IMF Working Papers

Capital Flows: The Role of Bank and Nonbank Balance Sheets

By Yuko Hashimoto, Signe Krogstrup

April 29, 2019

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Yuko Hashimoto, and Signe Krogstrup. Capital Flows: The Role of Bank and Nonbank Balance Sheets, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Balance of payments, Banking, Capital flows, External position, Financial institutions, Financial statements, Foreign assets, Foreign currency exposure, Money, Nonbank financial institutions, Public financial management (PFM)

Keywords: Africa, Bank credit, Bank share, Bank-nonbank interconnectedness, Capital flow, Capital flow management measures, Capital flows, Financial statements, Foreign assets, Foreign currency exposure, Foreign exposure, Forward contract, Global, Global factor, Global financial crisis, Macro prudential policy, Nonbank balance sheet exposure, Nonbank balance sheets, Nonbank client, Nonbank financial institutions, Nonbank investor, Nonbank liability, Nonbank risk management behavior, Nonbank risk management practice, Nonbank share, Portfolio adjustment, Risk aversion, Risk management behavior, WP

Publication Details

  • Pages:

    40

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/085

  • Stock No:

    WPIEA2019085

  • ISBN:

    9781498311472

  • ISSN:

    1018-5941

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