IMF Working Papers

Capital Flows: The Role of Bank and Nonbank Balance Sheets

Author/Editor:

Yuko Hashimoto ; Signe Krogstrup

Publication Date:

April 29, 2019

Electronic Access:

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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.

Series:

Working Paper No. 2019/085

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)