2014.11.27 - naec seminar_currency-based measures codes

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





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.

9

Outline





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


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.


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


Changes, 2005-13

17

Most actions focused on reserve

requirements and on limiting lending in FX


-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

19

Outline





Countries unable to borrow abroad in domestic

currency used more measures on banks’ FX liabilities

20

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0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

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Hu

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So

uth

Ko

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Po

lan

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Ma

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Ind

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Tu

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Isra

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De

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Cze

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Th

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Afr

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nd

Ca

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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





• 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

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2014.11.27 - naec seminar_currency-based measures codes

Economy & Finance