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Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation

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  • Garber, Peter M

Abstract

Prudential regulation is intended to channel capital inflows through institutions most likely to make sound investment decisions. The paper presents examples of prudential regulation in two countries, Mexico and Hong Kong, where capital was suddenly withdrawn in a test of the financial system. Especially under modern conditions, a risk-taking bank can avoid prudential regulation, which on paper is near the industrial country standard; and the case of Mexico shows how even the best intended regulation can be avoided and can even produce a result that is the opposite of their intent. The existence of offshore markets, particularly OTC derivative markets, makes on-shore regulation problematic in the absence of stringent, consolidated supervision. In addition, they have rendered meaningless the subaccounts of the standard balance of payments capital accounts. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.

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  • Garber, Peter M, 1996. "Managing Risks to Financial Markets from Volatile Capital Flows: The Role of Prudential Regulation," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 183-195, July.
    • Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:3:p:183-95
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    Cited by:

    1. Barry Eichengreen., 1998. "International Economic Policy in the Wake of the Asian Crisis," Center for International and Development Economics Research (CIDER) Working Papers C98-102, University of California at Berkeley.
    2. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246, National Bureau of Economic Research, Inc.
    3. Jean-Pierre Allegret, 2000. "Quel role pour les controles des mouvements internationaux de capitaux ?," Economie Internationale, CEPII research center, issue 81, pages 77-108.
    4. Graham Bird, 2004. "How Important is Sound Domestic Macroeconomics in Attracting Capital Inflows to Developing Countries?," Palgrave Macmillan Books, in: International Finance and the Developing Economies, chapter 9, pages 141-168, Palgrave Macmillan.
    5. Islam, Roumeen, 2000. "Should capital flows be regulated? - a look at the issues and policies," Policy Research Working Paper Series 2293, The World Bank.
    6. Essid, Zina & Boujelbene, Younes & Plihon, Dominique, 2014. "Institutional quality and bank instability: cross-countries evidence in emerging countries," MPRA Paper 56251, University Library of Munich, Germany.
    7. Paolo Savona & Aurelio Maccario & Chiara Oldani, 2000. "On Monetary Analysis of Derivatives," Open Economies Review, Springer, vol. 11(1), pages 149-175, August.
    8. Benjamin Hermalin & Andrew K. Rose & Peter M. Garber & Andrew Crockett & David W. Mullins, Jr, 1999. "Risks to Lenders and Borrowers in International Capital Markets," NBER Chapters, in: International Capital Flows, pages 363-420, National Bureau of Economic Research, Inc.
    9. C. E. Weller, 2001. "Financial Crises After Financial Liberalisation: Exceptional Circumstances or Structural Weakness?," Journal of Development Studies, Taylor & Francis Journals, vol. 38(1), pages 98-127.
    10. Clara Garcia, 2004. "Capital Inflows, Policy Responses, and Their Ill Consequences: Thailand, Malaysia, and Indonesia in the Decade Before the Crises," Working Papers wp81, Political Economy Research Institute, University of Massachusetts at Amherst.
    11. Demirguc-Kunt, Asli & Detragiache, Enrica, 1997. "The determinants of banking crises : evidence from industrial and developing countries," Policy Research Working Paper Series 1828, The World Bank.
    12. Sebastian Edwards, 1998. "Capital Inflows into Latin America: A Stop-Go Story?," NBER Working Papers 6441, National Bureau of Economic Research, Inc.
    13. Mr. Gianni De Nicolo & Mr. Patrick Honohan & Mr. Alain Ize, 2003. "Dollarization of the Banking System: Good or Bad?," IMF Working Papers 2003/146, International Monetary Fund.
    14. Weller, Christian E. & Morzuch, Bernard, 1999. "Why are Eastern Europe's banks not failing when everbody else's are?," ZEI Working Papers B 18-1999, University of Bonn, ZEI - Center for European Integration Studies.
    15. Peter M. Garber, 1997. "Transición a una red funcional de seguridad financiera en América Latina," Research Department Publications 4057, Inter-American Development Bank, Research Department.
    16. Garber, Peter M., 1996. "Transition to a Functional Financial Safety Net in Latin America," IDB Publications (Working Papers) 6202, Inter-American Development Bank.
    17. Peter M. Garber, 1998. "Derivatives in International Capital Flows," NBER Working Papers 6623, National Bureau of Economic Research, Inc.
    18. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1697-1727, July.
    19. Asli Demirgüç-Kunt & Ms. Enrica Detragiache, 1997. "The Determinants of Banking Crises: Evidence From Developing and Developed Countries," IMF Working Papers 1997/106, International Monetary Fund.
    20. Chiara Oldani, 2005. "An Overview of the Literature about Derivatives," Macroeconomics 0504004, University Library of Munich, Germany.
    21. Weller, Christian E. & von Hagen, Jürgen, 1999. "Financial fragility or what went right and what could go wrong in central European banking?," ZEI Working Papers B 13-1999, University of Bonn, ZEI - Center for European Integration Studies.

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