Integracin Financiera Internacional y Crisis Financieras Internacionales

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Integración Financiera Internacional y Crisis
Financieras Internacionales
Emilio Ontiveros
Curso de Doctorado, UAM, Marzo-Junio 2009
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Contents

• 1. The New International Financial Landscape
• 2. Measures and Drivers of the IFI
• 3. Effects opportunities and risks
• New Risks
• 5. Looking to the future. Requirements

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1. The New International Financial Landscape

• Financial Deepening
• b) International mobility of financial assets and
  liabilities
• 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).
• De facto measures
• Stock of Assets and Liabilities Lane and
  Milesi-Ferretti (2001). Edison and Warnock (
  2001) , Chanda (2000 ), O Donnell ( 2001)
• 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
19702003 (Percent of GDP)
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1. The Changing Financial Landscape. IFI Trends
19702003 (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

Rise of modern risk management
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2. Drivers of IFI Financial Innovation.
Instruments
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2. Drivers of IFI Financial Innovation.
Instruments
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2. Drivers of IFI Financial Innovation. Agents
US Equity Mutual Funds Net New Cash Flows (In
billions of U.S. dollars)
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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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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.
• To ease the capital scarcity constraint a
  developing
• economy might face.
• 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 Hufbauers (2001)

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3. Financial crises

• too many, too often,
• 1982 Debt Latin America
• 1987 Stock market crashes
• 1989 Failures of US SLs
• 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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Contagion
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3. Financial Crises. What in common? Contagion

• Channels
• 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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3. Financial crises. Costs
Korean Social Indicators Following the Crisis
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3. Post-Crises. Capital Flows to Emerging Markets
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Net Private Capital Flows
Source Graciela L. Kaminsky, Carmen M. Reinhart
and Carlos A. Végh ( 2003)
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3. Solutions to the instability in Emerging
countries

• 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

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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. Current account
balance, US, m.mUS
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4. New Risks Global Imbalances. Foreign holdings
of US Treasuries
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4. New Risks Global Imbalances Net lending and
borrowing in the US economy
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4. New Risks Global Imbalances. US household
debt-to-disposable income ratio
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4. New Risks Global ImbalancesSelected
financial vulnerability indicators for the main
emerging market economies
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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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US Current Account
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US International Investment Position
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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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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