Hyun Song Shin of the Bank for International Settlements gave a thoughtful speech today at the International Monetary Fund’s spring meeting. There’s a lot in there, but the bit we want to highlight is his argument that the recent fad for “capital controls” is dumb.
Large inflows of money from abroad can be deeply destructive, but they don’t have to be. What matters is the form those flows take:
Yes, the 2008 financial crisis was in large part a cross-border phenomenon, but focusing on capital flows confuses the symptoms (capital flows) from the underlying causes (excess leverage and funding risk). If the problem is excessive bank leverage and funding risk, then address these risks directly with traditional microprudential, or regulatory tools. Applying these microprudential tools with macroprudential intent, or the intent to work on the whole financial system, is what makes them part of a macroprudential framework.
Shin expanded on this by addressing a discussion we had with him and other luminaries at last year’s Camp Alphaville FT Festival of Finance, and our subsequent post on the case of Spain. We argued that if any country in the world would have benefited from capital controls, it would have been Spain. The implication is that if Spain didn’t need capital controls, no country ever would.
To recap briefly:
After the creation of the euro, Spain quickly became the recipient of one of the biggest net capital flows of all time. Even worse, more than all of those net flows were debt:
As we noted in our post from last summer, if you accept the arguments for regulating cross-border financial movements in any situation, you have to do the same for Spain. The country raised bank capital requirements and ran large fiscal surpluses, but none of that was enough. Plus,