Capital Flows: The Role of Bank and Nonbank Balance Sheets

41 Pages Posted: 2 Jun 2019

See all articles by Yuko Hashimoto

Yuko Hashimoto

International Monetary Fund (IMF)

Signe Krogstrup

National Bank of Denmark - Economics Department; Danmarks Nationalbank (The Central Bank of Denmark); IMF

Date Written: April 2019

Abstract

This paper assesses the role of bank and nonbank financial institutions' balance sheet foreign exposures and risk management practices in driving capital flow responses to global risk. Using a unique and previously unexplored dataset on domestic and cross border balance sheet positions of financial institutions collected by the IMF, we show that the response of overall capital flows to global risk shocks is associated with the on-balance sheet foreign exposures of nonbanks, but not with that of banks. A possible interpretation is that risk-averse and dynamically optimizing nonbanks reduce their foreign risk exposure when global risk perceptions increase, leading to capital flows, while banks tend to be hedged against these risks off balance sheet. In advanced countries, the findings suggest that nonbank portfolio adjustment to changing risk conditions may take place through derivatives transactions with banks, the hedging practices of which trigger bank related capital flows rather than portfolio flows.

Keywords: Bank credit, Central banks, Private capital flows, Foreign currency exposure, International financial markets, foreign exposure, global factor, risk aversion, global financial crisis, forward contract, capital flow management measures, macro prudential policy, VIX, capital flow, risk condition, foreign asset, Tille

JEL Classification: F3, G1, G2, G21, E01, F16, E52

Suggested Citation

Hashimoto, Yuko and Krogstrup, Signe, Capital Flows: The Role of Bank and Nonbank Balance Sheets (April 2019). IMF Working Paper No. 19/85. Available at SSRN: https://ssrn.com/abstract=3397543

Yuko Hashimoto (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Signe Krogstrup

National Bank of Denmark - Economics Department ( email )

1093 Copenhagen
Denmark

Danmarks Nationalbank (The Central Bank of Denmark) ( email )

Havnegade 5
Copenhagen, 1093
Denmark

IMF ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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