Washington, D.C., December 1, 2014 - Cross-border capital flows among mature economies have plummeted since the financial crisis and remain at lower levels putting global growth prospects at risk according to a new report on financial globalization by the Institute of International Finance.
"Financial globalization has helped lift hundreds of millions of people out of poverty, especially in emerging market countries," said Tim Adams, president and CEO of the IIF. "Since the financial crisis, we've seen a retrenchment of cross border flows and more fragmentation of financial markets, which jeopardizes the long-term outlook for global growth. The challenge now is to ensure that financial globalization regains momentum. Meeting this challenge will require a conscious decision by policymakers to shift back to global approaches in regulation, regaining consistency and convergence of local rules, and to encourage development of resilient market frameworks for investment in areas like infrastructure finance."
The report "Financial Globalization: Maximizing Benefits, Containing Risks" noted that since 2008 there has been a pronounced break in the previous strong trend towards financial globalization.
The IIF said that global capital flows were $8.5 trillion in 2007, but the annual average over the past three years has been just $3 trillion. Nearly the entire decline is accounted for by lower flows among mature economies, particularly interbank flows.
Capital flows to emerging markets have been better sustained, at around $1 trillion per' year, the report said. Emerging market flows, however, have declined markedly in relation to GDP.
The report noted that two factors are largely responsible for the abrupt shift in direction of financial globalization since the crisis: the reversal of a long credit boom which will eventually run its course and global regulatory reforms aimed at ensuring a safer and more secure global financial system.
The IIF supports the regulatory reform agenda put forward by the G20, but reiterated the concern about the current shift towards financial fragmentation on national lines through ring fencing and similar policies.' The report highlighted the importance of avoiding unintended consequences for international financing flows as the new global regulatory framework is put in place by individual jurisdictions.
The report noted the G20 and the FSB provide the best institutional framework to achieve greater coordination and harmonization. Current efforts include the strengthening of a peer review framework that would monitor and assess the extent to which national authorities are following commitments to implement internationally agreed polices, something that is essential to build the type of mutual trust that is necessary to prevent excessively unilateral and extraterritorial approaches to regulation.
The report also noted that emerging market countries should focus on attracting sustainable capital and investment by continuing to improve their business and economic climates, rather than taking short-term measures to limit flows with damaging long-term consequences.
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The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. Within its membership IIF counts commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. For more information visit www.iif.com.'