Euro Area Cross-Border Financial Flows and the Global Financial Crisis

44 Pages Posted: 28 Jul 2011

See all articles by Katrin Forster

Katrin Forster

European Central Bank (ECB)

Melina A. Vasardani

European Central Bank (ECB)

Michele Ca' Zorzi

European Central Bank (ECB)

Date Written: July 27, 2011

Abstract

This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short-term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of crossborder financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in crossborder financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources.

Keywords: global financial crisis, euro area, capital flows

JEL Classification: E44, E58, F33, F42

Suggested Citation

Forster, Katrin and Vasardani, Melina A. and Ca' Zorzi, Michele, Euro Area Cross-Border Financial Flows and the Global Financial Crisis (July 27, 2011). ECB Occasional Paper No. 126. Available at SSRN: https://ssrn.com/abstract=1791529

Katrin Forster (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Melina A. Vasardani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Michele Ca' Zorzi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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