1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?

Evidence from Past Crises Across OECD and Emerging Economies

This paper examines how structural policies can influence a country's risk of suffering financial turmoil. Using a panel of 184 developed and emerging economies from 1970 to 2009, the empirical analysis examines which structural policies can affect financial stability by either shaping the financial account structure, by reducing the risk of international financial contagion, or by directly reducing the risk of financial crises. Differentiated capital controls are found to affect financial stability via the structure of the financial account. Moreover, a number of structural policies including regulatory burdens on foreign direct investment, strict product market regulation, or tax systems which favour debt over equity finance are found to bias external financing towards debt, thereby increasing financial crisis risk. By contrast, more stringent domestic capital adequacy requirements for banks, greater reliance of a domestic banking system on deposits, controls on credit market inflows, and openness to foreign bank entry are found to reduce the vulnerability to financial contagion. Finally, vulnerability to international bank balance-sheet shocks is found to be lower in situations of abundant global liquidity, underlining the importance of adequate central bank reactions in situations of financial turmoil.

English

Keywords: banking regulations, balance sheet, foreign direct investment, financial stability, financial account, external debt, FDI restrictions, capital controls
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