Box C: Gross International Capital Movements
One of the defining characteristics of the financial crisis has been a sharp rise in risk aversion.
One aspect of this has been a reduction in capital flows to emerging markets in Eastern Europe,
Asia and Latin America. These regions are generally seen as attractive in times of global macrofinancial stability but particularly risky in times of global instability. In previous episodes of
global instability, reductions in flows to emerging markets have tended to be associated with
increased capital flows between industrialised economies. In the most recent episode, however,
this has not been the case and total capital flows have fallen sharply from their peak in 2007.
Graph C1
Gross International Capital Movements
Ratio to GDP
%
■ Bank and money market
■ Portfolio equity investment
■ Reserves and derivatives
20
%
■ Portfolio debt investment
■ Foreign direct investment
20
15
15
10
10
5
5
0
1983
1988
1993
1998
2003
0
2008
Sources: IMF; RBA
Graph C2
Foreign Lending by Euro Area Banks*
Rolling four-quarter sum
US$b
US$b
1 000
1 000
500
500
0
0
Emerging economies
-500
-500
-1 000
-1 000
Industrialised economies**
-1 500
-1 500
-2 000
2001
2003
2005
2007
* Austria, France, Germany, Italy, the Netherlands and Spain
** Excluding euro area countries
Source: BIS
32
R e s e r v e
b a n k
o f
A u s t r a l i a
2009
-2 000
Capital flows between countries
had been rising rapidly since 2002
in an environment of low interest
rates, solid economic growth and
generally
favourable
financial
conditions (Graph C1). The most
notable rise was in cross-border
bank lending and the purchase of
debt securities. Not surprisingly,
given the nature of the financial
crisis and the rise in counterparty
risk following the failure of several
high profile institutions, crossborder bank lending has been
sharply curtailed in 2008.
Looking at more detailed data on
cross-border bank lending from the
Bank for International Settlements,
it is evident that cross-border lending
by European banks both increased
most rapidly going into the crisis
and subsequently contracted most
sharply. Given that financial stress
was concentrated in industrialised
economies it is also noteworthy
that lending to other industrialised
economies peaked earlier than
lending to emerging markets, which
was curtailed only much later into
the financial turbulence (Graph C2).
This pattern is also evident in the
sharp reversal of (net) flows between the United States and the United Kingdom as a result
of reduced cross-border lending by European banks headquartered in London as institutions
sought to unwind their exposures.
The most recent fall in gross capital flows is very sharp by historical standards. However,
previous episodes of instability, such as the one around the time of the equity bubble earlier this
decade, resulted in reasonably short-lived falls in capital flows.�� R
� For more detail see also Bank for International Settlements (2009), BIS Quarterly Review, June.
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o n
M o n e t a r y
P o l i c y
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