What Do New Forms of Finance Mean for EM Central Banks? - An Overview

Abstract

The size and the structure of financial intermediation influence the cost of credit, the risk exposure of financial institutions and the effectiveness with which monetary policy is transmitted to the economy. Over the past decade, financial intermediation in emerging market economies (EMEs) has undergone important changes: a higher volume of debt financing has gone hand in hand with a growing internationalisation of financial markets and increased lending to households. The 2015 Deputy Governors meeting examined the implications of these trends for EMEs. Participants discussed three distinct but interrelated topics: (i) the role of banks; (ii) the role of debt securities markets; and (iii) the implications of recent changes in financial intermediation for monetary policy.

One of the main conclusions reached by participants is that greater access of households to bank credit and of EME corporations to domestic and external securities debt markets is a double-edged sword. On the one hand, it has helped foster financial development, diversifying funding sources and reducing credit risk concentration. On the other hand, it has also been accompanied by increased risks and vulnerabilities – as the financial market turbulences of 2015 illustrated (BIS (2015)). Domestic bond markets now react more strongly to global forces. Larger foreign currency debt has made many companies more vulnerable to exchange rate shocks. Credit cycles have also become more pronounced. These developments pose challenges to EME monetary authorities in containing monetary and financial stability risks, raising questions about the appropriate instruments required to stabilise the economy (Sobrun and Turner (2015)).

Full publication: What Do New Forms of Finance Mean for EM Central Banks?