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1、1,International Finance: Managing Capital Flows and Financial Risks,Joint CCER-World Bank Institute course July 16-20, Beijing, China,2,Capital Flow Volatility and Financial Risks: Overview,Dr. Yan Wang, Senior Economist Managing Capital Flows and Financial Risks, a CCER-WBI joint course July 16-20,
2、 Beijing, China,3,Capital Flow Volatility & Financial Risks,I. Rise and Fall of Capital Flows Capital flow volatility Implicit government guarantees market failures Volatility hurts growth and hurts the poor most,II. New issues in managing risks Fiscal risks and govt contingent liabilities Derivativ
3、es and risks “Value at Risk” Early warning indicators Short term flows and crises,III. Policy options to manage financial risks A spectrum of capital flow interventions Chile: reserve requirements for short term inflows: pros and cons Sound banking system and regulations: currency risk exposure and
4、etc. Competition and corporate governance crucial for market discipline Summary,4,Global Integration and Capital Flow Volatility,5,The rise and fall of international capital flows: capital market flows are volatile,Source: GDF 2000.,6,Capital Flow Volatility: FDI is More Stable,Source: GDF, 1999,7,L
5、arge reversals in net private capital flows,8,Capital Flow Volatility is linked with Volatile Growth,Relationship between economic growth variability and volatility in private foreign capital flows,Source: Thomas et al “The Quality of Growth,” 2000.,9,Capital Flow Volatility is linked with Frequency
6、 in Systemic Banking Crises,Frequent Banking Crisis,10,Banking Crises and aftermath are extremely costly for the real economy: unfair burden for the poor,High Cost of Banking Crises,11,Growth Volatility hurts the poor most,Source: Thomas et al “The Quality of Growth”, 2000.,12,Financial Deepening in
7、 the Domestic Economy can facilitate Economic Growth, however.,Source:Thomas et al “The Quality of Growth, 12000.,13,Capital Account Openness is negatively related with GDP Growth,Source: Thomas et al “The Quality of Growth,” 2000.,14,II. New Issues in managing risks: an overview of new topics in th
8、is course,Financial and fiscal risks are linked Capital flow volatility may lead to a rising government contingent liabilities Derivatives may lead to heightened systemic risks (see Steinherrs book) “Value at risk” method is important Early warning indicators of financial crises Short term debt shou
9、ld be controlled, regulated, and monitored, carefully.,15,Fiscal cost of banking crises, % of GDP,16,Derivatives may lead to heightened systemic risk: Markets have been growing rapidly, 1991-1997,17,Value at Risk (VAR) is an important tool to measure risk,“The Daily Earning at Risk for our combined
10、trading activities averaged approximately $15million” J.P. Morgan 1994 annual report VAR summarizes the expected maximum loss (or worst loss) over a target horizon (day/month) within a given confidence interval. It allows us to estimate company-wide risks in one number and compare across different c
11、ompanies/markets It is now widely used in firms and banks.,18,Value at Risk (VAR): for general distribution and an example,Define W0 as initial investment, R rate of return, then at the end of the day/month, W=W0(1+R). Denote the expected return as and volatility of R as ; and the lowest portfolio v
12、alue at the given confidence level c as W*=W0(1+R*). VAR is defined as the dollar loss relative to the mean, Value at Risk (mean)=E(W)-W*= - W0(R*- ) (1) J.P. Morgans distribution of daily revenue in 1994: Mean revenue is $5.1m, n=254. Select c=95%, 254x5%=12.7. In the chart, we find the 5% of occur
13、rences (15 obs) below -$9m. After interpolating, we find W*= -$9.6m The VAR of daily revenues, relative to the mean is VAR = E(W) W*= $5.1m- (-$9.6m) = $14.7m (2) Absolute VAR=$9.6m,19,Short Term Capital Flows are Linked to Financial Fragility: Short term debt/reserve ratios peaked before crises,Sou
14、rce: GDF, 1999,20,Short Term Debt /Reserve Ratios are good warning indicators of financial fragility: It peaked before the Peso crisis,Source: GDF, 1999,21,Short-term Debt as percent of international reserves: a liquidity index,22,Short-term Debt as percent of international reserves: a good warning
15、indicator,23,GDP growth and growth of short-term debt: Pro-cyclical to growth and exacerbate boom/bust,24,GDP growth and growth of short-term debt: Pro-cyclical to growth and exacerbate crises,25,III. Policy options to manage fiscal and financial risks,A spectrum of capital flow interventions Chile:
16、 reserve requirements for short term inflows: pros and cons Prudential fiscal policy and disciplines Do not provide implicit guarantees Sound banking system and regulations: regulate foreign currency exposure Competition and corporate governance crucial for market discipline Summary,26,Policy Options: A Spectrum of Capital Flow Interventions,1. Financial Autarky 2. Quantity Controls (All Capital Inflows) 3. Tax/Non-Remunerated Reserve Requirement (All Capital Inflows) 4. Quantit
