), King and Levine (1993), Levine (1997), Fry (1997), Beck, Levine, and Loayza (2000), Epaulard and Aude Pommeret, 2005.


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3. Effects on developing economies. The evidence There is mixed empirical evidence on whether capital

account liberalization and financial integration have resulted in increased long-run economic growth in developing economies.

Survey: Edison, Klein, Ricci, and Sløk, (2002a )

Over the last quarter of a century financial instability has reduced the incomes of developing countries by roughly 25 per cent.

Survey: Dobson and Hufbauer’s (2001)


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3. Financial crises

“too many, too often,…”

• 1982: Debt Latin America

• 1987: Stock market crashes

• 1989 : Failures of US S+Ls

• 1990: Junk bond And US municipal bond meltdowns

• 1992: EMS crises

• 1994: Mexico. (“Tequilazo”)

• 1997: East Asia ( “ Asian flu”)

• 1998: Russian debt default ( “ The Russian worm”)

• 1998 : LTCM ands its imitators

• 1999: Ecuador default

• 2001- 02 : Argentina devaluation + default


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3. Financial Crises. What in common?

a) All (near) in LDCs countries

b) Causes

c) Contagion: countries, markets and institutions.

d) Heavy Costs


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3. Financial Crises. What in common? Causes of financial instability

a) Unsustainable macroeconomic policies

Krugman (1979), Obstfeld and Taylor (1998 ): The Trilemma

b) Fragile financial systems

Goldstein and Turner (2003)

c) Institutional weaknesses.

IMF, GFSR., Williamson and Mahar (1998); Demirgüç-Kunt and Detragiache (1998)

d) Flaws in the structure of international financial markets

Eichengreen and Hausmann (1999), Devenow and Welch (1996) , Bhagwati (1998), Eichengreen, Hausmann, and Panizza (2002): “The original sin”


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Anatomy of a Systemic Financial Crisis


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Contagion


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3. Financial Crises. What in common? Contagion

Channels :

a) Investor behavior:

* Herding and fads: Bikhchandani, Hirshleifer, and Welch (1992), Banerjee (1992), Banerjee (1992)

* Global diversification of financial portfolios in the presence of information asymmetries: Calvo and Mendoza (1998),

b) Economic linkages

• Trade: Eichengreen, Rose, and Wyplosz (1996) , Glick and Rose (1999), Kaminsky and Reinhart (2000)

• Finance: Kaminsky and Reinhart (2000), Mody and Taylor (2002), Frankel and Schmukler (1998) , Caramazza, Ricci, and Salgado (1999)


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Emerging Market Bond Yield Spreads, 1992-2002


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3. Financial crises. Costs


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Korean Social Indicators Following the Crisis

3. Financial crises. Costs


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3. Post-Crises. Capital Flows to Emerging Markets


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Source: Graciela L. Kaminsky, Carmen M. Reinhart and Carlos A. Végh ( 2003)

Net Private Capital Flows


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3. Solutions to the instability in Emerging countries

1. Re-regulate domestic financial markets

Goldstein and Turner (2003)

Bhagwati (1998), Stiglitz (2002).

2. Reimpose capital controls

Dobson and Hufbauer (2001), Brouwer (2001).

3. Adopt a common currency

Mundell ( 2000)

4. Pursue an international solution to the currency-mismatch

problem

Eichengreen and Hausmann (2003)


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4. New Risks

Macro:

Global Imbalances

Micro:

Concentration in Derivatives Markets. Credit Derivatives

Growing role of Hedge Funds in Derivative Markets and the

Financial System

Conglomeration and cross-sector competition

Transfer of risk to the household sector


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4. New Risks: Global Imbalances

(In billions of U.S. dollars)


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4. New Risks: Global Imbalances. (% world GDP)


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4. New Risks: Global Imbalances. Foreign holdings of US Treasuries


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4. New Risks: Global Imbalances. US household debt-to-disposable income ratio


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4. New Risks: Global Imbalances. Emerging market sovereign bonds spreads


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4. New Risks: Global Imbalances. Underlying credit quality of benchmark EMBIG bond index


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4. Hedge Funds


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4. Hedge Funds. An estimate of hedge funds’ share of total trading volumes


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4. New Risks. Hedge Funds. Correlation among H.F. strategies


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4. Conglomeration and cross border


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4. From Volatility to Instability

Lack of Robust Risk Management:

Excessive leverage

Dynamic hedging strategies

Rigid risk limits : value-at-risk models and ratings-based approach in Basel II. Risk of pro-cyclicality

Incentive structures:

Peer-group performance measures

Index-tracking

Lack of transparency

Market Infrastructure Weaknesses

IMF, GFSR, Sept 2003, chap. III


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Financial risk is shifted to the household sector


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• Atomisation of risk

• Marketisation of finance

• A new configuration of

players

• Globalisation of finance

• Transfer of risk to the

household sector

Corollaries:

Resumen. Cambios en la escena financiera y Consecuencias

• Growing symbiosis

between markets and

intermediaries (Borio

(2003a), BIS (2003)

• Increased complexity

• The size of the financial

sector in relation to the

real economy has greatly

grown.


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What has not changed

• Asymmetric information

• Positive feedback mechanisms

• Limitations in risk perceptions.

• Limitations in incentives.

Financial vulnerabilities


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Policies towards road safety

(i) the state of the roads

payment and settlement systems.

International financial reporting standards

(ii) there are sufficient buffers to limit the damage of any accidents that do occur

minimum capital standards.

mechanisms to manage distress

(iii) the “speed limits” question).

better risk measurement and management

stronger market discipline.

reliance on built-in stabilisers

occasional discretionary measures.

cooperation among the relevant authorities


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5. Looking to the future. Requirements

National exigencies:

Credit risk management: solvency, market and liquidity risk

Infrastructure ( payments systems included)

Supervision: traditional or integrated

Global exigencies:

Don't press the LDCs

A Cooperative Strategy toward a International Financial

Architecture: Internationalization of regulation and

supervision

Documents

Integración Financiera Internacional y Crisis Financieras