18 March 2013: The global financial crisis: what is the role of net and gross capital flows?


The external stability of countries is traditionally assessed on the basis of net capital flows (or current account balances) and net foreign assets or liabilities. Therefore, not surprisingly, net flows figure prominently in the debates surrounding the global financial crisis. Global current account imbalances are often mentioned as an important cause of the crisis. The emergence of a global savings glut, due to excess savings in China and other emerging markets, led to large net capital flows towards advanced economies. These flows reduced long term interest rates and financed credit growth in deficit countries, which ultimately caused the global financial crisis. Through this lens the European sovereign debt crisis is also viewed as a balance of payments crisis, where EMU member states with large current account surpluses financed credit booms in deficit countries. These deficit countries subsequently experienced the burst of property and other bubbles when external financing collapsed.
While net flows have received a lot of attention in the public debate, the idea that gross capital flows might have been equally if not more culpable for the global financial crisis only recently gained attention. Recent research suggests that the buildup of the global credit boom was not so much fuelled by net inflows from emerging economies, but by gross inflows from financial sectors in advanced economies: the global banking glut.  Due to a rapid increase in gross capital inflows, local credit booms could be financed by domestic banks that raised funds cross-border. European banks for instance bought large amounts of mortgage backed securities in the US, financed by short-term funding from US money market funds. This influenced US credit conditions which led to the subprime crisis. As almost no relationship exists between the size of gross and net capital flows, gross flows can provide an explanation why the fall-out of the global financial crisis was not contained to countries with a current account deficit.
Gross capital flows therefore deserve more attention alongside net flows, both in research and in the policy debate. They pose risks to financial stability, but these risks may be of a different size and nature and are not yet well understood. This DNB workshop is intended to provide a platform for  distinguished academics, policymakers and market participants to discuss this increasingly relevant issue. Some questions that will be addressed are: How important have gross flows been alongside net flows in fuelling pre-crisis credit booms? What does this imply for the international monetary system: should we continue to aim for a further reduction in global imbalances, or is it more important to further regulate domestic financial sectors with respect to the external exposures of banks? What should individual countries do to reduce the risks of their sometimes very large external balance sheets? 


Morning session

Chair: Job Swank (DNB)

Introductory remarks by Job Swank, Executive Director of DNB

10.00 - 10.45
Key note speech by Stephen Cecchetti (BIS)


Session 1: Global imbalances: Do net capital flows still matter?
An international macroeconomic perspective

Lunch, speech by Klaas Knot (President of DNB), Net and gross capital flows in the European sovereign debt crisis

Afternoon session

Chair: Jan Marc Berk (DNB)

Session 2: Gross capital flows and the role of global banks.
A banking perspective

  • Discussion and Q&A from the audience