2014.11.27 - naec seminar_currency-based measures codes
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CURRENCY-BASED RESTRICTIONS-
A NEW CHALLENGE FOR FINANCIAL
OPENNESS?
New Approaches to Economic Challenges
NAEC Seminar Series, 27 November 2014
Pierre Poret (Acting Deputy Director)
Angel Palerm (Lead Manager)
Annamaria de Crescenzio (Economist)
Anne-Christelle Ott (Junior Economist)
OECD Directorate for Financial and Enterprise Affairs
2
Outline
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital Movements
Understanding currency-based measures
3
Why look at currency-based measures directed
at banks?
• Unconventional monetary policy (quantitative easing) in the US, Euro area and Japan
• Some emerging economies (EMEs) face financial stability concerns due to capital flows, often channeled through banks
• A number of countries have recently enacted capital management measures directed at banks, including currency-based measures, whose intent can be:
macro-prudential reduce systemic risk
capital flow management manage the volume or structure of capital flows
Other (micro-prudential, monetary policy)
• G20 Coherent Conclusions for the Management of Capital Flows (2011): “Country-specific circumstances have to be taken into account when choosing the overall policy approach to deal with capital flows (…) An appropriate macro-prudential framework should also be considered”.
4
Outline
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital Movements
Understanding currency-based measures
Currency-based measures discriminate on
the basis of the currency of an operation
5
Currency-based
measures
Discriminate on the basis of
currency
E.g. In country X, residents and
non-residents cannot open
bank accounts in foreign currency
Residency-based
measures
Discriminate on the basis of
residency
E.g. In country X, non-
residents cannot open bank accounts
Currency-based measures may also have implications on capital flow management
Two datasets were built to analyse currency-
based measures between 2005 and 2013
2005 stocktaking database
Database of changes from 2005 to 2013
• Introduction of new measures• Tightening or easing adjustments of
existing measures• Removal of measures
• An OECD survey to delegations• The IMF Annual Report on Exchange Arrangements
and Exchange Restrictions (AREAER)• Correspondence with delegations
6
49 Countries in the sample:• 34 OECD• 8 non-OECD G20 countries• 7 non-OECD non-G20 countries
7
Measures were classified based on a number
of criteria
Example of criteria Options
The capital flows potentially managed by the measures
• Inflows• Outflows• The net (inflows – outflows)
The “class” of measures
• Measures on banks’ assets• Measures on banks’ liabilities• Measures on banks’ net positions• Other (including measures on derivatives)
Whether the measure adjusts a previous measure
• No (it is added or removed)• Yes (it is adjusting an existing measure)
Whether the measure “eases” or “tightens” the restriction on the basis of currency
• Easing• Tightening
The self-declared intent of the measure
• Macro-prudential• Capital flow management
8
The databases contribute to understanding the
use of currency-based measures
• All adjustments in measures are recorded
• Information at highly disaggregated level
• Look at all sections of IMF’s AREAER
• Cover post-crisis period
• Previous works in the area, include:
• Chinn and Ito, (2006 then updated): does not record adjustments in measures, compilation of a final index of overall capital account restrictiveness.
• Quinn et al. (2009): does not cover adjustments in measures; ends in 2005.
• Ostry et al., (2012): indices of FX-related prudential measures based on specific sections of AREAER.
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Outline
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital Movements
Understanding currency-based measures
In 2005, EMEs had more currency-based
measures in place
10
2005 stocktaking
Source: OECD (2014).
8
7 7
6 6
5 5
4 4
3 3 3 3
2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1 11.7
3.6
3.9
0
1
2
3
4
5
6
7
8
Number of currency-based measure per country, 2005
Number of measures Average number of measures per country
Average: OECD members Average: Non-OECD G20
Average: non-OECD non-G20
Limits on the net FX position of banks were
most common
11Source: OECD (2014).
2005 stocktaking
27
13
8
8
7
6
3
3
3
1
1
1
1
1
1
0 5 10 15 20 25 30
Limit on the net FX position
Differentiated reserve requirement
Rules on FX accounts
Measure limiting lending in FX
Measure limiting trading in FX derivatives
Liquidity matching requirement
Rules on domestic currency accounts
Measure limiting lending in domestic currency to non-…
Measure limiting FX liabilities
Measure limiting investment in FX securities
Capital requirement on the net FX position
Reserve requirement on the net FX position
Limit on the FX cash position
Measure limiting domestic currency assets abroad
Limit on sureties, guarantees and financial back-up facilities
Categories of measures in force in 2005
12
OECD countries were more prone to having
measures on nets
10
1
20
16
5
8
13
108
0
5
10
15
20
25
Inflows Outflows Net
Measures by types of capital flows managed, 2005
OECD Non-OECD G20 Non-OECD non-G20
2005 stocktaking
13
From 2005-2013, easing actions peaked pre-
crisis while tightening actions peaked post-crisis
Changes, 2005-13
2005 2006 2007 2008 2009 2010 2011 2012 2013
Easing adjustments 4 4 6 11 4 4 4 6 5
Easing new measures 6 6 7 3 2 5 2 1 3
Tightening adjustments -2 -2 -3 -3 -4 -10 -7 -3 -9
Tightening new measures 0 -2 -6 -3 -4 -8 -6 -2 -3
20
15
10
5
0
5
10
15
20
Changes on currency-based measures, 2005-2013
Adjustments account for over half of actions for both easing and tightening actions
Source: OECD, (2014).
14
A few OECD countries actively used currency-
based measures
• 9 OECD countries increased currency-based restrictions overall
• Non-OECD non-G20 economies liberalised significantly, in particular by adjusting currency-based measures
49
1921
26
7
36
0
10
20
30
40
50
60
Tighteningactions, OECD
Easing actions,OECD
Tighteningactions, non-OECD G20
Easing actions,non-OECD
G20
Tighteningactions, nonOECD non-
G20
Easing actions,non OECDnon-G20
Tightening and easing measures, 2005-2013
Total Adjustments
Measures taken by:
13 OECD countries (out of 34)
7 non-OECD G20 countries (all but Saudi Arabia)
All 7 Non-OECD non G20 countries
Source: OECD, (2014).
Changes, 2005-13
15
Tightening actions on inflows were most
frequent
• Inflows were targeted most by both new measures and adjustments
• Actions on nets were more frequently adjustments than new measures
• Outflows were relatively eased most, followed by nets. Inflows were relatively least eased.
Source: OECD, (2014).
54 54
19
24
1720
0
10
20
30
40
50
60
Inflows,tightening
Inflows, easing Outflows,tightening
Outflows, easing Net, tightening Net, easing
Measures by type of capital flow managed, 2005-2013
Total Adjusments
Changes, 2005-13
16
Measures on liabilities were most frequently
tightened, but also most frequently removed
• The large majority of actions have a self-declared macro-prudential intent
• But few tightening actions were taken on traditional prudential rules that tend to focus on net positions (easing of limits on the net FX position of banks account for 23% of easing adjustments and only 7% of tightening adjustments)
2218
29
34
14
19
12 12
0
5
10
15
20
25
30
35
40
Measures onassets,
tightening
Measures onassets, easing
Measures onliabilities,tightening
Measures onliabilities,
easing
Measures onnet positions,
tightening
Measures onnet positions,
easing
Othermeasures(including
derivatives),tightening
Othermeasuresincluding
derivatives),easing
Measures by class, 2005-2013
Total Adjustments
Source: OECD, (2014).
Changes, 2005-13
17
Most actions focused on reserve
requirements and on limiting lending in FX
Source: OECD, (2014).
-20 -15 -10 -5 0 5 10 15 20
Differentiated reserve requirement
Measure limiting lending in FX
Limit on the net FX position
Measure limiting trading in FX derivatives
Rules on FX accounts
Rules on domestic currency accounts
Maturity requirement
Liquidity matching requirement
Capital requirement on the net FX position
Measure limiting lending in domestic currency
Limits on derivatives position
Regulation of FX assets
Limits on derivatives
Measure limiting FX liabilities
Levy on FX derivatives
Actions by categories, 2005-2013
Easing new measures Easing adjustments Tightening new measures Tightening adjustments
Changes, 2005-13
• 3 Asian economies, Malaysia , the Philippines and Thailand, liberalised significantly with respectively 13, 8 and 11 easing actions.
• Turkey was active; the country made 23 adjustments to its currency-based measures but did not increase regulation overall
• Iceland and Korea enacted a number of new currency-based regulations, especially post-crisis
• A number of European countries have regulated FX lending in line with the European Stability Board’s recommendations
18
Some trends have emerged
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Outline
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital Movements
Understanding currency-based measures
Countries unable to borrow abroad in domestic
currency used more measures on banks’ FX liabilities
20
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
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Original Sin Index, average 2005-2013
Countries using measures on FX liabilitiesCountries not using measures on FX liabilities
Original sin indexdebt securities issues by country I in currency I / total debt securities issued by country I
Source: OECD calculations based on BIS 2014 data on international debt securities.
A reversal in financial integration occurred post-crisis,
particularly in countries using measures on FX liabilities
(S-I) correlations are used as indicators of financial openness.
Source: OECD calculations, 2014
• For all groups of countries, except China and India, S-I correlations increased in the 1990’s capital mobility and integration increased
• For these groups, S-I correlations decreased after the 2008 financial crisis reversal in financial integration
• The reversal is particularly notable for the group of countries that use measures on FX liabilities.
21
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
199
5 Q
2-0
0 Q
1
199
6 Q
1-0
0 Q
4
199
6 Q
4-0
1 Q
3
199
7 Q
3-0
2 Q
2
199
8 Q
2-0
3 Q
1
199
9 Q
1-0
3 Q
4
199
9 Q
4-0
4 Q
3
20
00
Q3
-05
Q2
20
01
Q2
-06
Q1
20
02
Q1-
06
Q4
20
02
Q4
-07
Q3
20
03
Q3
-08
Q2
20
04
Q2
-09
Q1
20
05
Q1-
09
Q4
20
05
Q4
-10
Q3
20
06
Q3
-11
Q2
20
07
Q2
-12
Q1
20
08
Q1-
12 Q
4
20
08
Q4
-13
Q3
20
09
Q3
-14
Q2
Saving-Investment Correlations, 5-year rolling window
Countries with original sin and measures on FX liabilities
China & India
Countries with original sin and no measures on FX liabilities
22
Outline
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital Movements
Understanding currency-based measures
• The only multilaterally-binding legal instrument
• Committing adherents to progressive liberalisation
• Subject to reservations
• With possibilities of reintroducing restrictions
• A forum for transparency and accountability, mutual understanding, and peer scrutiny
23
OECD Code of Liberalisation of Capital
Movements
• Does and should the Code apply to currency-based restrictions?
• Does it provide adequate flexibility?
• Yes to both questions, according to the large majority of countries that responded to a recent OECD survey
• But…
No full consensus yet on interpretation of the scope
Less flexibility to reintroduce restrictions on certain capital inflows than their outflows counterparts. Does it matter?
• A review of the Code would clarify the issues
24
Does and should the Code apply to currency-
based restrictions?
• Calibration of the measure in the self interest of the country. Addressing interconnectedness need not sacrifice financial openness
• Preserving the collective interest against negative spill-overs
• International cooperation to reconcile financial openness globally and individual financial stability
25
Benefits of a broad but balanced application of the
Code to currency-based restrictions to capital flows?
THANK YOU
26