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International Capital Flows And Their Impact On Financial Stability

Posted on:2015-12-14Degree:DoctorType:Dissertation
Country:ChinaCandidate:G T ZhangFull Text:PDF
GTID:1109330464460862Subject:World economy
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As financial liberalization and the phasing out of financial regulation in developed countries, international capital flows have continuously accelerated in speed since 1990s. At this time, the CEE and CIS countries have reformed their financial markets. For example, opening domestic financial market, promoting the privatization of banks and capital account liberalization, these measures have attracted a substantial international capital flows, provide an important source of funding for these transition countries. It has profound impact on their industrial structure, trade and the level of financial development. However, it makes them rely heavily on foreign capital, causing these countries serious vulnerability. For example, during the global financial crisis in 2008, large scale of international capital flows back into their home country, leading to a liquidity shortage and the sharply rising bank’s bad debt ratio in the CEE and CIS countries. This is a serious threat to its stability of the domestic financial market. Thence, this paper aims to analyze the effect of international capital flows and its components on financial stability in 16 transition countries of Central and Eastern Europe and the CIS,1994-2011. It mainly studied on the status of capital flows, impacting factors, mechanisms in the banking system and reversal of capital flows impacting on financial stability in both macro and micro aspects. On this basis, this paper uses large amounts of data for empirical test, and ultimately gets relevant conclusions.The main contents are as follows:The introduction part explains the research background, theoretical and practical significance of the topic, structural arrangements, the main content, innovation and inadequacies.Chapterl is the review of literature, which includes the concept of international capital flows, classification, mobility mechanism, its impact on financial stability as well as how to prevent and early warnings.Chapter 2 analyzed the status of international capital flows and the economic vulnerability of performance before the global financial crisis in 2008. Firstly, this chapter draws a detailed analysis on the overview of international capital flows and its components of the CEE and CIS countries. Secondly, it focuses on the scale of capital flows, different features and performance from 1994 to 2011 between the CEE countries and the CIS countries. Finally, I research on the economic vulnerability before the global financial crisis in 2008. And this chapter points out that the international capital flows brings financial risks, and at last I summarized the general characteristics of international capital flows.Chapter 3 explores the influencing factors of the international capital flows in CEE and CIS countries combined theoretical methods and empirical methods. Through theoretical analysis, this chapter gets three major aspects of international capital flows, namely global push factors, domestic pull factors and the contagion effect. In the study of domestic pull factors, this chapter contains the financial development of the transition countries, for example, the stock market and banking reform and the reform of non-bank financial institutions. Then I tested the three major aspects of international capital flows, proving the existence and impact of the different roles of these three factors.Chapter 4 researches on international capital flows and financial stability in the banking system from the micro perspective. First, the chapter discusses the mechanisms of procyclical features of the banking sector, and points out that the banking sector has a tendency to take the initiative to adjust the size of its balance sheet. For example, in the period of economic prosperity, the bank tends to raise their leverage, increase debt, and thereby increases the supply of credit. When the economy is in recession, in order to maintain adequate capital adequacy ratio and reduce risk, the bank tend to reduce leverage and debt, thus reduces the size of credit. The qualitative analysis also confirms the existence of procyclical features in the banking system. Secondly, this paper draws on the research achievements of Adrian, Tobias and Shin (2010,2012), Bruno, Valentina and Shin (2013) et al.1 formulate a model of gross capital flows through the international banking system, and get the mechanism between the bank leverage ratio and the international capital flows. The empirical test has confirmed the existence of such a relationship.Chapter 5 studies the relationship between the reversal of international capital flows and financial stability. Firstly, based on the theory of international capital flow reversal, this chapter calculates and compares the reversal of values and volatility values of the international capital flows during the financial crisis and non-crisis periods in the CEE and CIS countries. To determine that which is the most volatile and most likely to be reversed capital flows during the financial crisis. Secondly, I draw on the theoretical model of Ozan Sula and Thomas D. Willett (2009) and make some improvements. Through testing on the model, this chapter confirms that the international capital flows have some impact on the financial stability of the host country. In addition, because the CEE and CIS countries have different financial market structure, the paper also analyzed and discussed these special factors.Chapter 6 concludes the whole dissertation and proposes appropriate policy recommendations, risk prevention and enlightenment to China.According to the study, we draw the following conclusions:(1) The size and composition of international capital flows changed greatly in the CEE and CIS countries. As a whole, it has experienced three development processes, namely the international capital of slow growth, rapid growth and declining growth. However, while large-scale international capital inflows, the vulnerability of these countries’domestic economy continue to accumulate such as current account deficits, import and export imbalance, a huge total external debt and so on.(2) The size and direction of international capital flows are influenced by global push factors, domestic pull factors and the contagion effect, and the global "push" factor plays a crucial impact, followed by the domestic "pull" factors. In addition, there are various channels of infection among the international capital exporting country, the importing country and a third country which has close contact with the capital exporting country. Although it is not obvious under normal circumstances, Its impact on the host country’s financial markets during the financial crisis would be disastrous.(3) Procyclical features of the banking system led to the procyclicality of the international capital flows, which brings risks to the financial markets of the world and the host country. Under the global banking system, the global excess liquidity will be amplified several times through the balance sheet of "shrink-expanding" effects. And enter the host country through local banks, impacting their credit scale, and it eventually threaten the stability of the domestic financial system. Therefore, this paper pointed out that the host country should treat the international capital inflows rationally, which comes through the banking system during the global economic boom. Build the early warning mechanism and counter-cyclical economic policy. Regulate the behavior of the banks. These will eliminate or reduce the risk which is brought by the international capital flows.(4) The international capital flows have higher instability in the CEE and CIS countries, especially during the global financial crisis. First, when the massive international capital flows into the host country, it is more prone to reverse. Bank loans are the most unstable capital, followed by FDI, while the international portfolio investment is not obvious. And the reversal will be strengthened during the financial crisis. Second, the situation in CEE countries is much more serious tharr the CIS countries. Third, the development of financial market has a higher degree of correlation with the host financial stability. Finally, larger extent of banking reform, higher capital market openness, higher financial deepening and so on will play an inhibitory effect against the international capital flows during the financial crisis.
Keywords/Search Tags:International capital flows, financial stability, FDI, International portfolio investment, Bank loans
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