## _sdn1114 - EXECUTIVE SUMMARY

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---

### Executive summary
- IMF staff clarify circumstances under which capital controls and prudential policies designed to influence cross-border capital flows (together “capital flow measures,” or CFMs) could be part of the toolkit to manage large capital inflows.
- Typical intended objectives of CFMs:
  - stemming currency appreciation;
  - reducing the volume of inflows;
  - changing their composition;
  - providing greater room for maneuver for monetary policy;
  - slowing credit growth;
  - dampening asset price bubbles.
- Empirical evidence (focused on the past decade) yields mixed results:
  - Capital controls (distinct from prudential CFMs) have little effect on overall flows but can change the composition of flows. In most cases, controls also have little effect on currency appreciation.
  - Little in-depth study exists on the effectiveness of prudential measures in addressing risks from capital inflows.
  - Econometric estimates for Brazil, Colombia, Korea, and Thailand during the 2000s confirm mixed success and indicate that effectiveness of measures decays over time.
  - A review of 13 emerging market economies in the 2000s does not provide unambiguous support for the effectiveness of capital controls and prudential measures. Prudential measures appear to have had more success in stemming credit growth and addressing financial stability concerns than capital controls, but only rarely reduced appreciation pressures and aggregate flows.
- Conclusion: For reasons not yet fully understood, CFMs achieve stated objectives in some cases but not in others; choice and design of measures are critical (see Ostry and others (2011)).

### Key takeaways on policy stance
- Macroeconomic policies are appropriate tools when facing capital inflows:
  - allowing the currency to appreciate when undervalued from a multilateral perspective;
  - purchasing foreign exchange reserves if their level is not more than adequate from a precautionary perspective;
  - lowering policy rates (when overheating is not a concern) or tightening fiscal policy to allow space for monetary easing (consistent with inflation objectives).
- Structural policies, improved regulation, and supervision of the financial sector are important to absorb inflows and cope with volatility.
- CFMs comprise:
  - (i) residency-based CFMs (capital controls) that discriminate on residency; and
  - (ii) other CFMs that do not discriminate on residency but aim to influence inflows.
- Precedence should be given to CFMs that do not discriminate on residency.

### Multilateral and empirical considerations
- Multilateral implications must be considered: CFMs can divert capital flows to other countries, with varied effects on economic performance and welfare.
- Effectiveness of CFMs is ultimately an empirical question; measurement is complicated by simultaneity, circumvention, and policy packages.

### Measurement and empirical challenges highlighted
- CFMs are almost always part of broader policy packages; disentangling effects is statistically difficult.
- Circumvention confounds measurement—example: Brazil’s tax on portfolio inflows was followed by lower portfolio flows but increased FDI.
- No generally accepted framework for analyzing effectiveness; simultaneity bias is pervasive.
- High-frequency data and focus on announcement/effective dates are more likely to detect short-lived effectiveness.
- Effectiveness depends on design, implementation, administrative capacity, legal compliance, coverage of measures, capital market development, and supporting policies.
- Intensity of controls is measured heterogeneously in the literature (binary indicators, counts of regulation changes, tax-equivalent intensity); most indices capture de jure not de facto enforcement.

### Meta-findings from the literature
- Controls on inflows tend to:
  - have little effect on overall volume of inflows in most econometric studies;
  - increase maturity of inflows (evidence for Brazil, Chile, Colombia, Croatia, Malaysia, Thailand);
  - have no clear effect on currency appreciation in most cases (URR in particular had no or small impact);
  - contribute to maintaining domestic–foreign interest rate differentials (example: Chile allowed higher domestic interest rate for 6 to 12 months).
- Magud, Reinhart, and Rogoff (2011) meta-study: capital controls on inflows seem to make monetary policy more independent, alter composition of capital flows, and reduce real exchange rate pressures (controversial); they seem not to reduce volume of net flows (and hence the current account balance).

### Empirics for the 2000s (Baba and Kokenyne)
- Episodes examined: Brazil (foreign exchange tax, 2008), Colombia (URR, 2007–08), Thailand (URR, 2006–08), Korea (extensive outflow liberalization, 2005–08).
- Methodology:
  - Indices track intensity of temporary price-based capital controls and other (more permanent) controls.
  - Determinants of capital flows estimated by GMM; effectiveness assessed using VAR.
  - Objectives assessed: (i) stemming capital flows; (ii) lengthening maturity; (iii) allowing room to raise domestic interest rates; (iv) easing currency appreciation pressures.
- Main econometric findings:
  - Colombia: URR reduced volume of net capital inflows and affected short-term flows, helping lengthen maturity.
  - Thailand: URR affected volume of net capital flows via increasing outflows.
  - Brazil: foreign exchange tax and Korea: outflow liberalization did not have significant impact on volume or composition of inflows.
  - Price-based controls in Brazil and Colombia provided greater room for monetary policy to increase interest rates.
  - Controls or outflow liberalization did not ease appreciation pressure in any of the four countries.
  - Thailand’s general inflow controls (tightened before URR) and outflow liberalization helped maintain monetary policy autonomy.
- Contextual modifiers:
  - Targeting narrow components of flows limits macroeconomic impact (e.g., Colombia measures moderated short-term flows but could not stem appreciation because majority of flows—FDI—were exempt).
  - Well-developed capital markets facilitate circumvention (e.g., Brazil’s sophisticated derivative markets).
  - Supporting policies can increase effectiveness (e.g., liberalizing outflows increased outflows and supported higher domestic interest rates in Thailand).
  - Policy impacts were short-lived; controls best suited to temporary surges and need reinforcement for longer effectiveness, at cost of increasing distortions.

### Selected GMM coefficient excerpts (preserve exact entries)
- Brazil, Price-based inflow controls (Net Total flows): -0.499 (0.365)
- Colombia, Price-based inflow controls (Inflow): -0.051 (0.022)**
- Thailand, Inflow controls (Short-term flows): -0.390 (1.467)
- Korea, Outflow controls (Short-term flows Inflow): 1.100 (1.092)

### Managing the risks of capital inflows—13-country VAR analysis (high-level findings)
- Country coverage: Brazil, Colombia, Croatia, India, Korea, Peru, Philippines, Romania, Russia, South Africa, Thailand, Uruguay, Vietnam.
- Indices tracked:
  - (i) changes in prudential regulations;
  - (ii) price-based capital controls on inflows;
  - (iii) other capital controls on inflows;
  - (iv) capital controls on outflows.
- Inflow controls:
  - Worked in some instances but not in others; effects were small, short-lived, and insufficient to reduce appreciation pressures.
  - URR in Colombia (2007–08) and Thailand (2006–08) and administrative controls in Croatia (2004–06) seem to have reduced aggregate net flows.
  - URR in Colombia and Russia (2004–06) and inflow control policies in Croatia and India temporarily lengthened maturity of inflows.
  - Brazil’s tax on foreign exchange portfolio inflows in 2008 allowed a higher interest rate differential for two to three quarters but did not reduce volume of flows, change composition, or stem appreciation pressure.
  - Other capital controls helped curb domestic credit growth in Croatia, Peru, and Philippines.
- Liberalization of outflows:
  - Generally succeeded in increasing capital outflows temporarily.
  - Dampened currency appreciation pressures only in Russia.
  - Did not affect aggregate volume of net flows.
  - Helped stem credit growth in Korea and reduced real estate price increases in South Africa.
  - Relaxing outflow controls contributed to maintaining higher domestic interest rates in the Philippines, Russia, Thailand, and Vietnam and often lengthened maturity of outflows.

### Appendix III — Prudential measures: effectiveness and country experiences (high-level)
- Prudential measures were more successful than capital controls in addressing concerns related to capital inflows in the country sample.
- Prudential measures appear somewhat effective in mitigating financial stability concerns from rapid credit growth and short-term inflows and in providing room for monetary authorities to set domestic interest rates.
- Selected country outcomes and measures:
  - Croatia and Peru: prudential measures helped ease appreciation pressures; they appear to have reduced net inflows significantly only in Peru. In Croatia, prudential measures are associated with a decrease in capital inflows, but the effect is not significant.
  - Croatia, South Africa, Thailand, Uruguay, and Vietnam: prudential measures provided greater scope for monetary authorities to set domestic interest rates.
  - Croatia (2003–07): speed limits and high liquidity and reserve ratios helped reduce credit growth.
  - Peru (2007–08): tighter loan classification and provisioning requirements and a hike in marginal reserve requirements helped slow credit expansion.
  - Korea (2007–08): tightened prudential rules, including extension of thin capitalization rules on foreign bank branches, to reduce credit growth.
  - India (2007): credit growth decreased following gradual tightening of prudential policies in 2007; effectiveness may have been offset by concurrent liberalization of capital controls.
  - Colombia (2007) and Romania (2003–08): significant strengthening of prudential measures did not stem credit growth.
  - Uruguay: wide-ranging tightening of prudential policies following the 2002–03 banking crisis did not prevent inflow-induced rapid credit expansion that began in late 2006, though it likely reduced credit risk in the banking sector.
- Combining prudential measures with capital inflow controls:
  - India: lowering of the maturity-dependent all-in cost ceiling on external borrowing and of the ceiling on interest rates on nonresidents’ deposits did not noticeably restrain credit growth.
  - Brazil, Colombia, and Thailand: tax and URR measures did not contribute noticeably to restraining credit growth.
  - Philippines; Peru; Croatia: inflow controls and hikes in differentiated reserve requirements and marginal reserve requirements on nonresident liabilities appear to have further dampened credit growth.
- Effects on foreign currency lending: mixed. Stronger prudential measures decreased banks’ lending to residents in foreign currency in some countries (Croatia, Uruguay); Korea (2008) tightening did not result in a significant decrease in unhedged foreign-currency lending by local banks.
- Effects on asset prices: prudential measures usually did little to restrain asset prices; examples of limited success include Vietnam where targeted prudential policies beginning in 2005 temporarily reduced the stock price index and portfolio inflows turned negative from 2008: Q1 when securities-related prudential regulations took effect.
- Other stability effects: measures in Brazil, Korea, Peru, Romania appear to have lengthened maturity of capital inflows, reducing maturity mismatches in the banking sector; Colombia and Croatia: prudential measures may have moderated financial stability risks by reducing bank-intermediated capital inflows.

### Key conclusions on CFMs
- Capital inflow surges pose significant risks: excessive currency appreciation damaging export sectors; credit booms and asset price bubbles that threaten financial stability.
- CFMs encompass capital controls and mainly prudential measures designed to influence inflows.
- Evidence on effectiveness:
  - Mixed evidence; prudential measures in the country sample appear somewhat more successful than capital controls.
  - Both the literature and country reviews indicate measures can be successful in some cases but not in others; effects are usually not long-lasting.
- Risks of extensive use:
  - Repeated strengthening and expansion of CFMs with stronger enforcement could lead to a heavily controlled foreign exchange and financial system (historical precedent in many emerging markets; China and India retain such features to some extent).
  - Overregulation or financial repression risks: much less efficient allocation of savings and lower long-run economic growth.
- Research priorities:
  - (i) Better understand which types of CFMs are effective, and why.
  - (ii) Develop a more reliable framework for assessing the effectiveness of CFMs relative to the distortions and costs they produce.
- Practical challenges: confronting theories with data is difficult due to the large number of variables and limited number of episodes; policy decisions on CFMs will continue to require considerable judgment.

### Selected numeric and policy details (preserve text entries)
- Croatia: prudential marginal reserve requirements on bank foreign financing (period 2004–08 noted).
- Peru: measures in 2007–08 included tighter loan classification and provisioning and hike in marginal reserve requirements.
- India: tightening of prudential policies in 2007; measures included lowering of maturity-dependent all-in cost ceiling on external borrowing and of the ceiling on interest rates on nonresidents’ deposits.
- Korea: extension of thin capitalization rules on foreign bank branches in 2007–08; 2008 prudential tightening aimed at unhedged foreign currency household lending; measures in 2009–10 implemented after the period examined.
- Romania: speed limit on credit growth expressed as a percentage of the bank’s capital (2003–08).
- Colombia (2007–08): URR of 40 percent on foreign borrowing and portfolio inflows; limits on currency derivative positions of banks (500 percent of capital); earlier URR limited to loans with maturities up to 18 months.
- Thailand (2006–08): URR of 30 percent on foreign currencies sold or exchanged against baht with authorized financial institutions (except for FDI and amounts not exceeding US$20,000); equity investments in listed companies were exempt.
- Malaysia (1994): prohibition on sale of short-term debt securities and money market instruments to nonresidents; non-interest bearing deposit requirement for commercial banks against ringgit funds of foreign banks.
- Brazil (1993–97): explicit tax on capital flows on stock market investments, foreign loans and certain foreign exchange transactions; administrative controls including outright prohibitions or minimum maturity requirements.
- Table notation: (ST) indicates cases where only short-term effects were detected.

*Source: _sdn1114 - Executive Summary, Appendix II, Appendix III.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction
- Section title: "Introduction"
- Page: 5

### II. What Does the Literature Tell Us?
- Section title: "What Does the Literature Tell Us?"
- Page: 6

### III. Capital Controls in the 2000s—Some New Econometric Evidence
- Section title: "Capital Controls in the 2000s—Some New Econometric Evidence"
- Page: 10

### IV. Managing the Risks of Capital Inflows—Capital Controls and Prudential Policies
- Section title: "Managing the Risks of Capital Inflows—Capital Controls and Prudential Policies"
- Page: 15

### V. Conclusions
- Section title: "Conclusions"
- Page: 19

### References
- Section title: "References"
- Page: 20

### Tables and Figures
- Table 1 title: "Impact of Capital Controls on the Volume of Capital Flows"
  - Page: 14
- Figure 1 title: "Indices of Capital Controls"
  - Page: 13

### Appendices
- Appendix I title: "Review of the Literature"
  - Page: 24
- Appendix II title: "Effectiveness of Capital Control and Prudential Policies in Selected Emerging Economies in the 2000s"
  - Page: 27
- Appendix III title: "Selected Capital Account Management Measures"
  - Page: 30

*Source: _sdn1114 - Executive Summary.*

### EXECUTIVE SUMMARY

### _sdn1114 - EXECUTIVE SUMMARY

### Executive summary
- IMF staff have clarified circumstances under which capital controls and prudential policies designed to influence cross-border capital flows (referred to together as “capital flow measures,” or CFMs) could be part of the toolkit to manage large capital inflows.
- Typical intended objectives of CFMs include: stemming currency appreciation; reducing the volume of inflows; changing their composition; providing greater room for maneuver for monetary policy; slowing credit growth; and dampening asset price bubbles.
- Empirical evidence (focused on the past decade) yields mixed results:
  - Capital controls (distinct from prudential CFMs) have little effect on overall flows but can change the composition of flows. In most cases, controls also have little effect on currency appreciation.
  - Little in-depth study exists on the effectiveness of prudential measures in addressing risks from capital inflows.
  - Econometric estimates for Brazil, Colombia, Korea, and Thailand during the 2000s confirm mixed success and indicate that effectiveness of measures decays over time.
  - A review of 13 emerging market economies in the 2000s does not provide unambiguous support for the effectiveness of capital controls and prudential measures. Prudential measures appear to have had more success in stemming credit growth and addressing financial stability concerns than capital controls, but only rarely reduced appreciation pressures and aggregate flows.
- Conclusion: For reasons not yet fully understood, capital controls and related prudential measures achieve stated objectives in some cases but not in others; close attention must be given to choice and design of measures (see Ostry and others (2011)).

### Key takeaways on policy stance
- Macroeconomic policies are appropriate tools in the face of capital inflows, including:
  - allowing the currency to appreciate when undervalued from a multilateral perspective;
  - purchasing foreign exchange reserves if their level is not more than adequate from a precautionary perspective;
  - lowering policy rates (when overheating is not a concern) or tightening fiscal policy to allow space for monetary easing (consistent with inflation objectives).
- Structural policies, improved regulation, and supervision of the financial sector have important roles in absorbing inflows and coping with volatility.
- CFMs comprise:
  - (i) residency-based CFMs (capital controls) that discriminate on residency; and
  - (ii) other CFMs that do not discriminate on residency but aim to influence inflows.
- Precedence should be given to CFMs that do not discriminate on residency.

### Multilateral and empirical considerations
- Multilateral implications must be considered: CFMs can divert capital flows to other countries, with varied effects on economic performance and welfare.
- Effectiveness of CFMs is ultimately an empirical question; measurement is complicated by simultaneity, circumvention, and policy packages.

### Measurement and empirical challenges highlighted
- CFMs are almost always part of broader policy packages; disentangling effects is statistically difficult.
- Circumvention (targeted flows shifting to alternative channels) confounds measurement—e.g., Brazil’s tax on portfolio inflows was followed by lower portfolio flows but increased FDI.
- No generally accepted framework for analyzing effectiveness; simultaneity bias is pervasive.
- High-frequency data and close focus on announcement/effective dates are more likely to detect short-lived effectiveness.
- Effectiveness depends on design, implementation, administrative capacity, legal compliance, coverage of measures, capital market development, and supporting policies.
- Intensity of controls is measured heterogeneously in literature (binary indicators, counts of regulation changes, tax-equivalent intensity); most indices capture de jure not de facto enforcement.

### Meta-findings from literature
- Controls on inflows tend to:
  - have little effect on overall volume of inflows in most econometric studies;
  - increase maturity of inflows (evidence for Brazil, Chile, Colombia, Croatia, Malaysia, Thailand);
  - have no clear effect on currency appreciation in most cases (URR in particular had no or small impact);
  - contribute to maintaining domestic–foreign interest rate differentials (e.g., Chile allowed higher domestic interest rate for 6 to 12 months).
- Magud, Reinhart, and Rogoff (2011) meta-study: capital controls on inflows seem to make monetary policy more independent, alter composition of capital flows, and reduce real exchange rate pressures (controversial); they seem not to reduce volume of net flows (and hence the current account balance).

### Empirics for the 2000s (Baba and Kokenyne)
- Episodes examined: Brazil (foreign exchange tax, 2008), Colombia (URR, 2007–08), Thailand (URR, 2006–08), Korea (extensive outflow liberalization, 2005–08).
- Methodology:
  - Indices track intensity of temporary price-based capital controls and other (more permanent) controls.
  - Determinants of capital flows estimated by GMM; effectiveness assessed using VAR.
  - Objectives assessed: (i) stemming capital flows; (ii) lengthening maturity; (iii) allowing room to raise domestic interest rates; (iv) easing currency appreciation pressures.
- Main econometric findings:
  - Colombia: URR reduced volume of net capital inflows and affected short-term flows, helping lengthen maturity.
  - Thailand: URR affected volume of net capital flows via increasing outflows.
  - Brazil: foreign exchange tax and Korea: outflow liberalization did not have significant impact on volume or composition of inflows.
  - Price-based controls in Brazil and Colombia provided greater room for monetary policy to increase interest rates.
  - Controls or outflow liberalization did not ease appreciation pressure in any of the four countries.
  - Thailand’s general inflow controls (tightened before URR) and outflow liberalization helped maintain monetary policy autonomy.
- Contextual modifiers:
  - Targeting narrow components of flows limits macroeconomic impact (e.g., Colombia measures moderated short-term flows but could not stem appreciation because majority of flows—FDI—were exempt).
  - Well-developed capital markets facilitate circumvention (e.g., Brazil’s sophisticated derivative markets).
  - Supporting policies can increase effectiveness (e.g., liberalizing outflows increased outflows and supported higher domestic interest rates in Thailand).
  - Policy impacts were short-lived; controls best suited to temporary surges and need reinforcement for longer effectiveness, at cost of increasing distortions.

### Tabled GMM evidence (high-level summary from Table 1)
- Periods covered in regressions:
  - Brazil and Korea: January 2000–August 2008.
  - Colombia: January 2004–August 2008.
  - Thailand: 2000: Q1–2008: Q2.
- Regression details:
  - GMM 2SLS estimates with lagged variables as instruments.
  - Values in parentheses are White’s heteroskedasticity consistent standard errors. ** and * indicate significance at the 5 percent and 10 percent level, respectively.
  - Capital flows expressed as a percent of GDP.
  - Regressions include interest rates and business cycles in respective country and in the United States, forward premium, ICRG, VIX, and current account balance. EMBI sovereign spread additionally included for Brazil and Colombia.
- Selected coefficient results (excerpt from Table 1; preserve exact numeric entries as presented):
  - Brazil, Price-based inflow controls (Net Total flows): -0.499 (0.365)
  - Colombia, Price-based inflow controls (Inflow): -0.051 (0.022)** 
  - Thailand, Inflow controls (Short-term flows): -0.390 (1.467)
  - Korea, Outflow controls (Short-term flows Inflow): 1.100 (1.092)
  - (See Table 1 for full matrix of estimates and standard errors.)

### Managing risks—capital controls and prudential policies (13-country VAR analysis)
- Country coverage: Brazil, Colombia, Croatia, India, Korea, Peru, Philippines, Romania, Russia, South Africa, Thailand, Uruguay, Vietnam.
- Data and indices:
  - Four indices track: (i) changes in prudential regulations; (ii) price-based capital controls on inflows; (iii) other capital controls on inflows; (iv) capital controls on outflows.
  - Changes weighted by number of affected types of transactions but not by stringency. Price-based index tracks tax-equivalent rates.
  - VAR estimated with quarterly data 2000: Q1–2008: Q2 (one lag) or monthly January 2000–August 2008 where available.
- Inflow controls (country case findings):
  - Worked in some instances but not others; effects were small, short-lived, and insufficient to reduce appreciation pressures.
  - URR in Colombia (2007–08) and Thailand (2006–08) and administrative controls in Croatia (2004–06) seem to have reduced aggregate net flows.
  - URR in Colombia and Russia (2004–06) and inflow control policies in Croatia and India temporarily lengthened maturity of inflows.
  - Brazil’s tax on foreign exchange portfolio inflows in 2008 allowed a higher interest rate differential for two to three quarters but did not reduce volume of flows, change composition, or stem appreciation pressure.
  - Other capital controls helped curb domestic credit growth in Croatia, Peru, and Philippines.
- Liberalization of outflows:
  - Generally succeeded in increasing capital outflows temporarily.
  - Dampened currency appreciation pressures only in Russia.
  - Did not affect aggregate volume of net flows.
  - Helped stem credit growth in Korea and reduced real estate price increases in South Africa.
  - Relaxing outflow controls contributed to maintaining higher domestic interest rates in the Philippines, Russia, Thailand, and Vietnam and often lengthened maturity of outflows.

*Source: EXECUTIVE SUMMARY, _sdn1114 - EXECUTIVE SUMMARY*

### Appendix III.

### Appendix III.

### Prudential measures: effectiveness and country experiences
- Prudential measures were more successful than capital controls in addressing concerns related to capital inflows in the country sample.
- Prudential measures appear to have been somewhat effective in addressing macroeconomic challenges of capital inflows and mitigating financial stability concerns from rapid credit growth and short-term inflows.
- Specific country outcomes and measures:
  - Croatia and Peru: prudential measures helped ease appreciation pressures; they appear to have reduced net inflows significantly only in Peru. In Croatia, prudential measures are associated with a decrease in capital inflows, but the effect is not significant.
  - Croatia, South Africa, Thailand, Uruguay, and Vietnam: prudential measures provided greater scope for monetary authorities to set domestic interest rates.
  - Croatia (2003–07): speed limits and high liquidity and reserve ratios helped reduce credit growth.
  - Peru (2007–08): tighter loan classification and provisioning requirements and a hike in marginal reserve requirements helped slow credit expansion.
  - Korea (2007–08): tightened prudential rules, including extension of thin capitalization rules on foreign bank branches, to reduce credit growth.
  - India (2007): credit growth decreased following gradual tightening of prudential policies in 2007; effectiveness may have been offset by concurrent liberalization of capital controls.
  - Colombia (2007) and Romania (2003–08): significant strengthening of prudential measures did not stem credit growth.
  - Uruguay: wide-ranging tightening of prudential policies following the 2002–03 banking crisis did not prevent inflow-induced rapid credit expansion that began in late 2006, though it likely reduced credit risk in the banking sector.
- Interaction with macroeconomic policies:
  - Romania (2003–08): prudential measures reduced the share of bank-intermediated flows from abroad, but strong credit growth continued as increased FDI in the banking sector funded lending against an open capital account and macroeconomic policies that did not rein in domestic demand.
  - Romania’s speed limit on credit growth was expressed as a percentage of the bank’s capital and could thus be circumvented by increasing banks’ equity.
- Combining prudential measures with capital inflow controls:
  - India: lowering of the maturity-dependent all-in cost ceiling on external borrowing and of the ceiling on interest rates on nonresidents’ deposits did not noticeably restrain credit growth.
  - Brazil, Colombia, and Thailand: tax and URR measures did not contribute noticeably to restraining credit growth.
  - Philippines; Peru; Croatia: inflow controls and hikes in differentiated reserve requirements and marginal reserve requirements on nonresident liabilities appear to have further dampened credit growth.
- Effects on foreign currency lending:
  - Mixed effectiveness. Stronger prudential measures decreased banks’ lending to residents in foreign currency in some countries (Croatia, Uruguay).
  - Korea (2008): prudential tightening aiming to reduce unhedged foreign currency lending to households did not result in a significant decrease in such lending to residents by local banks.
- Effects on asset prices:
  - Prudential measures usually did little to restrain asset prices.
  - Croatia, India, Romania, Vietnam: prudential measures introduced to rein in stock market or real estate price increases did not prove effective in most cases.
  - Vietnam: gradual tightening of targeted prudential policies beginning in 2005 and intensifying in 2007 contributed to a temporary reduction in the stock price index; portfolio inflows turned negative from 2008: Q1 when securities-related prudential regulations took effect.
- Other financial-stability effects:
  - Brazil, Korea, Peru, Romania: measures appear to have lengthened the maturity of capital inflows, helping reduce maturity mismatches in the banking sector.
  - Colombia and Croatia: prudential measures may have moderated financial stability risks by reducing bank-intermediated capital inflows.
  - Korea (measures introduced in 2009–10, implemented following the period examined): may have contributed to restraining banks’ foreign borrowing, although they did not stem capital inflows overall.
  - Uruguay: composition of inflows shifted from external borrowing to portfolio and FDI inflows, improving maturity structure and reducing financial sector exposure but leaving overheating concerns unaddressed.

### Key conclusions on CFMs (capital flow measures)
- Capital inflow surges pose significant risks: excessive currency appreciation damaging export sectors; credit booms and asset price bubbles that threaten financial stability.
- CFMs encompass capital controls and mainly prudential measures designed to influence inflows.
- Evidence on effectiveness:
  - Mixed evidence; prudential measures in the country sample appear somewhat more successful than capital controls.
  - Both the literature and country reviews indicate these measures can be successful in some cases but not in others; effects are usually not long-lasting.
- Risks of extensive use:
  - Repeated strengthening and expansion of CFMs with stronger enforcement could lead to a heavily controlled foreign exchange and financial system (as in the past for many emerging markets; China and India retain such features to some extent).
  - Overregulation or financial repression risks: much less efficient allocation of savings and lower long-run economic growth.
- Research priorities:
  - (i) Better understand which types of CFMs are effective, and why.
  - (ii) Develop a more reliable framework for assessing the effectiveness of CFMs relative to the distortions and costs they produce.
- Practical challenges:
  - While theoretical progress is feasible, confronting theories with data is difficult due to the large number of variables and the limited number of episodes, implying that policy decisions on CFMs will continue to require considerable judgment.

### Selected numeric and policy details from country table and text
- Croatia: prudential marginal reserve requirements on bank foreign financing (period 2004–08 noted).
- Peru: measures in 2007–08 included tighter loan classification and provisioning and hike in marginal reserve requirements.
- India: tightening of prudential policies in 2007; measures included lowering of maturity-dependent all-in cost ceiling on external borrowing and of the ceiling on interest rates on nonresidents’ deposits.
- Korea: extension of thin capitalization rules on foreign bank branches in 2007–08; 2008 prudential tightening aimed at unhedged foreign currency household lending; measures in 2009–10 implemented after the period examined.
- Romania: speed limit on credit growth expressed as a percentage of the bank’s capital (2003–08).
- Colombia (2007–08): URR of 40 percent on foreign borrowing and portfolio inflows; limits on currency derivative positions of banks (500 percent of capital); earlier URR limited to loans with maturities up to 18 months.
- Thailand (2006–08): URR of 30 percent on foreign currencies sold or exchanged against baht with authorized financial institutions (except for FDI and amounts not exceeding US$20,000); equity investments in listed companies were exempt.
- Malaysia (1994): prohibition on sale of short-term debt securities and money market instruments to nonresidents; non-interest bearing deposit requirement for commercial banks against ringgit funds of foreign banks.
- Brazil (1993–97): explicit tax on capital flows on stock market investments, foreign loans and certain foreign exchange transactions; administrative controls including outright prohibitions or minimum maturity requirements.
- Table notation: (ST) indicates cases where only short-term effects were detected.

*Source: Appendix III, _sdn1114 - Appendix III.*

### Appendix II. Effectiveness of Capital Control and Prudentia

### Appendix II. Effectiveness of Capital Control and Prudential Policies in Selected Emerging Economies in the 2000s

### Effectiveness summary (VAR and related results)
- The table reports “yes” if a shock to the respective policy index finds a statistically significant impact on a target variable at the 5 percent (**) or 10 percent (*) level.
- Reported results indicate if the measures had a statistically significant impact on:
  - decreasing the volume of net flows;
  - increasing long-term inflows or decreasing short term inflows;
  - maintaining the interest rate differential between international and domestic interest rates;
  - reducing the appreciation of the currency; and
  - stemming credit growth.
- In the case of outflow liberalization, reported results indicate the existence of statistically significant impact on short and long term outflows.
- The macroeconomic impact on the total volume of flows, interest rate differentials, exchange rates, and credit growth are evaluated by VAR model assuming these variables as potentially endogenous.
- The impact on the composition of capital flows is estimated in a separate VAR by replacing the total volume of flows with its disaggregated flows.
- Asset prices and foreign exchange loans are further added individually to the benchmark VAR when a country had associated concerns.
- The impact on stock price index was analyzed with a shorter sample period with fewer control variables due to data constraints.

### Country-level empirical findings (selected entries)
- Brazil (2000: M1–2008: M8)
  - Tax: No effect on Volume of flows; No effect on Composition of flows; Yes on Interest rate differential (2-3M**, 4-5M*); No on Currency appreciation; No on Credit growth.
  - Outflow liberalization: No effect on Volume of flows; LT outflows increased (1M**); No effect on Composition of flows; No on Interest rate differential; No on Currency appreciation; No on Credit growth.
  - Prudential measures: No effect on Volume of flows; Yes - LT inflows increased (2M** and 3M*); No on Interest rate differential; No on Currency appreciation; No on Credit growth.
- Colombia (2000: Q1–2008:Q2)
  - URR: Yes (1Q*) on Volume of flows; ST inflows decreased (1Q*); Yes (3-4Q**) on Interest rate differential; No on Currency appreciation; No on Credit growth.
  - Inflow controls: No effects across listed targets.
  - Prudential measures: No effects across listed targets.
- Croatia (2000: Q1–2008: Q2)
  - Inflow controls: Yes (2Q**) on Volume of flows; ST inflows decreased (2Q**); No on Interest rate differential; No on Currency appreciation; Yes (1Q*) on Credit growth; Stock price: No; FX loans: No.
  - Outflow liberalization: No effect on Volume of flows; ST outflows (1Q**) and LT outflows increased (2Q*); No on Interest rate differential; No on Currency appreciation; No on Credit growth; Stock price: No; FX loans: No.
  - Prudential measures: No effect on Volume of flows; Nonbank net flows initially decreased (1Q**) and then increased (2Q**), while net bank flows decreased (1Q*-2Q**); Yes (3Q**) on Composition of flows; Yes (1Q**-2Q*) on Interest rate differential; Yes (4-5Q**) on Currency appreciation; Stock price: No; FX loans: Yes (1-4Q**).
- India (2000: Q1–2008: Q2)
  - Inflow liberalization: No effect on Volume of flows; LT inflow increased (1Q*) and ST inflow decreased (1Q**); No on Interest rate differential; No on Currency appreciation; No, increased (1Q**) on Credit growth; Stock price: No.
  - Outflow liberalization: No effects across listed targets.
  - Prudential measures: No effects across listed targets; Stock price: No.
- Korea (2000: M1–2008: M8)
  - Outflow liberalization: No effect on Volume of flows; LT other inv outflows increased (1M*); ST outflows decreased (1M**); No on Composition of flows; No on Interest rate differential; Yes on Currency appreciation (3-4M*); No on Credit growth.
  - Prudential measures: No on Volume of flows; Yes - ST inflows decreased (2-8M**); No on Composition of flows; No on Interest rate differential; Yes on Currency appreciation (2-10M**); No on Credit growth.
- Peru (2000: Q1–2008: Q2)
  - Inflow controls: No effects across listed targets except Yes (1Q*) on Credit growth (reported as Yes (1Q*)).
  - Outflow liberalization: No effect on Volume of flows; ST outflows decreased (1Q**) then increased (2Q*); No effects otherwise.
  - Prudential measures: Yes (3Q**) on Volume of flows; Yes - ST inflows decreased (3Q**); No on Composition of flows; Yes (3-4Q**) on Interest rate differential; Yes (1Q**) on Currency appreciation; No on Credit growth.
- Philippines (2000: Q1–2008: Q2)
  - Inflow controls: No effects across Volume and Composition; No on Interest rate differential; No on Currency appreciation; Yes (1Q**) on Credit growth.
  - Outflow liberalization: No effect on Volume of flows; LT outflows increased (1Q**); Yes (1Q*) on Composition of flows; No on Interest rate differential; No on Currency appreciation; No on Credit growth.
  - Prudential easing: No effects across listed targets.
- Romania (2000: Q1–2008: Q2)
  - Outflow liberalization: No effect on Volume of flows; ST and LT outflows increased (2Q*); No effects on other targets; Stock price: No.
  - Prudential measures: No on Volume of flows; Yes - LT inflows increased (1Q**) Nonbank other inflows increased (1Q**); No effects on other targets; Stock price: No.
- Russia (2000: Q1–2008: Q2)
  - URR: No on Volume of flows; ST inflows decreased (1Q**) and LT inflows increased (1Q**); No effects on other targets.
  - Outflow liberalization: No on Volume of flows; No on Composition of flows; Yes (2Q*) on Interest rate differential; Yes (1Q*) on Currency appreciation; No on Credit growth.
  - Prudential easing: No effects across listed targets.
- South Africa (2000: Q1–2008: Q2)
  - Outflow liberalization: No on Volume of flows; ST outflows (1Q**) increased; No effects on other targets; House price: Yes (2Q**-3Q*).
  - Prudential measures: No on Volume of flows; Yes - LT inflows increased (1Q**); Yes (1-4Q**) on Composition of flows; No on Interest rate differential; No on Currency appreciation; No on Credit growth; House price: No.
- Thailand (2000: Q1–2008: Q2)
  - URR: Yes (1Q*) on Volume of flows; No on Composition of flows; No on Interest rate differential; No on Currency appreciation; No on Credit growth.
  - Inflow control: No on Volume of flows; No on Composition; Yes (1-2Q**) on Interest rate differential; No on other targets.
  - Outflow liberalization: No on Volume of flows; LT outflows increased (1Q**); Yes (2Q** and 3Q*) on Composition of flows; No on Interest rate differential; No on Currency appreciation; Results of GMM analysis indicate outflow liberalization had significant impact (at the 10 percent level) on the volume of net flows by increasing outflows in Thailand.
  - Prudential measures: No on Volume of flows; No on Composition of flows; Yes (2-3Q*) on Interest rate differential; No effects on other targets.
- Uruguay (2000: Q1–2008: Q2)
  - Inflow controls: No effects across listed targets.
  - Outflow liberalization: No on Volume of flows; LT outflow increased (1Q**); No effects on other targets.
  - Prudential measures: No on Volume of flows; Yes - LT inflows increased (1Q**); Yes (1Q*) on Composition of flows; No effects on other targets; De-dollarization: Yes (1Q**).
- Vietnam (2000: Q1–2008: Q2)
  - Inflow controls: No effects across listed targets; Stock price: No/6.
  - Outflow liberalization: No on Volume of flows; ST outflows increased (1Q**); No effects on other targets.
  - Prudential measures: No on Volume of flows; No on Composition of flows; Yes (1-2Q**) on Interest rate differential; No effects on other targets; Stock price: Yes (2Q**)6/.

### Selected capital-account management measures (summary of policy actions)
- Brazil (2000: M1–2008: M8)
  - Tax: IOF tax raised to 1.5 percent on March 17, 2008 on entry of foreign funds; extended in May to similar transactions made by simultaneous operations; exemptions applied to equities, equities derivatives, public offerings, subscription of shares; 1.5 percent tax eliminated in October 2008.
  - Outflow liberalization: Limits on employee stock option programs and on FDI by nonfinancial private enterprises and approval requirement on certain personal capital transactions lifted in March 2005; controls on transfers abroad abolished in September 2006.
  - Prudential measures: Limit on banks’ foreign exchange exposure increased to 60 percent in July 2006 and reduced back to 30 percent in December 2006; regulations on investment abroad by mutual funds made subject to prudential rules; banks’ capital requirement for foreign exchange exposure raised to 100 percent from 50 percent; countercyclical/time-varying capital requirements introduced in 2007.
- Colombia (2000: Q1–2008: Q2)
  - URR: Six-month 40 percent URR on May 6, 2007 for specified instruments; foreign trade financing subject to 12-month deposit of 11 percent in pesos or deposit of 20 percent in U.S. dollars; penalties for early withdrawal adjusted; URR on portfolio inflows raised from 40 percent to 50 percent in May 2008; URR eliminated on October 9, 2008.
  - Inflow controls: Deposit requirement on external financing lifted in May 2000; nonresidents’ purchase of fixed income securities limited to 20 percent of issuance in June; issuance of securities index derivatives permitted in 2002; one-year minimum holding period on nonresidents’ portfolio investments from December 2004 through June 2006; minimum stay of two years imposed on FDI in May 2008.
  - Prudential measures: Differentiated remunerated reserve requirements established in 2000; limits on banks’ leverage introduced in 2001; banks’ gross exposure in FX derivative market limited to 500 percent of capital in May 2007 and increased to 550 percent in May 2008; differentiated unremunerated marginal reserve requirements levied in May 2007 and increased later that year; remunerated reserve requirement leveled at 8.3 percent and remuneration reduced in July 2007; dynamic provisioning for commercial loans introduced in July 2007 and extended to consumer loans in 2008; reserve requirements on accounts and debt securities further increased in June and October 2008; banks’ profit distribution limited in October 2008.
- Croatia (2000: Q1–2008: Q2)
  - Inflow controls: Commercial banks’ new foreign borrowing subject to reserve requirement of 24 percent on July 1, 2004; second-tier marginal reserve requirement of 15 percent and third-tier of 55 percent introduced in January 2006 and extended in July 2006; marginal reserve requirement lifted in October 2008.
  - Outflow liberalization: Legal persons permitted to maintain accounts with banks abroad and purchase foreign exchange abroad in 2002; residents allowed as of June 18, 2003 to purchase certain securities and real estate abroad; portfolio investments fully liberalized in 2006; limits for pension funds’ foreign investments increased and eliminated for certain securities in 2007.
  - Prudential measures: Reserve requirements on deposits in domestic and foreign currency unified at 23.5 percent and limit on banks’ open FX position reduced to 25 percent; reserve ratios reduced in several steps with reserve requirements reaching 17 percent in 2006; speed limit on banks’ lending growth exceeding 4 percent per quarter implemented from January 15, 2003 through January 2004; subsequent speed limits and monthly/annual credit limits implemented in 2007; liquidity ratio on FX assets and liabilities reduced to 32 percent in February 2005 and expanded in October 2006; liquidity ratio further reduced in 2008.
- India (2000: Q1–2008: Q2)
  - Inflow liberalization: Sectoral restrictions on inward FDI relaxed in 2001–08; limits on prepayment of loans to residents increased in 2001 and eliminated in 2003; limits on foreign institutional investors’ investments increased from US$1.75 billion to US$5 billion in government securities and from US$500 million to US$3 billion in corporate debt in 2004–08; various other liberalizations of derivatives access, external borrowing rules, holding periods, and interest rate ceilings across 2003–2008; interest rates on nonresidents’ rupee term deposits and foreign currency deposits reduced in 2007; 10-year holding period for real estate investments eliminated in 2006.
  - Outflow liberalization: Limits on investments in employee stock option plans increased in 2001 and lifted in 2004; banks allowed to invest abroad and offer foreign currency swaps in 2002; limits on mutual funds’ equity investments abroad and residents’ capital transactions increased over 2003–07; approval requirement on residents’ transfer of shares to nonresidents removed in 2004; external borrowing for FDI abroad allowed in 2004; exporters allowed to open accounts abroad in 2007.
  - Prudential measures: Rules on residents’ forward and option contracts relaxed in 2003 and 2007; cash reserve ratio gradually increased to 7.5 percent from January 2004 through November 2007; standard provisioning tightened in several steps in 2005–07; risk weights on various loans increased in 2006 and adjusted in 2007; risk weights on housing loans linked to amount and LTV in 2008; banks permitted to lend in foreign currency up to specific limits in 2004.
- Korea (2000: M1–2008: M8)
  - Outflow liberalization: Limits on deposits abroad eliminated; limit on lending to nonresidents increased; residents’ personal capital transfers liberalized in 2001; ceiling on commercial credits increased in 2002; limits on individual FDI and real estate purchases raised and then eliminated by March 2006; repatriation rules eased and approval requirements changed to notification in January 2006; threshold for prior notification of won-denominated loans to nonresidents raised to W 10 billion in 2006 and to W 30 billion in 2007; further liberalizations in 2007–08.
  - Prudential measures: Restrictions on lending locally in foreign exchange were eliminated (text truncated in source).

### Other methodological note
- GMM analysis on the impact of capital controls on the volume of capital flows in Brazil, Colombia, Korea, and Thailand confirms the VAR results and indicates outflow liberalization had significant impact (at the 10 percent level) on the volume of net flows by increasing outflows in Thailand.
- Dollarization is measured by the share of foreign currency credits in total private credit by private banks.

*Source: Appendix II and Appendix III, _sdn1114 - Appendix II. Effectiveness of Capital Control and Prudential Policies in Selected Emerging Economies in the 2000s_*

### 2001. Banks’ liquidity

### 2001. Banks’ liquidity

### Overview: general tightening and measures (2000–2008)
- Banks’ liquidity requirements were tightened in 2000–01 and in 2004.
- The limit on insurance companies’ investments in foreign currency denominated assets was increased March 2005.
- Banks’ net open foreign exchange position was raised from 30 percent to 50 percent in 2006.
- Thin capitalization rules were extended to foreign bank branches, limiting the tax deductibility of interest on borrowing from parent banks to three times the capital from six times the capital in August 2007.
- Limits on the use of foreign-currency-denominated loans were introduced January 28, 2008.

### Peru (2000: Q1–2008: Q2) — Currency appreciation; Credit boom
- Inflow controls:
  - The limit on the overall short position in foreign currency was increased to 5 percent of net worth in 2003 and to 10 percent in 2005.
  - Reserve requirements were extended to increases in the foreign liabilities of financial institutions in 2008.
  - The registration of transferring certificates of deposit with nonresidents was made subject to a commission in January 2008.
  - The marginal reserve requirement for domestic currency deposits was increased in steps to 25 percent for residents and 120 percent for nonresidents.
  - An additional reserve requirement was introduced on bank liabilities in domestic currency with nonresident financial institutions in early 2008.
  - A 9 percent reserve requirement on foreign long-term credit lines was established in July 2008.
- Outflow liberalization:
  - The limit on pension funds’ investments in foreign securities was gradually increased from 9 percent to 30 percent from 2004 through May 2008.
- Prudential measures:
  - The average reserve requirement on foreign exchange deposits was reduced by 3 percentage points, and the mandatory minimum reserve requirement was lowered to 6 percent from 7 percent in 2004.
  - Reserve requirements were increased from February 2008.
  - The minimum unremunerated reserve requirement for both domestic and foreign currencies was increased from 6 percent to 9 percent by November 2008 and reduced to 7.5 percent a month later.
  - The marginal reserve requirement on banks’ foreign currency liabilities was raised from 20 percent in 2004 to 50 percent in September 2008.
  - The marginal reserve requirement for domestic currency deposits of residents and nonresidents was increased from zero to 15 percent in February 2008.
  - The rate of remuneration on the reserve requirements in foreign currency was gradually increased from 2005 to 2007.
  - Banks were required to make additional provisions if “unhedged” borrowers were not properly identified or adequate provisions had not been already established for foreign currency loans in 2006.
  - Banks were required to consider in their lending decisions the overall exposure of borrowers with the entire financial system.
  - Prudential limits were set on government securities in pension funds portfolios in May 2008.

### Philippines (2000: Q1–2008: Q2) — Currency appreciation; Credit boom
- Inflow controls:
  - Conditions for investments in domestic banks were eased in 2000 and for short-term forwards on government securities in 2002.
  - The maturity of foreign exchange forward and swap contracts was limited to the maturity of the underlying foreign exchange obligation or to the approximate due date or settlement of the foreign exchange exposure in 2003.
  - Effective May 2007, nonresidents may not acquire 100 percent of voting stock of domestic banks.
  - The registration requirement was lifted for certain guarantees of nonresidents, and rules on borrowing abroad were relaxed in 2008.
- Outflow liberalization:
  - The limit on banks’ long foreign exchange position was reduced, and the maturity of foreign exchange forward and swap contracts was limited to the maturity of the underlying foreign exchange obligation or to the approximate due date or settlement of the foreign exchange exposure in 2003.
  - Investment in a bank subsidiary abroad was made subject to prior approval by the central bank.
  - The limit on residents’ FDI and portfolio investments abroad was increased to US$12 million per investor per year in 2007 and to US$30 million in 2008. Institutional investors’ investments were subject to the same limit.
- Prudential easing:
  - Nonfinancial corporations were required to report monthly their purchases, sales, and daily foreign exchange positions in 2000.
  - The liquidity reserve requirement on peso deposits was reduced to 7 percent in 2002 and gradually increased to 11 percent in 2003–06.
  - Foreign exchange banking units of domestic banks were allowed to lend under certain conditions to resident banking units in foreign exchange in 2002.
  - Rules on investments in foreign exchange structured products by foreign currency units of domestic banks were relaxed in 2005, and conditions for the establishment and operations of foreign currency units were eased in 2006–07.
  - Banks’ net open foreign exchange position was set at the lower of 20 percent of their unimpaired capital or US$50 million in April 2007.

### Romania (2000: Q1–2008: Q2) — Credit boom (unhedged FX lending); Currency appreciation; Real estate boom
- Outflow liberalization:
  - Controls on the purchase of real estate abroad, on personal capital transfers, and on banks’ long-term lending to nonresidents were lifted on December 3, 2001.
  - Residents’ portfolio investments and lending abroad were liberalized in 2003.
  - Nonresidents were allowed to issue or sell securities in January 2004.
  - Controls on residents’ account and derivatives transactions were lifted in 2005.
- Prudential measures:
  - The reserve requirements for lei and foreign currency deposits were unified at 22 percent in April and differentiated again in November 2002.
  - A maturity dependent reserve requirement was introduced on foreign currency liabilities, extended to all foreign currency deposits and gradually raised to 40 percent in 2004–06.
  - Loan classification and provisioning rules were tightened in 2003.
  - Prudential norms on consumer and mortgage loans were introduced in 2004 (for example, limit on the monthly payment-to-net-income ratio of 30 percent, mandatory 25 percent down payment or a co-signer/insurance for consumer loans and a co-signer, insurance, or collateral for personal loans, maximum payment-to-net-income ratio of 35 percent for mortgage credit, and a maximum loan-to-value ratio of 75 percent) and further tightened in 2005.
  - A speed limit of 300 percent of the bank’s own funds was implemented on bank lending in foreign currency to unhedged borrowers from September 2005 through January 2007.
  - Provisioning requirements on foreign exchange credits to unhedged borrowers were further tightened in 2008.

### Russia (2000: Q1–2008: Q2) — Post-crisis liquidity shortage (2004); Credit boom (2006-07)
- URR:
  - Differentiated URRs were implemented from August 1, 2004, through July 1, 2006: 20 percent for 365 calendar days on nonresidents’ investments in government securities and 3 percent for 365 calendar days on nonresidents’ other portfolio investments and lending to residents.
  - A URR of 50 percent for 15 calendar days was implemented from August 1, 2004, through July 1, 2006, on residents’ portfolio investments abroad and lending to nonresidents except long-term loans.
- Outflow liberalization:
  - The limit on FDI in CIS countries was increased to US$10 million, and on resident individuals’ portfolio investments to US$75,000, in 2001.
  - Foreign exchange lending to residents by local banks was allowed in September 2001.
  - Rules on residents’ account operations abroad were gradually relaxed from 2001 and eliminated in 2007.
  - The 1 percent tax on purchases by resident natural persons of foreign currencies and foreign payments instruments was lifted in 2003.
  - Residents were required to open accounts with local banks for certain capital transactions with nonresidents in 2004, and controls on purchasing real estate abroad were lifted.
- Prudential easing:
  - The reserve requirement for ruble liabilities to legal entities and for foreign currency liabilities to legal entities and individuals was gradually reduced to 3.5 percent in 2004.
  - The required reserve ratios were further decreased from 4–4.5 percent to 3–3.5 percent for all types of obligations in October 2007 and in 2008.

### South Africa (2000: Q1–2008: Q2) — Currency appreciation; Asset price boom (Real estate prices)
- Outflow liberalization:
  - The limit on institutional investors in foreign investments was increased to 15 percent of all assets and foreign currency transfers were allowed up to 10 percent of the net inflow of funds in 2001.
  - The asset swap requirement was eliminated in 2002, and the limit on foreign investments was gradually increased through 2008.
  - Institutional investors were allowed to invest in rand-denominated instruments issued abroad in 2008.
  - The limit on corporates’ outward FDI was gradually raised from R 250 million in 2001 and was eliminated in 2004.
  - Personal capital transfers and lending abroad were allowed up to R 30,000 in 2003; the limit was further increased to R 500,000 in 2008.
  - The listing of foreign securities in the securities exchanges was allowed in 2004.
  - The ceiling on residents’ investments abroad was increased to R 2 million in 2006.
- Prudential measures:
  - Domestic lending rules were tightened in June 2007.
  - Rules on haircuts applied to eligible collateral were introduced, and banks were made subject to an additional capital charge to take into account concentration risk and interconnectedness in 2008.
  - Long-term insurers’ policy underwriting business was increased to 20 percent, and the investment-linked business was set at 30 percent of total retail assets under management in 2008.

### Thailand (2000: Q1–2008: Q2) — Currency appreciation
- URR:
  - A one-year URR of 30 percent was put in place for capital inflows, except for FDI and amounts not exceeding US$20,000, on December 19, 2006.
  - Early repatriation was subject to a refund of only two-thirds of the URR.
  - Equity investments in the stock exchange were exempted on December 22, 2006. Further exemptions were determined in early 2007.
  - Certain investment in property funds and long-term foreign borrowing not exceeding US$1 million were made exempt from the URR in December 2007.
  - The URR was lifted on March 3, 2008.
- Inflow control:
  - Short-term borrowing from nonresidents was limited to B 50 million, and a limit of B 300 million was introduced on nonresidents’ accounts in 2003.
  - Nonresidents’ accounts carried no interest except for fixed accounts with maturities of at least six months.
  - Banks were not allowed to issue or sell bills of exchange in baht of any maturity to nonresidents from November 15, 2006.
  - Sell-and-buy-back transactions of debt securities and certain foreign exchange or account transactions with government debt securities were prohibited on December 4, 2006.
  - A B 50 million limit was extended to banks’ borrowing of baht from nonresidents with maturities of less than six months.
  - The limit on banks’ borrowing or transactions comparable to borrowing from nonresidents without underlying trade or investment in Thailand was decreased to B 10 million March 3, 2008.
- Outflow liberalization:
  - Investments in employee stock option plans, and real estate up to a limit and lending to affiliated companies was allowed in 2002 and an aggregate limit was established on foreign investments of institutional investors in 2003.
  - Foreign companies were allowed to issue baht-denominated bonds in 2006.
  - Significant outflow liberalization started in 2007 by gradually increasing investment limits in Thai persons’ foreign affiliates: the limit was set at US$50 million in January 2007 and increased to US$100 million in February 2008.
  - The ceiling on institutional investors’ foreign investments was increased to US$50 million in January 2007.
  - The deadline for the repatriation of foreign currency proceeds was extended from 120 days to 360 days in early 2007.
  - In June 2007, the limit for real estate purchase and other personal remittances abroad was increased to US$1 million, and listed companies were allowed to make outward FDI up to US$100 million.
  - The limits on lending abroad were increased to US$100 million and its scope expanded in February 2008 and on real estate purchase to US$5 million.
  - In March 2008, banks were allowed to make swap transactions with nonresidents of up to B 300 million and portfolio investments were allowed through private funds or securities companies.
- Prudential measures:
  - Open position limits in accordance with Basel I were introduced in 2002.
  - The loan-to-value ratio was limited to 70 percent on high-value real estate in 2003.
  - Regulation on credit card debt was tightened in 2004.
  - A personal loan lending limit of five times of average monthly income was introduced in 2005.
  - Asset classification and provisioning regulations were tightened in 2006 and loan loss provisioning guidelines were aligned with IAS in 2007.

### Uruguay (2000: Q1–2008: Q2) — Currency appreciation; Dollarization; Credit boom; Post-crisis, precautionary
- Inflow controls:
  - Liquidity requirements on nonresident deposits were tightened in 2003, and limits on exposure to foreign banks were introduced in 2006.
- Outflow liberalization:
  - The limit on insurance companies’ foreign investment portfolio was raised to 30 percent in 2003.
  - The 2 percent tax on public sector institutions’ purchases of foreign exchange was abolished in 2007.
- Prudential measures:
  - Dynamic provisioning requirement of up to 3 percent of total loans was introduced in September 2001.
  - Currency and maturity dependent reserve requirements were increased except on foreign currency deposits exceeding 180 days in 2002.
  - Private pension funds were required to gradually increase their foreign currency assets in 2002.
  - The reserve requirement on local currency deposits was gradually reduced and the reserve requirement on foreign currency deposits increased in 2003.
  - Limits on credit concentration exposures and loan classification rules were tightened in 2003.
  - Pension funds’ investments in foreign currency denominated assets were made subject to a ceiling in 2004.
  - Limits on country risk and interbank exposure were introduced, and different risk weights for financial instruments denominated in local and foreign currency were established in June 2005.
  - Loan-loss provisioning and loan classification rules were tightened in 2006.
  - Liquidity requirements were separated from reserve requirements in 2007.
  - Residency based reserve requirements were implemented in 2008, and the rates were increased on short-term maturities.
  - Implementation of integrated risk management system in local banks was required in July 2008.

### Vietnam (2000: Q1–2008: Q2) — Currency appreciation; Asset price boom (Stock market boom); Credit boom
- Inflow controls:
  - State-owned enterprises were allowed to borrow from abroad without prior approval in 2005.
  - All sales or issues of securities by residents abroad were made subject to approval in 2007, except bonds, on which rules on foreign borrowing applied.
  - Foreign banks were allowed to establish subsidiaries in Vietnam in June 2007.
- Outflow liberalization:
  - Rules on residents’ portfolio investments were eased on January 27, 2007.
- Prudential measures:
  - The reserve requirement on short-term foreign currency deposits was gradually lowered from 12 percent to 4 percent in 2002–03 and increased to 5 percent in 2004, and the reserve requirement on local currency deposits was decreased in 2003.
  - The maximum open position limits on individual currencies were removed in 2002.
  - Restrictions on the use of foreign exchange loans were introduced in 2003 and further tightened in 2008.
  - The rules on lending to purchase securities and on the operation of securities companies and investment funds were tightened January 19, 2007.
  - Banks’ total securities-related credit exposures were limited to 3 percent of their loan portfolio in May 2007 and to 20 percent of the equity in 2008.

*Source: _sdn1114 - 2001. Banks’ liquidity*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2011/_sdn1114.pdf_