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International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies

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  • Rudiger Ahrend
  • Antoine Goujard

Abstract

This paper examines how structural policies can influence a country's risk of suffering financial turmoil. Using a panel of 184 developed and emerging economies from 1970 to 2009, the empirical analysis examines which structural policies can affect financial stability by either shaping the financial account structure, by reducing the risk of international financial contagion, or by directly reducing the risk of financial crises. Differentiated capital controls are found to affect financial stability via the structure of the financial account. Moreover, a number of structural policies including regulatory burdens on foreign direct investment, strict product market regulation, or tax systems which favour debt over equity finance are found to bias external financing towards debt, thereby increasing financial crisis risk. By contrast, more stringent domestic capital adequacy requirements for banks, greater reliance of a domestic banking system on deposits, controls on credit market inflows, and openness to foreign bank entry are found to reduce the vulnerability to financial contagion. Finally, vulnerability to international bank balance-sheet shocks is found to be lower in situations of abundant global liquidity, underlining the importance of adequate central bank reactions in situations of financial turmoil. Flux de capitaux internationaux et fragilité financière : Partie 3. Comment les politiques structurelles affectent-elles la probabilité de crise financière? Analyse empirique des crises financières passées des pays OCDE et émergents Cet article examine comment les politiques structurelles peuvent influencer le risque de crise financière. L’analyse empirique porte sur un échantillon de 184 pays développés et émergents de 1970 à 2009 et teste quelles politiques structurelles peuvent favoriser la stabilité financière, soit en influant sur la structure du compte financier, soit en réduisant les risques de contagion financière internationale, soit en réduisant directement le risque de crise financière. Des mesures ciblées de contrôle des flux de capitaux ont influé sur la stabilité financière en modifiant la structure des engagements internationaux. De plus, de nombreuses politiques structurelles, comme les restrictions trop importantes aux investissements directs étrangers, une réglementation des marchés de produits défavorable à la compétition, ou des systèmes de taxation favorisant le financement par la dette au détriment des investissements de capitaux, ont contribué à réduire la stabilité financière en augmentant la part de la dette dans les engagements externes des pays au détriment des IDEs ou des investissements de capitaux. En revanche, une meilleure réglementation des fonds propres bancaires, un ratio crédits sur dépôts bancaires plus faible et une plus grande ouverture à l’entrée des banques étrangères ont réduit les risques de crises financières lors des épisodes de contagion bancaire. Enfin, la vulnérabilité des pays à la contagion par le système bancaire international a été moindre lorsque la liquidité globale était abondante, ce qui souligne l’importance d’une réaction appropriée des banques centrales lors des périodes d’instabilité financière.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 966.

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Date of creation: 12 Jun 2012
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Handle: RePEc:oec:ecoaaa:966-en

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Keywords: foreign direct investment; FDI restrictions; capital controls; balance sheet; banking regulations; financial account; external debt; financial stability; compte financier; dette externe; bilan des banques; investissement direct étranger; contrôle des flux de capitaux; réglementation bancaire; stabilité financière;

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Cited by:
  1. ATI Abdessatar & BEN JAZIA Rachida, 2013. "Institutional Quality And Financial Stress: Experience From Emerging Country," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 8(3), pages 5-20, December.
  2. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.

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