Rise of Debt and Market Based Finance

Rise of Debt and Market Based Finance

It is also known as Non Bank finance or Shadow Banking.

The key difference between traditional banking and shadow banking is fragmented credit chains in the shadow banking.

Traditional Banking does

  • Maturity Transformation
  • Liquidity Transformation
  • Credit Transformation

While traditional banking has backstops

  • Deposit Insurance
  • Central bank

Shadow Banks are not regulated and do not have advantage of backstops.

Hence they are susceptible to systemic risk and runs.


  • What is Market based Finance?
  • How big is the market?
  • Institutions?
  • Instruments?
  • Who are the borrowers?
  • Who are the investors?
  • What are the risks in market based finance?
  • Role of Central Banks?
  • How to minimize risks?
  • Regulations? Macro Prudential policies?
  • How are banks involved in market based finance?
  • How are they connected to each other and others?

Key Terms

  • Market based Finance MBF
  • Non Bank Credit Intermediation NCBI
  • Shadow Banking
  • Financial Stability
  • Systemic Risk
  • Liquidity Risk
  • Broker Dealers
  • Non Bank Finance NBF
  • Balance Sheet Economics
  • Market Makers
  • Capital Markets
  • Money Markets
  • Money View
  • Money Flows
  • Network Dynamics
  • Regulatory Arbitrage
  • Credit Chains
  • Fragmented Credit Chains
  • Financial Supply Chains
  • Credit Chain Length
  • Growth of Debt

Growth and Size of Market based Finance


Image Source: Shining a Light on Shadow Banking

Image Source: The Shadow Banking System in the United States: Recent Developments and Economic Role

Image Source: Shining a Light on Shadow Banking




Structural Dynamics of Banking and Financial System

Changes prior to Global Financial Crisis

  • Rise of Debt
  • Rise of Market Based Finance
  • Increase in capital flows both domestic and cross border

Debt dynamics is related to assets side of balance sheet of financial intemediatory.

Market based Finance is related to liabilities side of balance sheet of Financial Intermediatory.

If the chains of financial intermediation are long, then both assets and liabilities of each participant are linked.

Intermediation results in increase of capital flows. From money markets to capital markets. From deposits to loans. From liabilities to assets. There is both pull and push of money flows in the financial system. Demand for capital and supply of capital. They both are linked by banks and non bank finance. Growth of debt is linked to growth of money markets and non bank finance.

Size of Nonfinancial Business and Household Credit


In a future post I will discuss debt in US and global financial system.

Please see my related posts for evolution of Financial System Complexity and Its dynamics.

Low Interest Rates and Banks’ Profitability – Update October 2020

Funding Sources and Liquidity for US Commercial Banks

Trends in Assets and Liabilities of Commercial Banks in the USA

Size and complexity arise together. Along with balance sheet expansion comes changes in links with counterparties (financial networks and interconnections).

Research continues in this area by several institutions and academics.

  • OECD
  • BIS
  • ECB
  • FSB
  • BOE
  • IMF
  • BOF
  • Others

Source: Structural developments in global financial intermediationThe rise of debt and non-bank credit intermediation

The global financial crisis of 2008 underlined the importance for policy makers in understanding the scale and types of financial intermediation in their economies. During the financial crisis, non-bank financial intermediation was of particular concern to authorities, as such forms of ‘shadow banking’, contributed to both the root causes of the crisis, the transmission of financial contagion, and the amplification of shocks.

As this report is published, the rapid spread of the novel coronavirus Covid-19 has caused a global health crisis, has brought economic activity in some sectors to a halt, and has presented the greatest challenge to the global financial system since 2008. As then, understanding financial intermediation activities is critical to mapping the faultlines in the global financial system and mounting effective policy responses.

However, the shape of financial intermediation has changed in important ways since the global financial crisis. Activities in non-bank intermediation, including market-based intermediaries like investment funds and securitised products, have grown and are increasingly interconnected with financial markets. Understanding the interplay between these elements, and the benefits and risks of each, offers a more complete understanding of how global finance can contribute to sustainable economic growth. It also helps provide the full picture needed to help policy makers prepare for and respond to shocks, including pandemics.

“Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation” shines a light on the evolution of global financial intermediation in three key ways. First, it maps the broad-based growth of financial intermediation relative to GDP in many advanced and emerging market economies, and with this growth a shift toward market-based finance. Second, it assesses the shift from equity to debt markets, and the growing imbalances in sovereign and corporate debt markets during a period of highly accommodative monetary policies. Third, it draws attention to key activities in credit intermediation that could contribute to structural vulnerabilities in the global financial system, including: a sharp rise of below-investment grade corporate debt, in particular leverage loans and collateralised loan obligations; the growth of open-ended investment funds that purchase high-yield debt and leveraged loans; and risks associated with the large stock of bank contingent convertible debt.

While these various activities have helped to satisfy investors’ reach for yield during years of market exuberance, they represent new potential faultlines of systemic risk in the event of exogenous shocks, be they from trade tensions, geopolitical risks or the current global pandemic. This report underlines the need for policy frameworks to adapt to market-based finance, and fully reflect the interaction between monetary, prudential, and regulatory tools on credit intermediation. It also underlines the need for dynamic microprudential and activities-based tools to help mitigate excessive risk taking with respect to liquidity and leverage.

By mapping the global financial system, evaluating growing imbalances and risks that could amplify shocks, and assessing the interaction between macro and regulatory tools, this report provides a practical complement to the OECD’s Policy Framework for Effective and Efficient Financial Regulations. Financial authorities should use this analysis to inform both their assessments of activities and risks, and efforts to maximise available tools to harness the benefits of market-based finance to support fair, efficient markets and sustainable economic growth.

Greg Medcraft Director, OECD Directorate for Financial and Enterprise Affairs





Table 1. A Stylized View of Structural Characteristics of Credit-based Intermediation

Characteristic:Traditional BankingShadow BankingMarket-based Finance
Key Risk TransformationsLiquidity, maturity, leverageCredit enhancement,liquidity, maturity, leverageLess emphasis on credit enhancement and less opaque vs. shadow banking
Institutions Involved in Intermediation Single entityCan be many entities, interconnected through collateral chains and credit guaranteesSingle/few entities
Formal Ex-anteBackstopYesNo / IndirectNo
Implied Sponsor Supportn.a.Yes, can sometimes be contingent liabilitiesNo(insolvency remote)
Example of EntitiesCommercial bankSynthetic CDO, Structured Investment Vehicle (SIV), CNAV MMF, ABCP ConduitBond mutual fund, Distressed debt or PE partnership,Direct lending by pension fund
Main Form of LiabilitiesDebt and deposits,Wholesale & retail-financedDebt,Mainly wholesale financedHighly diverse –Short and long-term debt and equity,Retail & wholesale financed
Key Resulting Financial Stability Risk Systemic risk(institutional spillovers)Systemic risk(institutional spillovers)Shift in price of risk (market risk premia)

My Related Posts

Shadow Banking

Economics of Broker-Dealer Banks

Evolution of Banks Complexity

Low Interest Rates and International Capital Flows

Repo Chains and Financial Instability

Global Liquidity and Cross Border Capital Flows

The Dollar Shortage, Again! in International Wholesale Money Markets

Low Interest Rates and Banks’ Profitability – Update October 2020

Funding Sources and Liquidity for US Commercial Banks

Funding Strategies of Banks

Trends in Assets and Liabilities of Commercial Banks in the USA

Key sources of Research

The growth of non-bank finance and new monetary policy tools 

Adrien d’Avernas, Quentin Vandeweyer, Matthieu Darracq Pariès  

20 April 2020


Financial Stability Report

November 2019

Board of Governors of the Federal Reserve System

Financial Intermediaries, Financial Stability, and Monetary Policy

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Federal Reserve Bank of New York Staff Reports, no. 346 September 2008



Unconventional monetary policy and funding liquidity risk


Structural developments in global financial intermediation

The rise of debt and non-bank credit intermediation


Robert Patalano and Caroline Roulet*



Financial Stability Review, May 2020



Structural changes in banking after the crisis

Report prepared by a Working Group established by the Committee on the Global Financial System

The Group was chaired by Claudia Buch (Deutsche Bundesbank) and B Gerard Dages (Federal Reserve Bank of New York)

January 2018



Ross Levine

Working Paper 9138 http://www.nber.org/papers/w9138


1050 Massachusetts Avenue
Cambridge, MA 02138
September 2002

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Financial Stability Review

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The Origins of Bank-Based and Market-Based Financial Systems: Germany, Japan, and the United States

Sigurt Vitols*

January 2001

Financial Stability Report

August 2020

Bank of England

Market-Based Finance:
Its Contributions and Emerging Issues

May 2016

Financial Conduct Authority

Bank-Based Versus Market-Based Financing: Implications for Systemic Risk


Off the radar: The rise of shadow banking in Europe 

Martin Hodula  

16 March 2020


Global Monitoring Report on Non-Bank Financial Intermediation 2019




Global Monitoring Report on Non-Bank Financial Intermediation 2018

FSB 2019


Global Shadow Banking Monitoring Report 2017

FSB 2018


Global Shadow Banking Monitoring Report 2016

10 May 2017

FSB 2015 Report

FSB 2014 Report


FSB 2013 Report

FSB 2012 Report

FSB 2011 Report

Shadow Banking: Monitoring Vulnerabilities and Strengthening Policy Tools



Asli Demirguc-Kunt and Ross Levine*

June 1999


Off the Radar: Exploring the Rise of Shadow Banking in the EU

Martin Hodula



Shadow Banking: Economics and Policy

Stijn Claessens, Zoltan Pozsar, Lev Ratnovski, and Manmohan Singh




Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons

A. Demirguc-Kunt

Published 1999


Market-based finance: a macroprudential view

Speech given by
Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee


Asset Management Derivatives Forum, Dana Point, California Friday 9 February 2017

Shadow Banking and Market Based Finance

Tobias Adrian, International Monetary Fund 

September 14, 2017


Transforming Shadow Banking into Resilient Market-based Finance

An Overview of Progress

12 November 2015


Mapping Market-Based Finance in Ireland

Simone Cima, Neill Killeen and Vasileios Madouros1,2 

Central Bank of Ireland
December 13, 2019



Financial Stability Review

November 2019


Shadow Banking

Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky

FRBNY Economic Policy Review / December 2013


Shadow Banking and Market-Based Finance

Tobias Adrian and Bradley Jones


No 18/14

Why Shadow Banking Is Bigger Than Ever



The Non-Bank Credit Cycle

Esti Kemp, Ren ́e van Stralen, Alexandros P. Vardoulakis, and Peter Wierts


Fed Reserve

The role of financial markets for economic growth

Speech delivered by Dr. Willem F. Duisenberg, President of the European Central Bank, at the Economics Conference “The Single Financial Market: Two Years into EMU” organised by the Oesterreichische Nationalbank in Vienna on 31 May 2001


Bank deleveraging, the move from bank to market-based financing, and SME financing

Gert Wehinger


OECD Journal: Financial Market Trends Volume 2012/1
© OECD 2012

Shadow Banking: A Review of the Literature

Tobias Adrian Adam B. Ashcraft

2012 FRBNY

The Global Pandemic and Run on Shadow Banks




Shadow Banking: The Rise, Risks, and Rewards of Non-Bank Financial Services

Roy J. Girasa

The Macroeconomics of Shadow Banking



Is Shadow Banking Really Banking?

Bryan J. Noeth ,  Rajdeep Sengupta

Saturday, October 1, 2011



Three Essays on Capital Regulations and Shadow Banking

Diny Ghuzini
Western Michigan University, diny.ghuzini@wmich.edu


Amias Gerety 2017

Institute of International Economic Law Georgetown University Law Center

Commercial Banking and Shadow Banking

The Accelerating Integration of Banks and Markets and its Implications for Regulation


(prepared as revised version of Chapter 3 in The Oxford University Press Handbook, The Accelerating Integration of Banks and Markets and its Implications for Regulation, 3rd edition.)

The Shadow Banking System in the United States: Recent Developments and Economic Role

Tresor Economics




Shadow Banking: Policy Challenges for Central Banks

Thorvald Grung Moe*

Levy Economics Institute of Bard College

May 2014


Stephan Luck and Paul Schempp

2014 ECB

Restructuring the Banking System to Improve Safety and Soundness

Thomas M. Hoenig
Vice Chairman of the Federal Deposit Insurance Corporation

Charles S. Morris
Vice President and Economist Federal Reserve Bank of Kansas City

Original version: May 2011 Revised: December 2012

Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned

by David Luttrell Harvey Rosenblum and Jackson Thies

FRB Dallas

Shadow Banking Concerns: The Case of Money Market Funds

Saad Alnahedh† , Sanjai Bhagat

Towards a theory of shadow money

Daniela Gabor* and Jakob Vestergaard

The Economics of Shadow Banking 

Manmohan Singh


Regulating the Shadow Banking System



Yale University

The Rise of Shadow Banking: Evidence from Capital Regulation

Rustom M. Irani, Raymakal Iyer, Ralf R. Meisenzahl, and Jos ́e-Luis Peydr ́o


Fed Reserve

Shadow Banking: Background and Policy Issues

Edward V. Murphy

Specialist in Financial Economics

December 31, 2013

Shining a Light on Shadow Banking

The Clearing House





Duke Law

Money Creation and the Shadow Banking System Adi Sunderam

Harvard Business School and NBER September 2014


Financial Crisis Inquiry Commission Report Chapter 2

Shadow Banking


By Melanie L. Fein*

February 15, 2013

Assessing shadow banking – non-bank financial intermediation in Europe

No 10/ July 2016

Laurent Grillet-Aubert Jean-Baptiste Haquin Clive Jackson
Neill Killeen
Christian Weistroffer


Shedding Light on Shadow Banking

Timothy Lane

Bank of Canada

shadow banking and capital markets


Group of Thirty

Shadow Banking and Market Based Finance

Tobias Adrian, International Monetary Fund 

September 14, 2017


Financial Stability Report – November 2020

Federal Reserve





Funding Sources and Liquidity for US Commercial Banks

Funding Sources and Liquidity for US Commercial Banks

Funding Types

  • Secured
  • Unsecured
  • Short Term
  • Long Term
  • Domestic
  • Foreign



Canadian Banks Funding Types

Canadian Banks Funding Instruments


US Dollar Funding Sources and Instruments
  • Interbank Funding Market
  • Money Market Mutual Funds Market
  • Repo Market
  • Fed Funds Market
  • Commercial Paper Market
  • Asset Backed Commercial Paper Market
  • Certificate of Deposits
  • Auction Rate Securities
  • Bilateral and Tri Party Repos
  • GSEs
  • GSE Mortgage Pools
  • Finance Companies
  • Broker Dealers
  • ABS Insurers

Major Trends prior to Global Financial Crisis of 2008

  • Decline of Banks and Growth of Mutual Funds
  • Rise of Market Based Finance (Non Bank Finance, Shadow Banking)
  • Globalization of Financial Intermediation
  • Rise of Repo Market
  • Securitization

Please see detailed discussion in this reference from which I have used most of the charts.

Economic Policy Review

Federal Reserve Bank New York

Special Issue: The Stability of Funding Models, Feb 2014

Decline of Banks and Growth of Mutual Funds

Rise of MArket based Finance

Also, known as Non Bank Finance, Shadow Banking

Globalization of Financial Intermediation

Rise of Repo Market


How did Central Banks respended during the crisis?

Central Bank Backstops During Financial Crisis

During financial crisis, US Federal Reserve has provided emergency liquidity facilities for markets in which liquidity dried up.

  • AMLF Asset Back Comercial Papers Funding Facility
  • MMLF Money MArket Mutual Funds Funding Facility
  • CPFF Commercial Paper Funding Facility

Macro Prudential Policies and Regulations

For financial stability

Some of the important policies that aim at promoting stability are as follows:

  • deposit insurance
  • lender of last resort
  • supervision
  • capital requirements
  • reserve requirements
  • liquidity requirements
  • transparency and disclosure requirements

Key Terms

  • Market based Finance
  • Shadow Banking
  • Funding LIquidity
  • Funding Sources
  • Funding Instruments
  • Bank Liabilities
  • Interlinked Balance sheets
  • Interconnectivity
  • Balance Sheet Expansion
  • Money Flows
  • Systemic Risk
  • Financial Contagion
  • Capital Requirements
  • LCR Liquidity Coverage Ratio
  • Money Market Mutual Funds MMMF
  • Asset Backed Commercial Paper ABCP
  • Commercial Paper CP
  • Repurchase Agreements REPOs
  • Fed Funds
  • Interbank Funds
  • Exposure
  • Spillover
  • Counterparties
  • Cross Border Claims
  • Quadruple accounting

My related Posts

Funding Strategies of Banks

Shadow Banking

The Dollar Shortage, Again! in International Wholesale Money Markets

Low Interest Rates and International Capital Flows

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Contagion in Financial (Balance sheets) Networks

Economics of Money, Credit and Debt

Trends in Assets and Liabilities of Commercial Banks in the USA

Low Interest Rates and Banks’ Profitability – Update October 2020

Key Sources of Research

US dollar funding markets during the Covid-19 crisis – the money market fund turmoil

12 May 2020


Mapping U.S. Dollar Funding Flows

This interactive map shows how various institutions generally engage with one another, and the Federal Reserve’s balance sheet, in the course of borrowing and lending U.S. dollar instruments in the money markets.


Recent stress in money market funds has exposed potential risks for the wider financial system

Prepared by Miguel Boucinha, Laura Capotă, Katharina Cera, Emmanuel Faïk, Jean-Baptiste Galléty, Margherita Giuzio, Maciej Grodzicki, Isabel Kerner, Simon Kördel, Luis Molestina Vivar, Giulio Nicoletti, Ellen Ryan and Christian Weistroffer

Published as part of Financial Stability Review, May 2020.


The circular flow of dollars in the world financial markets

Kashi NathTiwari


The Euro-dollar market as a source of United States bank liquidity

Steve B. Steib

Iowa State University

Shadow Banking: The Money View

Zoltan Pozsar

Key Information on the Money Market Mutual Fund Liquidity Facility (MMLF)



Managing the Liquidity Crisis

April 09, 2020


Financial Stability Report

May 2020

Financial Stability Board

FED Reserve

Interbank lending market


Liquidity Risk and Credit in the Financial Crisis




The Money Market Mutual Fund Liquidity Facility

Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset



US money market funds and US dollar funding

Céline Choulet

BNP Paribas


The Dark Side of Bank Wholesale Funding

Rocco Huang

Philadelphia Fed

Lev Ratnovski

Bank of England

A Macroeconomic Model of Liquidity, Wholesale Funding and Banking Regulation

Corinne Dubois* Luisa Lambertini􏰀

The Effect of Monetary Policy on Bank Wholesale Funding

Dong Beom Choi (Federal Reserve Bank of New York)

Hyun-Soo Choi (Singapore Management University)

Between deluge and drought: The future of US bank liquidity and funding

Rebalancing the balance sheet during turbulent times

Kevin Buehler Peter Noteboom Dan Williams

July 2013
McKinsey & Company


Can Banks Provide Liquidity in a Financial Crisis?

By Nada Mora

How important was the worldwide use of wholesale funds for the international transmission of the US subprime crisis? 

Claudio Raddatz  15 March 2010


The Role of Liquidity in the Financial System

Notes from the Vault

Larry D. Wall
November 2015


Global Banks, Dollar Funding, and Regulation

by Iñaki Aldasoro, Torsten Ehlers and Egemen Eren

Monetary and Economic Department March 2018, revised May 2019

Global Monitoring Report on
Non-Bank Financial Intermediation 2019 

19 January 2020

Bank Financing: The Disappearance of Interbank Lending

March 05, 2018


Liquidity Risk and Funding Cost

Taking Market-Based Finance Out of the Shadows

Distinguishing Market-Based Finance from Shadow Banking



Wholesale Funding of the Big Six Canadian Banks

Matthieu Truno, Andriy Stolyarov, Danny Auger and Michel Assaf, Financial Markets Department

Bank of Canada Review

Liquidity Risk after the Crisis 

By Allan M. Malz


Global Shadow Banking Monitoring Report 2017

5 March 2018

The Federal Funds Market since the Financial Crisis


Funding liquidity regulation

Allan M. Malz

The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

Rosalind Z. Wiggins2,
Yale Program on Financial Stability Case Study

May 9, 2017, revised: October 10, 2020

Liquidity Risk and Credit in the Financial Crisis


Economic Policy Review

February 2014 Volume 20 Number 1

Special Issue: The Stability of Funding Models

Trends in Assets and Liabilities of Commercial Banks in the USA

Trends in Assets and Liabilities of Commercial Banks in the USA

To big to fail means too interconnected to fail.
As the balance sheets of banks have expanded so has their number of counterparties on both sides of balance sheets.

The US commercial banks have have expanded their balance sheets.

On assets side, the loans portfolio has expanded.

Low Interest Rates and Banks’ Profitability – Update October 2020

On liabilities side, the deposits and borrowings have increased.

US Federal Reserve publishes H8 report on Assets and Liabilities of the US commercial banks. Detailed information on aggregate data presented in this post can be obtained from it.


On liabilities side, the borrowings from wholesale money markets and shadow banking contributed to systemic risk during 2008 financial crisis. Please see my posts on this subject.

Funding Strategies of Banks

Shadow Banking

There were also capital flows in US markets from foreign banks and other markets.

Low Interest Rates and International Capital Flows

On liabilities side, because of increased borrowings from short term markets, the financial interconnections have also increased resulting in systemic risk and financial contagion.

On assets side, because of increased volumes of loan portfolios, the systemic risk and chances for financial contagion have increased.

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Contagion in Financial (Balance sheets) Networks

For analytical framework, accounting approach (Post Keynesian Economics) is one of the option.

Balance Sheet Economics – Financial Input-Output Analysis (using Asset Liability Matrices) – Update March 2018

Foundations of Balance Sheet Economics

Economics of Money, Credit and Debt

Morris Copeland and Flow of Funds accounts

Stock-Flow Consistent Modeling

Key Terms

  • Money View
  • Money Flows
  • Stocks and Flows
  • System Dynamics
  • Business Dynamics
  • Business Strategy
  • Asset Liability Management ALM
  • Balance Sheet Economics
  • Monetary Policy
  • Interest Rates
  • Credit
  • Debt
  • Money
  • Balance Sheet Expansion
  • Systemic Risk
  • Interconnectivity
  • Loan Portfolio
  • To big to fail
  • Networks
  • Funding Strategy
  • Market Liquidity
  • Funding Liquidity
  • Deposits
  • Interest Income
  • Non Interest Income
  • Borrowings
  • Wholesale Money Markets
  • Shadow Banking
  • International Capital Flows
  • Round Tripping
  • Global Liquidity
  • Eurodollar Market
  • Money Market Mutual Funds
  • Quadruple Accounting
  • Morris Copeland
  • Hyman Minsky
  • Wynn Godley
  • Perry Mehrling

Image Source: Liberty Street Economics 2017

Image Source: Statista

Image Source: FRED

Total Assets, All Commercial Banks (TLAACBW027SBOG)
Image Source: FRED

Total Liabilities, All Commercial Banks (TLBACBW027NBOG)
Image Source: FRED

Image Source: FRED

My Related Posts

Balance Sheet Economics – Financial Input-Output Analysis (using Asset Liability Matrices) – Update March 2018

Foundations of Balance Sheet Economics

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Funding Strategies of Banks

Economics of Money, Credit and Debt

Low Interest Rates and International Capital Flows

Low Interest Rates and Banks’ Profitability – Update October 2020

Morris Copeland and Flow of Funds accounts

Key Sources of Research

Deposits, All Commercial Banks (DPSACBW027SBOG)


Total Liabilities, All Commercial Banks (TLBACBW027NBOG)




Between deluge and drought:
The future of US bank liquidity and funding

Rebalancing the balance sheet during turbulent times




Assets and Liabilities of Commercial Banks in the United States – H.8


The geography of dollar funding of non-US banks1

Network Economics of Block Chain and Distributed Ledger Technology

Network Economics of Block Chain and Distributed Ledger Technology


Quadruple Accounting System

Morris Copeland, and Hyman Minsky emphasized quadruple entry accounting system envisioning interrelated interlocking balance sheets of economic agents.  Interlocking balance sheets create a network of economic agents.

I attach a slide from a presentation by Marc Lavoie given at Minsky Summer school in 2010 at the Levy Institute of Economics (Bard College).




There are several FINTECH innovations which are bringing about dramatic changes in the financial services business.

  • Block Chain and Distributed Ledgers
  • Payment Banks
  • Retail P2P Payment services
  • Mobile Payments
  • Secured Wallets
  • Domestic Real Time Payments and Transfers
  • Cross Border Near Real time Money Transfers


Block Chain and Distributed Ledgers, in my opinion, are/can be implementation of quadruple accounting principles envisioned by Morris Copeland and Hyman Minsky.  Two economic agents engage in financial transactions which are recorded in distributed ledgers.

Some of the key components of distributed ledger technology are:

  • Peer-To-Peer Networking
  • Cryptography
  • Distributed Data Storage

In contrast with centralized ledgers, distributed ledgers store data at each node in the P2P network.  So there is no need for an intermediating institution.  From a payment system perspective, each node in the P2P network can be thought of as a bank.   Each node will have its own ledger and balance sheet which will record assets and liabilities.

Ripple is a Cross Border money transfer solution which is based on block chain technology.


Recent rise of retail P2P payment services such as

  • Xoom
  • M-Paisa
  • PayTM

indicates a trend toward real time payments/money transfers domestic and international.  This trend also indicates decoupling of these services from traditional deposit/lending banks. XOOM is a service provided by PAYPAL for international Money Transfers.  Money transfers are within a few minutes.

In USA, there are new P2P services offered to facilitate faster near real time payments/money transfers through mobile and online interfaces.

  • Venmo (Paypal)
  • Zelle (clearXchange Network)
  • Square Cash
  • Braintree (Paypal)

There are also social media payments available now through which consumers can quickly send money using social media applications such as

  • Facebook (through Messanger app)
  • Snapcash (through SnapChat)
  • Apple PayCash (through imessages app)
  • TenCent via WeChat


Rise of payment banks such as PayTM is one such example.  Reserve Bank of India has granted PayTM a payment bank status.  But transfers are still between bank accounts of transacting consumers where deposits are kept. Payment Bank acts as a technology provider and acts as an intermediary.

As per the RBI guidelines, payments banks cannot lend they can only take deposits or accept payments.

There are four payment banks in India now.

  • PayTM Payment Bank
  • Airtel Payment Bank
  • India Post Payment Bank
  • FINO Payment Bank


Mobile payments using secured wallets is another such example.

  • Consumer to Business payments and transfers
  • Consumer to Consumer payments and transfers
  • Google Wallet
  • Apple Pay
  • Android Pay
  • Alipay


Cross Border Payment Solutions:

  • XOOM
  • Earthport
  • TransferWise
  • Remitly
  • WorldRemit



Please see my other related posts:

Next Generation of B2C Retail Payment Systems

Cross Border/Offshore Payment and Settlement Systems



Key sources of Research:


Minsky and Godley and financial Keynesianism

Marc Lavoie
University of Ottawa


Click to access Lavoie.pdf


Block Chain:  A Primer


Click to access MPRA_paper_76562.pdf


Distributed Ledger Technologies/Blockchain: Challenges, opportunities and the prospects for standards

Advait Deshpande, Katherine Stewart, Louise Lepetit, Salil Gunashekar




Banking on Distributed Ledger Technology: Can It Help Banks Address Financial Inclusion?

By Jesse Leigh Maniff and W. Blake Marsh


Click to access 3q17maniffmarsh.pdf



Distributed ledger technology in payments, clearing, and settlement

Mills, David, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquardt, Clinton
Chen, Anton Badev, Timothy Brezinski, Linda Fahy, Kimberley Liao, Vanessa Kargenian,
Max Ellithorpe, Wendy Ng, and Maria Baird (2016).

Finance and Economics Discussion
Series 2016-095. Washington: Board of Governors of the Federal Reserve System,


Click to access 2016095pap.pdf



Distributed Ledger Technology: beyond block chain

A report by the UK Government Chief Scientific Adviser

Click to access gs-16-1-distributed-ledger-technology.pdf


Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality


Click to access au-deloitte-technology-bitcoin-blockchain-distributed-ledgers-180416.pdf



Distributed ledger technology in payment, clearing and settlement
An analytical framework



Click to access d157.pdf



The Truth About Blockchain

January–February 2017 Issue








Peer-to-peer payments: Surveying a rapidly changing landscape

By Jennifer Windh

August 15, 2011


Click to access 110815wp.pdf

Currency Credit Networks of International Banks

Currency Credit Networks of International Banks

During the Global Financial Crisis, institutions which were monitoring and regulating Banking systems realized that there are gaps in data to get a better understanding of cross border lending by Banks.

Bank of International Settlement BIS collects and publishes following datasets:

  • Consolidated Banking Statistics (CBS)
  • Locational Banking Statistics (LBS)


From US Banks’ International Balance Sheet Linkages: A Data Survey

International financial linkages are mostly established through banks’ lending and borrowing across the borders. Still, very little is known on the actual geographical composition of banks’ foreign balance sheet positions due to the fact that existing bilateral banking statistics is rather incomplete and scant both at the aggregate and micro level ( (Cerutti, et al., 2011); (Fender & Patrick, 2009); (McGuire & von Peter, 2009)). At the micro level, in particular, bilateral positions of banks by location of counterparty are neither collected by the regulator nor available from commercial databases (Herrero & Martinez Peira, 2007).

At the macro level, the Consolidated Banking Statistics (CBS) published by the Bank of International Settlements (BIS) is the most complete data source publicly available on aggregate bilateral claims of banks, available on a comparable cross-country basis and collected according to the nationality principle1. The CBS is best suited to assess country risk, as it reports gross claims of home and worldwide offices reported by national banks to individual foreign countries.

The consolidation within the CBS, however, does not allow to quantify gross cross-border bilateral positions that banks have vis-à-vis their foreign affiliates. Important direct linkages can, indeed, arise through cross-border positions with banks’ foreign-related entities, such as branches or subsidiaries, especially in those countries, such as the US, where foreign-related offices are the largest foreign counterparties of domestic banks.

Moreover, bilateral banking liabilities are not publicly available within the CBS preventing the assessment of other important macro risks arising from international banking activity, most notably funding and global systemic risks. The Committee on the Global Financial System (CGFS) at the the Bank of International Settlements (BIS) has recently announced that the latter limitation is being tackled in the new reporting regime in which banks must disclose also bilateral liabilities a consolidated basis with details of the instrument type (CGFS, 2012). The BIS also collects unconsolidated positions (i.e. both assets and liabilities) of banks located in a given country on all foreigners in the Locational Banking Statistics (LBS), in which bilateral positions are not publicly disclosed2. For the US, however, bilateral foreign unconsolidated banking assets and liabilities are available from the Treasury International Capital System (TICS)3. Coherent to the balance of payment residency principle, the reporting institutions are branches of foreign banks residing in the US which report their positions vis-à-vis all foreigners by foreign country, including related-offices.

Residency-based statistics is ill-suited to assess bi-lateral linkages of US banks as confounding resident foreign and domestic banks does not allow to disentangle the different lending conducts and funding structures4. Also, the foreign counterparty includes foreign branches and subsidiaries of domestic banks as well as parents, branches and subsidiaries of foreign banks resident in the US, hindering a full understanding of the geography of banks’ funding, liquidity and capital allocation.

The aim of this paper is to review all the available data at the macro level in order to both draw a map of the bilateral international balance sheet positions of US banks by counterparty country and stress the data limitations and gaps. Firstly, this paper presents an extensive survey of all available bilateral macro data on international linkages created by US banks’ balance sheets. This investigation details the components and measurements (consolidated vs. unconsolidated data collection) of external positions of US banks. The survey is mainly based on the statistics provided by the Country Exposure Lending Survey (CELS) published by the Federal Financial Institutions Examination Council (FFIEC), upon which the BIS CBS for the US is based, and the US Banking claims and liabilities statistics published by the Treasury International Capital System (TICS). The second part of the paper discusses how data gaps might distort the measurement of important bilateral linkages and suggests how these limitations might be tackled by future research.

In the literature can be found a few papers that bring together existing available datasets to evaluate bi-lateral financial linkages, such as the works by (Lane & Milesi-Ferretti, 2011), (Milesi- Ferretti, et al., 2010) and (Cerutti, 2013). The latter study, in particular, estimates the linkages created by banks’ balance sheet by combining BIS CBS with foreign office data available commercially at the micro-level with the intent of measuring foreign rollover risks.

In this paper it is stressed that consolidated and unconsolidated banking statistics should both include a vis-à-vis country dimension, other than a sectoral and instrument-type segmentation. Moreover, statistics should be segmented enough to allow mapping unconsolidated to consolidated data. In particular, consolidated banking statistics should differentiate claims booked from domestic offices to those from branches and subsidiaries, possibly by host country. Unconsolidated statistics, should disentangle positions booked from domestic banks and foreign banks and vis-à-vis related- offices, possibly identifying the nationality foreign banks. While the statistics enhancements of the CGFS are definitely going towards this direction, this paper suggests that more detailed information should be collected on the funding structure of foreign-related offices, disentangling, when possible, branches by subsidiaries by host country.


An overview of bi-lateral foreign exposure of US banks

The linkages created by banks via their international balance sheet positions can be assessed on either a consolidated or unconsolidated basis.

The BIS provides the framework to collect international banking claims on a consolidated basis. The Consolidated Banking Statistics (CBS) provides very useful scope for assessing country risk as its concern is to measure the exposure of the banking sector of a given country i on a foreign country j on a nationality basis: banks are grouped according to their nationality so that all branches of banks with nationality i located worldwide report their positions vis-à-vis the residents of a given country j. Total foreign exposure, namely foreign claims, of the banking sector in i on country j is obtained by summing the consolidated cross-border claims on unaffiliated foreigners in j and local claims of foreign offices established in j. The BIS publishes bilateral foreign claims for the reporting county vis-à-vis the rest of the world by country of location of the counterparty on a quarterly basis. For the US case, more detailed data is available from the Country Exposure Lending Survey (CELS) published by the Federal Financial Institutions Examination Council (FFIEC), upon which the BIS CBS for the US is based.

Banks’ foreign exposure evaluated on an unconsolidated (or locational) basis, on the other hand, complies with the balance of payments principles. Banks are grouped according to their residency so that in a given country i the reporting banks are all those institutions operating in i, including the resident branches of foreign banks. Total foreign exposure is here calculated by measuring unconsolidated cross-border claims only, i.e. claims on all those counterparties which are not domestically located, including related offices. The BIS collects quarterly statistics on unconsolidated banking assets and liabilities, that is, the Locational Banking Statistics (LBS), for a large set of reporting countries, reporting positions broken down by currency, counterparty sector and nationality of banks. Although the BIS collects unconsolidated banking statistics by country of location of the counterparty (i.e. vis-à-vis country dimension), this information is not publicly disclosed hindering a geographical mapping of the counterparties of reporting banks. For the case of US, however, this bilateral assets and liabilities of banks on an unconsolidated basis are published by the US Treasury within the Treasury International Capital System (TICS), upon which the BIS LBS for the US is based.


Data Gaps identified during the GFC have been corrected to some extent.  New improved data sets became available in 2015.  Based on this new data, several new papers have been published by BIS.


From Enhanced data to analyse international banking

Banks have become larger and more complex over the past 25 years, offering multiple services and products through operations spanning the globe. Some rely heavily on wholesale or non-deposit sources of funding, often from non-bank financial intermediaries about whom information is sparse. Such changes in the international financial system were not well captured in historical data (BIS (2011)). This made it hard to analyse where, in which instruments and on which side of banks’ balance sheets vulnerabilities might emerge, and harder still to assess how vulnerabilities in one part of the financial system might affect other parts. In 2012, the Committee on the Global Financial System (CGFS), which oversees the collection of the BIS international banking statistics (IBS), approved a major set of enhancements to the IBS aimed at filling long-standing data gaps and better capturing the new financial landscape (CGFS (2012)). To a large extent, the enhancements were informed by the Great Financial Crisis of 2007–09, which revealed critical gaps in the information available to monitor and respond to financial stability risks.2 The basic thrust of the enhancements is twofold. First, they expand the coverage of banks’ balance sheets to include their domestic positions, not just their international activities. Second, they provide more information about the sector of banks’ counterparties, in particular banks’ exposures to and reliance on funding from non-bank financial counterparties. The remainder of this feature explains the enhancements in more detail and discusses a few analytical uses of the new data.


Overview of the enhancements

The IBS comprise two data sets – the locational banking statistics (LBS) and the consolidated banking statistics (CBS) – each collected using a different methodology. Jointly, they are a key source of information for assessing risks to financial stability, understanding banks’ role in the transmission of shocks across borders, and monitoring changes in internationally active banks’ business models. The principal use of the LBS is to analyse capital flows between countries. They capture the positions of banking offices located in 44 reporting countries on counterparties resident in each of over 200 countries. The LBS are collected following the same principles as national accounts and balance of payments, meaning that their compilation is based on the residence of entities and the data are not adjusted for intragroup or intrasector links. The CBS provide measures of internationally active banks’ country risk exposures. In contrast to the LBS, the CBS are compiled on a nationality basis, using the consolidated approach followed by banking supervisors. The business of offices that are part of the same banking group is consolidated and reported by the country where the controlling parent entity is located.3 Table 1 summarises the breakdowns reported in each data set, and a companion piece in this Review describes the LBS and CBS in more detail. The enhancements approved by the CGFS focused on five areas. First, in both the LBS and the CBS, the coverage of banks’ balance sheets was extended to domestic positions; previously, the data sets captured only banks’ international business. In the LBS, banks are now asked to report their local positions – positions against residents of the country where they are located – in local currency, to complement the existing data on local positions in foreign currencies.4 In the CBS, since end-2013, internationally active banks have reported their worldwide consolidated claims on residents of their home country – the country where the bank’s controlling parent is headquartered. Second, in the CBS, data for the funding side of banks’ consolidated balance sheets were introduced. Previously, very little liability-related information was collected in the CBS: only the local liabilities of banks’ foreign affiliates, and only those denominated in local currency. Since end-2013, banks have reported their total liabilities on a consolidated basis, with a breakdown by instrument.5 They also report their total equity, selected capital measures, and total assets (comprising financial and non-financial assets).

Third, in both the LBS and the CBS, the sectoral breakdown of counterparties was improved. The main improvement was to distinguish between non-bank financial counterparties and non-financial counterparties; previously, the two sectors were grouped together as non-bank entities.6 Banks are also asked to distinguish between different non-financial counterparties: non-financial corporations, households and governments. However, the reporting of the latter breakdown is encouraged, not required, and thus is incomplete (as discussed below). In the LBS, the breakdown of counterparties classified as banks was also improved. Since end- 2013, banks have reported different types of bank counterparties – related banking offices (or intragroup affiliates), unrelated banks and central banks – by residence of the counterparty.7 Fourth, the LBS were refined to provide more granular information by nationality of the reporting bank. In particular, since end-June 2012, four dimensions of data have been jointly reported: the residence and nationality of the reporting bank, the residence of the counterparty, and the currency in which positions are denominated. Previously, no more than three of the four dimensions were jointly reported in either the CBS or LBS (Table 2). Box 1 explains how these new data help clarify the geography of banks’ operations. The more granular information by nationality of the reporting bank is often composed of data reported by very few banks. For example, there are many banks in the United Kingdom that have claims on South Africa, and there are several Australian banks that have offices in the United Kingdom, but there may be only one or two Australian banks in the United Kingdom that have claims on South Africa. If an aggregate comprises data from only one or two banks, then its disclosure risks revealing proprietary information about those banks’ activities. Consequently, reporting authorities classify a significant part of the enhanced data that they report to the BIS as confidential. Such data cannot be disclosed by the BIS, but they can serve as building blocks in the construction of published aggregates that combine data from many reporting countries. While the enhancements made the residence and nationality of reporting banks and the residence of counterparties available simultaneously in the LBS, they did not make the distinction between data by residence and nationality redundant. In particular, the instrument breakdown – loans and deposits, debt securities and other instruments – continues to be reported only for LBS by residence (Table 2). The enhancements also refined the IBS in a number of smaller ways. Banks reporting the LBS are now encouraged to provide an expanded currency breakdown. To complement the LBS by nationality of reporting bank, data by type of bank – branch or subsidiary – are also reported, although without a detailed counterparty country breakdown of cross-border positions. In addition, the quality of the data was improved through closer alignment of reporting practices with the guidelines. For example, authorities in some reporting countries refined sectoral or other classifications. Such methodological changes have sometimes led to significant changes in reported outstanding positions. Finally, the BIS comprehensively revised the tables presenting the IBS so as to include data collected as part of the enhancements (Box 2). The enhancements also prompted the BIS to revisit the way in which some aggregates are calculated or presented, resulting in changes to previously published data (Box 3).


From Enhanced data to analyse international banking



From Enhanced data to analyse international banking



From Enhanced data to analyse international banking



From Recent enhancements to the BIS statistics

Locational banking statistics by reporting country

One of the enhancements to the international banking statistics (IBS) agreed by the Committee on the Global Financial System following the Great Financial Crisis of 2007–09 was to make the IBS more widely available (CGFS (2012)). The new tables and data published by the BIS in September 2015 were an important step in that direction (Avdjiev et al (2015)). The BIS and central banks continue to work towards publishing more data and improving the tools for accessing them.

Concurrently with this Quarterly Review, the BIS has started publishing more details at the reporting country level from the locational banking statistics (LBS), in particular the claims and liabilities of banks in individual reporting countries on counterparties in more than 200 countries. Previously, the BIS had made public only two types of aggregates in the LBS: the positions of banks in all reporting countries on counterparties in individual countries (Table A6 in the BIS Statistical Bulletin and the BIS Statistics Explorer), and the positions of banks in individual reporting countries on all counterparties abroad (Table A5). The BIS now discloses a matrix of reporting countries and counterparty countries, for the full history of the LBS. For example, whereas previously only the cross-border claims of all LBS-reporting banks on borrowers in China were published, now the location of those reporting banks is also disclosed. This information shows that, at end-March 2016, banks in Hong Kong SAR were the main creditors, accounting for 42% of cross-border claims on China’s mainland borrowers, followed by banks in Chinese Taipei with 9%.

Such geographical details can be used to analyse how shocks might propagate across sectors and borders. For example, they can help track how funds are transferred from sources in one country via banks to users in another. They can also shed light on the complexity of banks’ international operations.

When undertaking such analysis, it is very important to distinguish between the unconsolidated office-level view in the LBS and the consolidated group-level view in the consolidated banking statistics (CBS). The LBS capture the positions of banking offices located in a given country, following the same residency principles as national accounts and balance of payments. By contrast, the CBS capture the worldwide positions of banking groups headquartered in that country, using the consolidated approach followed by banking supervisors. Accordingly, the principal use of the LBS is to analyse capital flows between countries, whereas the CBS provide measures of banks’ country risk exposures.3

The published matrix of reporting countries and counterparty countries covers the cross-border positions of banks located in up to 29 LBS-reporting countries on counterparties in more than 200 countries. As many as eight series are publicly available in the LBS for each reporting-counterparty country pair: total claims and liabilities on counterparties in all sectors and the non-bank sector, and the same details for the instrument component loans and deposits. Selected series are published in Table A6 of the BIS Statistical Bulletin, and all the data can be downloaded from the BIS Statistics Explorer, the BIS Statistics Warehouse or in a single CSV file. A matrix of reporting countries and counterparty countries is also published for the CBS, in Table B4 of the BIS Statistical Bulletin.


Table below shows stock positions in different currencies by location and by sector.

From Currency networks in cross-border bank lending



From Currency networks in cross-border bank lending

At end-2014, the outstanding stock of BIS IBS cross-border bank claims totalled $28.5 trillion. Using the new dimensions in the Stage 1 data, we can simultaneously identify the nationality of the lending bank and the location of the borrower for 92% ($26.2 trillion) of the global total. Nearly three quarters ($19.3 trillion) of the bilaterally-identified claims represented lending by banks from advanced economies (AEs) to borrowers in AEs (Table 2). The second largest component of global crossborder bank lending was the one from AE banks to offshore centres – it stood at $3.5 trillion (or 13% of the global aggregate). “AE-to-EME” lending (ie lending by AE banks to EME borrowers) was also substantial – it amounted to $2.3 trillion (or 9% of global cross-border lending). Meanwhile, cross-border lending by EME banks, which has been growing rapidly over the past few years, stood at $1.1 trillion or around 4% of global cross-border claims. It was fairly evenly distributed among borrowers from AEs ($395 billion), EMEs ($351 billion) and offshore centres ($205 billion).

Currency networks

More than three-quarters of global cross-border claims were accounted for by lending in two major currencies: the US dollar and the euro. Claims denominated in US dollars alone equalled $13.0 trillion, or 45% of the global total. Meanwhile, crossborder lending denominated in euros stood at $9.0 trillion, or 31% of the global aggregate. The third largest currency denomination, the Japanese yen accounts for only around 5% of the global total. At the aggregate level, the above currency shares are remarkably stable across counterparty sectors (Table 3). The US dollar shares of global cross-border lending to banks (46%) and non-banks (45%) are virtually the same. The same is true for the respective euro shares, with both at 31%. In the case of yen, the difference is more pronounced: cross-border lending to non-banks (6.4%) is almost twice as high as interbank lending (3.6%).

The variation in the currency composition of cross-border lending across locations is considerably larger (Table 3). In terms of lending to advanced economies, the US dollar and euro shares are roughly equal at 41% and 39%, respectively. Approximately half of US dollar-denominated bank lending to advanced economies is accounted for by cross-border claims on residents of the United States ($4.1 trillion). Similarly, the majority ($5.7 trillion) of euro-denominated cross-border bank lending is directed towards borrowers in the euro area – and most ($3.8 trillion) of that amount represents intra-euro area cross-border claims. Outside the United States and the euro area, the US dollar and the euro still dominate lending to advanced economies, albeit with somewhat smaller shares (36% and 25%, respectively).

Lending to EMEs tends to be primarily denominated in US dollars as well. The proportion of cross-border claims on EMEs denominated in US dollars (47%) is more than four times higher than that of the euro (11%). Nevertheless, the aggregate EME numbers mask considerable variations across regions. The US dollar accounts for the majority of the claims on Latin America and on Africa and the Middle East (73% and 61%, respectively). Yet, it accounts for less than half (41%) of the lending to emerging Asia and less than a third (30%) of the lending to emerging Europe. In fact, emerging Europe is the only EME region where the euro is the leading currency with around 41% of all claims. The share of yen is negligible at around 1% of lending to all four EME regions.

The dominance of the US dollar is most pronounced in cross-border claims on offshore centres with a share of nearly two thirds (63%) of the total. Conversely, the respective share for the Japanese yen is merely 11%. The share of the euro is even smaller at 8%.


From Drivers of cross-border banking since the Global Crisis

Since the Global Crisis, international credit markets have become more segmented. Figure 1 illustrates the development of cross-border bank claims over the last years; after a continuous and steep increase, the Crisis has led to a retrenchment in cross-border bank lending. Yet, international lending has evolved heterogeneously across regions. While cross-border lending to developing and emerging economies has increased again, foreign bank claims to developed countries have rather continued to decrease.

Even if part of the retrenchment in cross-border bank claims was cyclical, part of the adjustment seems to be structural as the economic recovery did not go along with a notable increase in total foreign bank claims.

What role do policy changes play for adjustments in cross-border bank claims?

The adjustments in international bank lending have led to a debate on how recent policy interventions have affected international capital flows in the aftermath of the crisis.

  • On the one hand, different observers stress the role of changes in financial regulation for the international activities of banks.

After the experiences of the recent Crisis, national regulators may aim at a lower degree of banking globalisation to facilitate the resolution of large, internationally active banks, and hence to better protect taxpayers from potential losses (The Economist 2012). Using bank-level data for the UK banking sector, Rose and Wieladek (2011) have analysed the implications of bank nationalisations for international lending. They present evidence that foreign banks that profited from government support have cut back their lending to the UK. Thus, part of the retrenchment in international bank lending may be due to increased financial protectionism since the crisis.

  • On the other hand, the effects of monetary policy on capital flows – especially to emerging markets – have been intensely debated.

Among others, Bernanke (2013) has pointed out that in an environment of low interest rates, banks may tend to lean their foreign activities towards higher-yielding markets. Nier and Saadi Sedik (2014) point out that managing the large and volatile capital inflows since the Crisis has been costly for emerging markets.

In a recent study (Bremus and Fratzscher 2014), we add to this debate by investigating the effects of policy-related drivers of changes in cross-border bank lending since the Global Crisis.

  • The first question we address is how shifts in banking regulations have affected international bank lending in the wake of the Crisis.

As illustrated by Figure 2, bank capital regulation has, on average, become stricter since the Crisis. In general, tighter regulatory requirements may have different implications for banks’ international lending business. An increase in capital requirements in the source country of cross-border credit may lead to a reduction in credit outflows if banks cut back risky foreign lending activities in order to deleverage. However, stricter regulations in the source country could also lead to an increase in foreign lending activities to countries where regulation is more lenient. Using data from the pre-crisis period, Houston et al. (2012) indeed find that differences in banking regulation are important push and pull factors of cross-border bank lending; banks are attracted by countries with a less restrictive regulatory environment.

In order to study policy-related drivers of changes in international lending between the pre- and the post-Crisis period, we use bilateral credit data for 46 countries from the Bank for International Settlements for the period 2005-2012.[1] Information on capital stringency, supervisory power, and supervisory independence is available from Barth et al. (2013). Following the literature, the years until 2007 can be classified as the ‘pre-crisis’ period, while the years as of 2010 are classified as the ‘post-crisis’ phase. We use a cross-sectional regression model where all variables are expressed as the change between the average across 2005-2007 and the average across 2010-2012.

  • Our results indicate that regulatory policy has been an important driver of adjustments in cross-border banking since the Global Crisis.

Source countries of bilateral credit which have seen a larger increase in supervisory power or independence have extended more cross-border credit. Put differently, the more independent or powerful supervisors got, the less severe was the reduction in cross-border credit in the aftermath of the Crisis. Another interpretation for this result is that stricter regulation in the source country has led to more cross-border lending due to regulatory arbitrage.

With respect to bank capital regulation, the estimation results are similar when the whole country sample is considered. Yet, the larger the differential in capital stringency between the source and the recipient country of cross-border credit in the Eurozone got, the lower the increase (or the larger the reduction) in cross-border lending between these countries.

  • In a second part, we examine which role expansionary monetary policy – as measured by reserve deposits of commercial banks held at central banks – has played for bilateral cross-border lending.

Aggregate reserves at central banks reflect the size of monetary policy interventions (Keister and McAndrews 2009). The more accommodative monetary policy has been since the Crisis, the larger was the increase in total reserves. The estimation results reveal that a larger expansion in source countries’ reserve deposits have come along with smaller reductions (or, larger increases) in credit outflows. Hence, the findings suggest that monetary policy has mitigated credit market fragmentation in the aftermath of the Global Crisis.

Concluding remarks

Our results show that regulatory and monetary policy changes have been important drivers of adjustments in cross-border bank lending since the crisis. While expansionary monetary policy measures have mitigated credit market fragmentation, regulatory policy changes have had mixed effects, depending on the measure and region considered.

More independent and powerful supervisory authorities tend to promote international lending. Our findings indicate that capital regulation should be adjusted in a harmonised and transparent way in order to avoid distortionary lending behaviour, especially in the Eurozone.


From The currency dimension of the bank lending channel in international monetary transmission

In this paper, we add to the existing literature on the cross-border bank lending channel of monetary policy by examining how the use of a currency in cross-border lending transmits monetary policy-induced monetary shocks across countries. We do so by using new and unique data on bilateral cross-border lending flows across a wide array of source banking systems and target countries, broken down by currency denomination (USD, EUR and JPY).

We obtain three main results.

First, monetary policy-induced monetary shocks in a currency significantly affect cross-border bank lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. This is what we call the currency dimension of the bank lending channel.

Second, we find that this currency dimension of the bank lending channel works primarily through lending to non-banks.

Third, we find that these currency effects work similarly across the three main currencies, that is, the transmission effects are present in EUR and JPY-lending as much as in USD-lending. All these results are robust across our various specifications, including IV estimations.26

We hope that our results will help policymakers and researchers gain further insight into how the global use of currencies transmits monetary policy shocks through the international banking system. In particular, our results suggest that when policymakers in borrowing countries think about external spillovers to their economies they should explicitly consider the currency denomination of the cross-border claims.




KeySources of Research:


Estimating Global Bank Network Connectedness

Mert Demirer Laura Liu

.Francis X. Diebold Kamil Ylmaz




Click to access DDLYpaper.pdf



A network analysis of global banking: 1978–2009

Camelia Minoiu and Javier A. Reyes



Click to access wp1174.pdf



Global Banks and Transmission


Click to access Goldberg.pdf



Crisis Transmission in the Global Banking Network

Galina Hale

Tu ̈mer Kapan

Camelia Minoiu

December 31, 2014


Click to access hale_paper.pdf



Currency networks in cross-border bank lending

Stefan Avdjiev and Előd Takáts

September 2015

Click to access takats_paper.pdf



Monetary policy spillovers and currency networks in cross-border bank lending

by Stefan Avdjiev and Előd Takáts

March 2016


Click to access work549.pdf








Click to access 101098-revised-PUBLIC-CBR-Report-November-2015.pdf



Correspondence course: Charting a future for US-dollar clearing and correspondent banking through analytics



Click to access pwc-correspondent-banking-whitepaper.pdf



Correspondent banking

July 2016


Click to access d147.pdf



The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action

Michaela Erbenová, Yan Liu, Nadim Kyriakos-Saad, Alejandro López-Mejía, Giancarlo Gasha, Emmanuel Mathias, Mohamed Norat, Francisca Fernando, and Yasmin Almeida



Click to access sdn1606.pdf



FSB action plan to assess and address the decline in correspondent banking

End-2016 progress report and next steps


19 December 2016


Click to access FSB-action-plan-to-assess-and-address-the-decline-in-correspondent-banking.pdf



Improving the BIS international banking statistics

Click to access cgfs47.pdf



Enhancements to the BIS international banking statistics

Stefan Avdjiev, Patrick McGuire and Philip Wooldridge


Click to access 14-25.pdf



Enhanced data to analyse international banking

Stefan Avdjiev Patrick McGuire Philip Wooldridge



Click to access 15-11a.pdf




Recent enhancements to the BIS statistics

BIS Quarterly Bulletin September 2016





Enhancements to the International Banking Statistics

By John Lowes and David Osborn



Click to access art2may15.pdf



Toward a global risk map

Stephen G Cecchetti, Ingo Fender and Patrick McGuire1

Revised Draft May 2010


Click to access 7c8a4bf13bf32eab3fbe47da80875f22fedf.pdf



Bilateral Financial Linkages and Global Imbalances: a View on the Eve of the Financial Crisis

Gian Maria Milesi-Ferretti

Francesco Strobbe

Natalia Tamirisa

This Draft: May 13, 2011


Click to access Milesi-Ferretti_Bilateral%20Financial%20Linkages%20and%20Global%20Imbalances.pdf



Cross-border financial linkages: Identifying and measuring vulnerabilities


Philip R. Lane


Click to access PolicyInsight77.pdf




Global banks turning more local: Improved host countries’ financial stability

Gaston Gelos, Frederic Lambert

17 May 2015




Drivers of cross-border banking since the Global Crisis

Franziska Bremus, Marcel Fratzscher

28 January 2015




Systemic Risks in Global Banking What Available Data Can Tell Us and What More Data Are Needed?

Eugenio Cerutti, Stijn Claessens, and Patrick McGuire


Click to access c12557.pdf



US Banks’ International Balance Sheet Linkages: A Data Survey

Carmela D’Avino



Click to access MPRA_paper_69422.pdf



G20 Agenda towards a More Stable and Resilient International Financial Architecture



Click to access g20-international-financial-architecture.pdf



Cross-Border Interbank Networks, Banking Risk and Contagion

Lena Tonzer



Click to access N_129-Tonzer.pdf



Developments in a Cross-Border Bank Exposure “Network”

Masazumi Hattori

Yuko Suda



Click to access wp07e21.pdf



Systemic Risks in Global Banking: What Available Data Can Tell Us and What More Data are Needed?

By Eugenio Cerutti, Stijn Claessens and Patrick McGuire

April 18, 2012


Click to access 6798726.pdf



Globalisation and Financial Stability Risks: Is the Residency-Based Approach of the National Accounts Old-Fashioned?

Bruno Tissot


Click to access btissot.pdf



The currency dimension of the bank lending channel in international monetary transmission

Elod Takats and Judit Temesvary



Click to access 2017001pap.pdf



Banks and Cross-Border Capital Flows: Policy Challenges and Regulatory Responses

Committee on International Economic Policy and Reform




How the interactions of monetary and regulatory policies may have been ahead of the anti-globalisation backlash
Kristin Forbes, Dennis Reinhardt, Tomasz Wieladek

23 December 2016




European bank deleveraging and global credit conditions
Erik Feyen, Ines Gonzalez del Mazo

12 May 2013


Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative

Balance Sheets, Financial Interconnectedness, and Financial Stability – G20 Data Gaps Initiative


From G-20 Data Gaps Initiative II: Meeting the Policy Challenge

In 2009, the G-20 Finance Ministers and Central Bank Governors (FMCBG) endorsed 20 recommendations to address data gaps revealed by the global financial crisis. The initiative, aimed at supporting enhanced policy analysis, is led by the Financial Stability Board (FSB) and the International Monetary Fund (IMF). The Inter-Agency Group on Economic and Financial Statistics (IAG)1 plays the global facilitator role to coordinate and monitor the implementation of the DGI recommendations.

The financial crisis which started in 2007 with problems in the U.S. subprime market, spread to the rest of the world becoming the most severe global crisis since the Great Depression. One difference between the global financial crisis and earlier post-war crises was that the crisis struck at the heart of the global financial system spreading throughout the global economy. This required global efforts for recovery. As one element of the global response, in October 2009, the G-20 Finance Ministers and Central Bank Governors (FMCBG) endorsed a DGI led by the Financial Stability Board (FSB) Secretariat and the IMF Staff. DGI was launched as an overarching initiative of 20 recommendations to address information gaps revealed by the global financial crisis.

Following the global financial crisis, in 2008, the G-20 leaders, at their meeting in Washington,9 committed to implement a fundamental reform of the global financial system to strengthen financial markets and regulatory regimes so as to avoid future crises.10 As part of the reform agenda, the FSB was established in April 2009 as the successor to the Financial Stability Forum (FSF) and started working as the central locus of coordination to take forward the financial reform program as developed by the relevant bodies. The obligations of members of the FSB were set to include agreeing to undergo periodic peer reviews, using among other inputs IMF/World Bank Financial Sector Assessment Program (FSAP) reports. The G-20 leaders noted the importance of global efforts in implementing the global regulatory reform so as to protect against adverse cross-border, regional and global developments affecting international financial stability.

The components of the G-20 regulatory reform agenda complement each other with an ultimate goal of strengthening the international financial system. The DGI has been an important element of this agenda as the regulatory reform agenda items mostly require better data. The collection of data on Global Systemically Important Banks’ (G-SIBs) exposures and funding dependencies is among the steps towards addressing the “too-big-to-fail” issue by reducing the probability and impact of G-SIBs’ failing. The FSB work on developing standards and processes for global data collection and aggregation on securities financing transactions aims to improve transparency in securitization towards the main goal of reducing risks related to the shadow banking system. Over-the-counter (OTC) derivatives markets including Credit Default Swap (CDS) were brought under greater scrutiny towards the main goal of making derivatives markets safer following the global crisis. DGI supported this goal by improving information in CDS markets. A number of other G-20 initiatives have strong links with the DGI project including the FSB work on strengthening the oversight and regulation of the shadow banking system; and on the work on global legal entity identifiers (LEI)11 which contribute to the robustness of the data frameworks with a more micro focus. The changing global regulatory reforms particularly the implementation of Basel III was also taken into consideration in the development of the DGI.

Surveillance Agenda

The importance of closing the data gaps hampering the surveillance of financial systems was also highlighted as part of the IMF’s 2014 Triennial Surveillance Review (TSR).12 The 2014 TSR emphasized that due to growing interconnectedness across borders, financial market shocks will continue to have significant spillovers via both capital flows and shifts in risk positions. Also, new dimensions to interconnectedness will continue to emerge such as through the potential short-run adverse spillovers generated by the financial regulatory reforms. To this end, the TSR recommended improving information on balance-sheets and enriching flow-of funds data. The IMF has overhauled its surveillance to make it more risk-based. To this end, the IMF Managing Director’s Action Plan for Strengthening Surveillance following the 2014 TSR13 underlined that the IMF will revive and adapt the Balance Sheet Approach (BSA) to facilitate a more in-depth analysis of the impact of shocks and their transmission across sectors, and possibly initiate the global flow of funds to better reflect global interconnections (Box 1). This work requires data from the DGI as it will help support the IMF’s macro-financial work including in the key exercises and reports (i.e., Early Warning Exercise, FSAP, and GFSR).

Global Flow of Funds

Through the use of internationally-agreed statistical standards, data on cross-border financial exposures (IBS, CPIS, and Coordinated Direct Investment Survey (CDIS)) can be linked with the domestic sectoral accounts data to build up a comprehensive picture of financial interconnections domestically and across borders, with a link back to the real economy through the sectoral accounts. This work is known as the “Global Flow of Funds (GFF).”14 The GFF project is mainly aimed at constructing a matrix that identifies interlinkages among domestic sectors and with counterpart countries (and possibly counterpart country sectors) to build up a picture of bilateral financial exposures and support analysis of potential sources of contagion. The concept of the GFF was first outlined in the Second Progress Report on the G-20 Data Gaps Initiative and initiated in 2013 as part of a broader IMF initiative aimed at strengthening the analysis of interconnectedness across borders, global liquidity flows and global financial interdependencies. In the longer term, the GFF matrix is intended to support regular monitoring of bilateral cross-border financial positions through a framework that highlight risks to national and international financial stability. IMF Staff is working towards developing a GFF matrix starting with the largest global economies.


How Does the DGI Address the Surveillance Agenda?

As noted above, in the wake of the 2014 TSR the IMF Managing Director published an Action Plan for Strengthening Surveillance. Among the actions to be taken was that “The Fund will revive and adapt the balance sheet approach to facilitate a more in-depth analysis of the impact of shocks and their transmission across sectors.” This responded to a call from outside experts David Li and Paul Tucker in their external study for the 2014 TSR on risks and spillovers.37

Sectoral Analysis

Even though the 2007/2008 crisis emerged in the financial sector, given its intermediary role, the problems in the financial sector also affected other sectors of an economy. To this end, analysis of balance sheet exposures is essential given the increasingly interconnected global economy. As it is pointed out in the IMF TSR 2014, the use of balance sheets to identify sources of vulnerability and the transmission of shocks, could have helped detect risks associated with European banks’ reliance on U.S. wholesale funding to finance structured products. In June 2015, the IMF set out the way forward in a paper for the IMF Executive Board on Balance Sheet Analysis in Surveillance. 38 Sectoral accounts and balance sheet data are essential, including from-whom to-whom data, in providing the context for an assessment of the links between the real economy and financial sectors. The sectoral balance sheets of the SNA is seen as the overarching framework for balance sheet analysis as the IMF Executive Board paper makes clear. Further, the paper sets out a data framework for such analysis.39 Putting the sectoral balance sheets of the SNA in a policy context, the IMF has developed a BSA, which compiles all the main balance sheets in an economy using aggregate data by sector. The BSA is based on the same conceptual principles as the sectoral accounts, providing information on a from-whom-to-whom basis with an additional focus on vulnerabilities arising from maturity and, currency mismatches as well as the capital structure of economic sectors.

While currently not that many economies compile from-whom-to-whom balance sheet data, BSA data can be compiled from the IMF’s Standardized Report Forms, IIP, and government balance sheet data—a more limited set of data than needed to compile the sectoral accounts. The DGI-2 recommendations address key data gaps that act as a constraint on a full-fledged balance sheet analysis. The DGI recommends addressing such gaps through improving G-20 economies’ dissemination of sectoral accounts and balance sheets building on 2008 SNA, including for the non-financial corporate and household sectors. (Annex 1, Recommendation II.8) Given the multifaceted character of the datasets, implementation of this recommendation is challenging and progress has been slow. However, all G-20 economies agree on the importance of having such information and have plans in place to make it happen.

Understanding Cross-border Financial Interconnections

The crisis emphasized the fact that it is not possible to isolate the problems in a single financial system as shocks propagate rapidly across the financial systems. Indeed, the IMF, since 2010, has been identifying jurisdictions with systemically important financial sectors based on a set of relevant and transparent criteria including size and interconnectedness. Within this identification framework, cross-border interconnectedness is considered an important complementary measure to the size of the economy: it captures the systemic risk that can arise through direct and indirect interlinkages among financial sectors in the global financial system (i.e., the risk that failure or malfunction of a national financial system may have severe repercussions on other countries or on overall systemic stability.48 The 2014 TSR summed up the issue succinctly in its Executive Summary: “Risks and spillovers remain first-order issues for the world economy and should be central to Fund surveillance. Recent reforms have made surveillance more risk-based, helping to better capture global interconnections. Experience so far also points to the need to build a deeper understanding of how risks map across countries, and how spillovers can quickly spread across sectors to expose domestic vulnerabilities.”49 Four existing datasets that include key information on cross-country financial linkages are the IIP, BIS IBS, IMF CPIS and IMF CDIS. Together these datasets provide a comprehensive picture of cross-border financial interconnections. This picture is especially relevant for policy makers as financial connections strengthen across border and domestic conditions are affected by financial developments in other economies to whom they are closely linked financially. DGI-2 focuses on improving the availability and cross-country comparability of these datasets (Annex1, Recommendations II.10, 11, 12 and 13). The well-known IIP is a key data source to understanding the linkages between the domestic economy and the rest of the world by providing information on both external assets and liabilities of the economy with a detailed instrument breakdown. However, the crisis revealed the need for currency and more detailed sector breakdowns, particularly for the other financial corporations (OFCs) sector. Consequently, as part of the DGI, the IIP was enhanced to support these policy needs. Significant progress has also been made in ensuring regular reporting of IIP along with the increase in frequency of reporting from annual to quarterly. By end-2015 virtually all G-20 economies reported quarterly IIP data. The IBS have been a key source of data for many decades providing information on aggregate assets and liabilities of internationally active banking systems on a quarterly frequency. The CPIS data, while on an annual frequency, provided significant insights into portfolio investment assets. That said, both datasets had limitations in terms of country coverage and granularity. CPIS also needed to be improved in terms of frequency and timeliness. To this end, the DGI supported the enhancements in these datasets.


Key Terms:

  • G-20 Data Gaps Initiative (DGI)
  • Financial Stability Board (FSB)
  • The Inter-Agency Group on Economic and Financial Statistics (IAG)
  • Finance Ministers and Central Bank Governors (FMCBG)
  • Financial Stability Forum (FSF)
  • Global Systemically Important Banks (G-SIBs)
  • Over-the-counter (OTC)
  • Credit Default Swap (CDS)
  • Global legal entity identifiers (LEI)
  • IMF Triennial Surveillance Review (TSR)
  • IMF Balance Sheet Approach (BSA)
  • IMF Global Flow of Funds (GFF)
  • IMF IIP (International Investment Positions)
  • BIS IBS (International Banking Statistics)
  • IMF CPIS (Coordinated Portfolio Investment Survey)
  • IMF CDIS (Coordinated Direct Investment Survey)
  • IMF GFSR ( Global Financial Stability Report)


Other Related Terms:

  • Global Systemically Important Financial Institutions (G-SIFIs )
  • Systemically Important Financial Market Utilities (G-FMUs)
  • Nonbank Financial Companies (G-SINFC)
  • Financial Stability Oversight Council (FSOC)


The IAG members are

  • BIS (Bank of International Settlements)
  • G20 (Group of 20 Nations)
  • IMF (International Monetary Fund)
  • OECD (Organisation for Economic Co-operation and Development)
  • ECB (European Central Bank)
  • World Bank
  • Eurostat (European Statistics/Directorate-General of the European Commission)
  • UN (United Nations)


From G-20 Data Gaps Initiative II: Meeting the Policy Challenge


From G-20 Data Gaps Initiative II: Meeting the Policy Challenge



Progress of DGI ((DGI-I and DGI-II)

From G-20 Data Gaps Initiative II: Meeting the Policy Challenge

The first phase of the DGI was successfully concluded in September 2015 and the second phase of the initiative (DGI-2) was endorsed by the G-20 FMCBG. The key objective of the DGI-2 is to implement the regular collection and dissemination of comparable, timely, integrated, high quality, and standardized statistics for policy use. DGI-2 encompasses 20 new or revised recommendations, focused on datasets that support: (i) monitoring of risk in the financial sector; and (ii) analysis of vulnerabilities, interconnections and spillovers, not least cross-border.

Following the significant progress in closing some of the information gaps identified during the global financial crisis of 2007/08, the G-20 FMCBG endorsed, in September 2015, the closing of DGI-1. During the six-year implementation of DGI-1, significant achievements were obtained, particularly regarding the development of conceptual frameworks, as well as enhancements in some statistical collection and reporting. Regarding the latter, more work is needed for the implementation of some recommendations, especially in seven high-priority areas across G-20 economies, notably in government finance statistics and sectoral accounts and balance sheets.

In September 2015, the G-20 FMCBG also endorsed the launch of the second phase of the DGI. The main objective of DGI-2 is to implement the regular collection and dissemination of reliable and timely statistics for policy use. Its twenty recommendations are clustered under three main headings: (1) monitoring risk in the financial sector, (2) vulnerabilities, interconnections and spillovers, and (3) data sharing and communication of official statistics. The DGI-2 maintains the continuity with the DGI-1 recommendations while setting more specific objectives with the intention for the G-20 economies to compile and disseminate minimum common datasets for these recommendations. The DGI-2 also includes new recommendations to reflect the evolving users’ needs. Furthermore, the DGI-2 aims at strengthening the synergies with other relevant global initiatives.

The DGI-2 facilitates closing data gaps that are policy-relevant. By achieving its main objective, the DGI-2 will be instrumental in closing gaps in policy-relevant data. Most of the datasets covered by the DGI-2 are particularly relevant for meeting the emerging macro- financial policy needs, including the analysis of international positions, global liquidity, foreign currency exposures, and capital flows volatility.

The DGI-2 introduces action plans that set out specific “targets” for the implementation of its twenty recommendations through the five-year horizon of the initiative. The action plans acknowledge that countries may be at different stages of statistical development and take into account national priorities and resource constraints. The DGI-2 intends to bring the G-20 economies at higher common statistical standards through a coordinated effort; however, flexibility will be considered in terms of intermediate steps to achieve the targets based on national priorities, resource constraints, emerging data needs, and other considerations.




Key Sources of Research:


Second Phase of the G-20 Data Gaps Initiative (DGI-2) Second Progress Report


Prepared by the Staff of the IMF and the FSB Secretariat September 2017

Click to access 092117.pdf





Second Phase of the G-20 Data Gaps Initiative (DGI-2) First Progress Report


Prepared by the Staff of the IMF and the FSB Secretariat September 2016


Click to access 090216.pdf



Sixth Progress Report on the Implementation of the G-20 Data Gaps Initiative


Prepared by the Staff of the IMF and the FSB Secretariat September 2015


Click to access The-Financial-Crisis-and-Information-Gaps.pdf



Fifth Progress Report on the Implementation of the G-20 Data Gaps Initiative


Prepared by the Staff of the IMF and the FSB Secretariat September 2014

Click to access 5thprogressrep.pdf



Fourth Progress Report on the Implementation of the G-20 Data Gaps Initiative


Prepared by the Staff of the IMF and the FSB Secretariat September 2013


Click to access 093013.pdf




Progress Report on the G-20 Data Gaps Initiative: Status, Action Plans, and Timetables


Prepared by the Staff of the IMF and the FSB Secretariat September 2012

Click to access 093012.pdf




Implementation Progress Report


Prepared by the IMF Staff and the FSB Secretariat June 2011

Click to access 063011.pdf




Progress Report Action Plans and Timetables


Prepared by the IMF Staff and the FSB Secretariat May 2010


Click to access 053110.pdf




Report to the
G-20 Finance Ministers and Central Bank Governors


Prepared by the IMF Staff and the FSB Secretariat October 29, 2009


Click to access 102909.pdf




G-20 Data Gaps Initiative II: Meeting the Policy Challenge

by Robert Heath and Evrim Bese Goksu


Click to access wp1643.pdf




Why are the G-20 Data Gaps Initiative and the SDDS Plus Relevant for Financial Stability Analysis?

Robert Heath

Click to access wp1306.pdf




Toward the Development of Sectoral Financial Positions and Flows in a From-Whom-to-Whom Framework

Manik Shrestha


Click to access c12835.pdf



An Integrated Framework for Financial Positions and Flows on a From-Whom-to- Whom Basis: Concepts, Status, and Prospects

Manik Shrestha, Reimund Mink, and Segismundo Fassler


Click to access wp1257.pdf



Financial investment and financing in a from-whom-to-whom framework

Mink, Reimund

Click to access 2011_dublin_61_01_mink.pdf



Users Conference on the Financial Crisis and Information Gaps

Conference co-hosted by The International Monetary Fund and The Financial Stability Board





A Status on the Availability of Sectoral Balance Sheets and Accumulation Accounts in Advanced Economies not Represented by Membership in the G-20



Click to access g20a.pdf



A Status on the Availability of Sectoral Balance Sheets and Accumulation Accounts in G-20 Economies



Click to access g20b.pdf




FEBRUARY 28 – MARCH 2, 2011





The Balance Sheet Approach:
Data Needs, Data at Hand, and Data Gaps (August 2009)


Alfredo Leone, Statistics Department, International Monetary Fund


Click to access leone_paper.pdf



Development of financial sectoral accounts

New opportunities and challenges for supporting financial stability analysis

by Bruno Tissot



Click to access ifcwork15.pdf



A Flow-of-Funds Perspective on the Financial Crisis Volume I: Money, Credit

edited by B. Winkler, A. van Riet, P. Bull, Ad van Riet



A Flow-of-Funds Perspective on the Financial Crisis Volume II: Macroeconomic

edited by B. Winkler, A. van Riet, P. Bull



Financial investment and financing in a from-whom-to-whom framework

Mink, Reimund


Click to access 650287.pdf



Expanding the Integrated Macroeconomic Accounts’ Financial Sector

By Robert J. Kornfeld, Lisa Lynn, and Takashi Yamashita


Click to access 0116_expanding_the_integrated_macroeconomic_accounts_financial_sector.pdf



Using the Balance Sheet Approach in Surveillance: Framework, Data Sources, and Data Availability

Johan Mathisen and Anthony Pellechio


Click to access wp06100.pdf



Balance Sheet Analysis: A New Approach to Financial Stability


By Jean Christine A. Armas



Click to access EN16-01.pdf



Analyzing the Israeli economy’s resilience to exchange rate risk


Click to access JFS2007_HaimLevy_pres.pdf

Click to access dp0701e.pdf




A Balance Sheet Approach to Financial Crisis

Mark Allen, Christoph Rosenberg, Christian Keller, Brad Setser, and Nouriel Roubini


Click to access wp02210.pdf




Giovanni Cozzi and
Jan Toporowski


Click to access wp_485.pdf



Balance-sheets. A financial/liability approach

Bo Bergman



Click to access bergman_paper.pdf



Understanding Financial Crisis Through Accounting Models

Dirk J Bezemer


Click to access Bezemer_-_No_one_show_this_comming.pdf




Schumpeter Might Be Right Again: The Functional Differentiation of Credit

Dirk J. Bezemer
University of Groningen

Click to access the_functional_differentiation_of_credit.pdf



Causes of Financial Instability: Don’t Forget Finance

Dirk J. Bezemer

April 2011


Click to access wp_665.pdf






Click to access ACS_1250047_1st_Prf.pdf



Did Credit Decouple from Output in the Great Moderation?

Maria Grydaki and Dirk Bezemer

June 2013

Click to access MPRA_paper_47424.pdf




Towards an ‘accounting view’ on money, banking and the macroeconomy: history, empirics, theory

Dirk J. Bezemer


Click to access Camb._J._Econ.-2016-Bezemer-1275-95.pdf



Modelling systemic financial sector and sovereign risk

Dale F. Gray anD anDreas a. Jobst



Click to access Gray_2.pdf





Click to access 061215.pdf

Click to access 071315.pdf



The role of external balance sheets in the financial crisis

Yaser Al-Saffar, Wolfgang Ridinger and Simon Whitaker



Click to access fs_paper24.pdf



Global Conferences on DGI

June 2, 2016





IMF Note for G20 IFA WG

February 2016


Click to access P020160811536051676178.pdf



Introduction to Balance of Payments and International Investment Position Manual, 6th Edition and BPM6 Compilation Guide

Click to access Link3_766_105.pdf



Introduction: ‘cranks’ and ‘brave heretics’: rethinking money and banking after the Great Financial Crisis

Geoffrey Ingham Ken Coutts Sue Konzelmann

Camb J Econ (2016) 40 (5): 1247-1257.



Network Analysis of Sectoral Accounts: Identifying Sectoral Interlinkages in G-4 Economies

by Luiza Antoun de Almeida


Click to access wp15111.pdf




Prepared By David Daokui Li and Paul Tucker


Click to access 073014e.pdf

Click to access 14-10.pdf






Click to access 073014.pdf




Measuring Global Flow of Funds and Integrating Real and Financial Accounts: Concepts, Data Sources and Approaches

Nan Zhang (Stanford University)


Click to access zhang.pdf



Cross-border financial linkages: Identifying and measuring vulnerabilities


Philip R. Lane



Click to access PolicyInsight77.pdf



Global Flow of Funds: Mapping Bilateral Geographic Flows

Authors1: Luca Errico, Richard Walton, Alicia Hierro, Hanan AbuShanab, Goran Amidzic



Click to access STS083-P1-S.pdf


Global-Flow-of-Funds Analysis in a Theoretical Model -What Happened in China’s External Flow of Funds –


Nan Zhang


Click to access 08GFOF.pdf



Mapping the Shadow Banking System through a Global Flow of Funds Analysis

Hyun Song Shin

Princeton University

Click to access Hyun-Song-Shin2.pdf



The Composition of the Global Flow of Funds in East Asia


Nan Zhang





What Has Capital Flow Liberalization Meant for Economic and Financial Statistics?

Robert Heath


Click to access 41aac8864e53b6176f7b3b7df22aba05ac0e.pdf



Global flows in a digital age: How trade, finance, people, and data connect the world economy

McKinsey & Company Report




Managing global finance as a system

Speech given by

Andrew G Haldane, Chief Economist, Bank of England

At the Maxwell Fry Annual Global Finance Lecture, Birmingham University 29 October 2014

Click to access speech772.pdf

External Balance sheets of Nations

External Balance sheets of Nations

Also read my other related post.

Foundations of Balance Sheet Economics


From The role of external balance sheets in the financial crisis

Gross external balance sheets are important in explaining the incidence of the financial crisis across economies. Just as for banks, leverage of the national balance sheet was an indicator of subsequent vulnerability. Countries that also experienced strong domestic credit growth, in part fuelled by ‘savings glut’ net capital inflows, suffered particularly badly. And banks’ balance sheets were critical in the transmission mechanism: high gross external interbank debt — the ‘banking glut’ — and maturity and currency mismatches, contributed to foreign rollover risk.


From  Bilateral Financial Linkages and Global Imbalances: a View on The Eve of the Financial Crisis

During the last 15 years international financial integration has increased dramatically. This process was characterized in particular by two related trends: an explosion in the size of cross-border capital inflows and outflows, reflected in rapidly expanding stocks of external assets and liabilities; and the emergence of global imbalances, reflected in an increased dispersion in world current account positions and a sharp widening of global net debtor and creditor positions. With cross-border financial linkages becoming much stronger, measuring them accurately is essential to understand the impact and international transmission of shocks, as the global financial crisis has clearly shown. However, while research on causes and consequences of global imbalances and international financial integration has been extensive, and recent pioneering work by Kubelec and Sa (2010) has documented the increase in bilateral financial linkages among 18 advanced economies and emerging markets, we still lack a comprehensive global picture of bilateral net and gross positions across countries. This paper takes a first step towards filling that gap.

From The geographical composition of national external balance sheets: 1980–2005

Financial globalisation has been one of the most striking phenomena happening in the world economy in the past two decades. Until recently, very little was known about the size and composition of countries’ external nancial assets and liabilities. This gap was partly narrowed by the work of Lane and Milesi-Ferretti, which provides estimates of the total external nancial assets and liabilities of 145 countries, from 1970 to 2004. These data show that there has been a marked increase in the ratio of foreign assets and liabilities to GDP, particularly since the mid-1990s. This increase has been especially pronounced among industrial countries, where nancial integration has exceeded trade integration. However, very little is known about the geographical composition of assets and liabilities. This paper contributes to a better understanding of the geographical composition of countries’ external positions by constructing a data set of stocks of bilateral assets and liabilities for a group of 18 countries, covering the period from 1980 to 2005.

The data distinguish between four asset classes: foreign direct investment, portfolio equity, debt, and foreign exchange reserves. For the rst three asset classes, missing data are constructed using gravity models, which have been extensively applied to explain cross-border trade and have been increasingly used to explain nancial stocks and ows. These models explain bilateral assets by the geographical and historical proximity between the source and host countries, including variables such as distance, time difference, whether the source and host countries share a common border, a common language, or have colonial links. These models tend to have a large explanatory power, suggesting that nancial markets are not frictionless, but are segmented by information asymmetries and familiarity effects. For reserves, a two-step procedure is adopted. First, data on the currency composition are collected and then are translated into geographical composition.


Key Sources of Research:

Financial globalisation, external balance sheets and economic adjustment

By Chris Kubelec


Click to access qb070204.pdf


Global imbalances and external adjustment after the crisis

Philip R. Lane

Gian Maria Milesi-Ferretti

This draft: May 15, 2014


Click to access LMF%20EXTADJUST%20July2014.pdf


The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004

Philip R. Lane and Gian Maria Milesi-Ferretti



Click to access wp0669.pdf


Europe and Global Imbalances

Philip R. Lane and Gian Maria Milesi-Ferretti


Click to access wp07144.pdf


A Global Perspective on External Positions

Philip R. Lane and Gian Maria Milesi-Ferretti

Click to access c0122.pdf


Capital Flows to Central and Eastern Europe

Philip R. Lane

Gian Maria Milesi-Ferretti

Click to access iiisdp161.pdf


Cross-border portfolios: assets, liabilities, and non- flow adjustments

Stephanie E Curcuru,2 Charles P Thomas,2 Francis E Warnock

Click to access bispap82a.pdf


Why do Foreigners Invest in the United States?

Kristin J. Forbes


Click to access Why_Do_Foreigners_Invest_in_US-03-15-08.pdf



Kristin J. Forbes

Click to access cj27n2-9.pdf


Patterns of International Capital Flows and Their Implications for Economic Development

Eswar Prasad, Raghuram G. Rajan, and Arvind Subramanian

Click to access NEG11Rajan.pdf


Financial Globalisation and the Crisis

Philip R. Lane

June 2012

Click to access lseGC_lane_FinGlob.pdf


The financial crisis and its international transmission: some tentative lessons 

Gian Maria Milesi-Ferretti

September 14, 2009

Click to access 1_Milesi_Ferretti.pdf


External liabilities and crises

Luis A.V. Catão , Gian Maria Milesi-Ferretti


Click to access Catao_Milesi-Ferretti_External%20Liabil_Crises_jie%2014.pdf


International Investment Patterns

Philip R. Lane
Gian Maria Milesi-Ferretti


Click to access wp04134.pdf


Where Did All the Borrowing Go?
A Forensic Analysis of the U.S. External Position

Prepared by Philip R. Lane and Gian Maria Milesi-Ferretti1

February 2008

Click to access wp0828.pdf


An Elephant in the Room: The US External Balance Sheet and International Monetary Power


Iain Hardie

Sylvia Maxfield


Click to access An%20Elephant%20in%20the%20Room%20Brown%20Oct%202015.pdf


THE EXTERNAL WEALTH OF NATIONS Measures of Foreign Assets and Liabilities For Industrial and Developing Countries

Philip Lane

Gian Maria Milesi-Ferretti

August 14, 2000

Click to access TEPNo4PL21.pdf


The role of external balance sheets in the financial crisis

Yaser Al-Saffar, Wolfgang Ridinger and Simon Whitaker


Click to access fs_paper24.pdf


Domestic Credit Growth and International Capital Flows

Philip R. Lane and Peter McQuade


Click to access ecbwp1566.pdf



Alfredo Pistelli

Jorge Selaive

Rodrigo O. Valdés


Click to access 6360170.pdf


External Balance Sheets as Countercyclical Crisis Buffers

Joseph Joyce


Click to access MPRA_paper_66039.pdf


Bilateral Financial Linkages and Global Imbalances: a View on the Eve of the Financial Crisis

Gian Maria Milesi-Ferretti

Francesco Strobbe

Natalia Tamirisa

This Draft: May 13, 2011


Click to access Milesi-Ferretti_Bilateral%20Financial%20Linkages%20and%20Global%20Imbalances.pdf


Financial Globalization and Cross-Country Spillovers

Chris Kubelec  and Filipa Sa




The geographical composition of national external balance sheets: 1980–2005

Chris Kubelec and Filipa Sá

March 2010

Click to access wp384.pdf


U.S. Net International Investment Position



The International Balance Sheets of China and India

Philip R. Lane

Preliminary Draft. March 2006.


Click to access Philip_lane.pdf


Economics of Money, Credit and Debt

Economics of Money, Credit and Debt

Global Financial Crisis and subsequent Global recession ( Secular Stagnation) has invoked lot of research in the causes of GFC.  Post Keynesian Economists were particularly correct about predicting the GFC.  Main stream Neoclassical Economists and their DSGE models did not predict the crisis.  Great Moderation was the main explanation given by neoclassical economists.  Low volatility in economic growth was seen as calm waters with no turbulence ahead.  GFC proved them wrong.

There are several development prior to GFC.

  • Role of Financial Sector
  • Rise of Credit and Debt
  • Rise of Shadow Banking
  • Securitization
  • Financial Globalization
  • Income Inequality
  • Lowered Credit standards
  • Lowered ratings standards by Rating Agencies
  • Global Capital flows

There are several outstanding researchers who are developing new ideas and thinking about the Banks, Money, Credit and Debt, Shadow Banking, Income Inequality, Effective demand, Low Interest Rates, Endogenous money and others.

  • Hierarchy of Money and Credit
  • Institutionalism
  • Accounting Approach
  • Quadruple Entry system
  • Endogenous Sources of Instability
  • Credit is debt 
  • Inherent Instability of Credit
  • Endogenous Creation of Money
  • Effective Demand
  • Lender of Last Resort
  • Open Economies
  • Interlinkages among economic agents 
  • Effectiveness of Monetary Policies
  • Federal Reserve Open Market operations
  • Shadow Banking
  • Fiscal Policies
  • Global Coordination and Cooperation
  • International Lender of Last Resort
  • Swap Network Among Central Banks
  • Regulation of Banks
  • Liquidity and Solvency
  • Capital, Reserve, Liquidity Ratios
  • Capital Flows across borders
  • Linkages among Financial Markets
  • Cross border Spillovers
  • Impact of Low Interest Rates
  • Stock flow Consistency
  • Essential Hybridity ( Public vs Private Money, Local vs Global )
  • Interdependence among Markets, Institutions and Market Infrastructure
  • Payment, clearing and Settlement Systems
  • Interlinked Balancesheets, Credit Chains, Repo Chains


Key People:

  • Steve Keen
  • Marc Lavoie
  • Dirk Bezemer
  • Richard Werner
  • Perry Mehrling
  • Hyun Song Shin

Also see

  • Richard Koo
  • Adair Turner
  • Gennaro  Zezza
  • Wynn Godley
  • Hyman Minsky
  • Zoltan Pozsar
  • Claudio Borio


Key Sources of Research:


The Inherent Hierarchy of Money

Perry Mehrling

January 25, 2012


Click to access Mehrling_P_FESeminar_Sp12-02.pdf



Economics of Credit and Debt

Daniel H. Neilson†

18 November 2012


Click to access inet2012neilson_economicsofcredit.pdf



The New Lombard Street How the Fed became the dealer of last resort

Perry Mehrling April 4, 2010





Why central banking should be re-imagined

Perry Mehrling


Click to access bispap79i.pdf



A Money View of Credit and Debt

November 4, 2012

Perry Mehrling

Click to access inet2012mehrling_amoneyviewofcreditanddebt.pdf



Why is money difficult?

Perry Mehrling

BCRA, Buenos Aires

June 4, 2015


Click to access JMB_2015_Mehrling.pdf



Central Bank Deleveraging and Financial Sector Regulation

Perry Mehrling

Minsky Conference, DC

April 15, 2015

Click to access minsky2015_mehrling.pdf



Modern Money: Fiat or Credit?

Author(s): Perry Mehrling
Source: Journal of Post Keynesian Economics, Vol. 22, No. 3 (Spring, 2000), pp. 397-406


Click to access Mehrling%20Fiat.pdf



Shadow Banking, Central Banking, and the Future of Global Finance

Perry Mehrling

Shadow Banking: A European Perspective City University London
Feb 2, 2013


Click to access Mehrling_Future-Global-Finance-126sn0t.pdf


Five Key Features of Modern Monetary Systems

New Thinking in Finance, London February 12, 2014

Perry Mehrling


Click to access 20140212_0930_Perry_Mehrling.pdf



Elasticity and Discipline in the Global Swap Network

Perry Mehrling1∗

Working Paper No. 27 November 12, 2015


Click to access WP27-Mehrling.pdf



The Credit Money and State Money Approaches

L. Randall Wray

Working Paper No. 32

April 2004


Click to access wray_-_state_and_credit_theories_of_money.pdf



Bagehot was a Shadow Banker:
Shadow Banking, Central Banking, and the Future of Global Finance

Perry Mehrling, Zoltan Pozsar, James Sweeney, Daniel H. Neilson

February 22, 2013


Click to access Paper_Sweeney.pdf



The rise of asset management and capital market-based financing: a cyclical or a structural shift?

Perry Mehrling

ECMI, Brussels October 20, 2015


Click to access Perry%20Mehrling.pdf




Credit theory of money




The Credit Theory of Money

By A. Mitchell Innes

From The Banking Law Journal, Vol. 31 (1914), Dec./Jan., Pages 151-168.






From The Banking Law Journal, May 1913.




Schumpeter Might Be Right Again: The Functional Differentiation of Credit


Dirk J. Bezemer


Click to access the_functional_differentiation_of_credit.pdf



The post-Keynesian economics of credit and debt

Marc Lavoie
Department of Economics, University of Ottawa

November 2012



Click to access inet2012lavoie_post-keynesianeconomics.pdf



The role of State and the Hierarchy of Money

Stephanie Bell


Click to access Bell%20The%20Role%20of%20the%20State%20and%20the%20Hierarchy%20of%20Money.pdf




Stephanie Bell



Click to access 231.pdf



Towards a theory of shadow money

Daniela Gabor and Jakob Vestergaard

Click to access Towards_Theory_Shadow_Money_GV_INET.pdf



The economic consequences of “market-based” lending

Carolyn Sissoko

May 24, 2016




Money creation in the modern economy

Michael McLeay, Amar Radia and Ryland Thomas


Click to access qb14q1prereleasemoneycreation.pdf



Money in the modern economy: an introduction

Michael McLeay, Amar Radia and Ryland Thomas

Click to access qb14q1prereleasemoneyintro.pdf



Banks are not intermediaries of loanable funds — and why this matters

Zoltan Jakab  and Michael Kumhof

Click to access wp529.pdf



Where Does Money Come From?






Explaining money creation by commercial banks: Five analogies for public education


Ib Ravn

Click to access Ravn71.pdf



The Truth about Banks 

Michael Kumhof and Zoltán Jakab



Click to access kumhof.pdf



How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking 

Richard A. Werner





Can banks individually create money out of nothing? — The theories and the empirical evidence 

Richard A. Werner




A lost century in economics: Three theories of banking and the conclusive evidence

Richard A. Werner





Money and credit as means of payment: A new monetarist approach 

Sébastien Lotza, , Cathy Zhang




Head and Tail of Money Creation and its System Design Failures

– Toward the Alternative System Design


Kaoru Yamaguchi, Ph.D.

Yokei Yamaguchi

Click to access Head-and-Tail-2016_WP__-_Japan_Futures_Research_Center.pdf



Applying the Quantity Theory of Credit: The role of the ECB in the propagation of the European financial and sovereign debt crisis and the policy implications

Professor Richard A. Werner

Click to access werner_qtc_ecb_and_policy.pdf



Towards a New Research Programme on ‘Banking and the Economy

Implications of the Quantity Theory of Credit for the Prevention and Resolution of Banking and Debt Crises

Richard A. Werner

Click to access Werner_IRFA_QTC_2012.pdf






Click to access 41_Man_Sch_2011_Werner_Disaggregated_Credit.pdf



The Quantity Theory of Credit and Some of its Applications

Richard Werner


Click to access RW301012PPT.pdf



Banks As Social Accountants And Social Controllers: Credit and Crisis in Historical Perspective

Dirk J Bezemer


Click to access MPRA_paper_15766.pdf




Adair Turner



Click to access aturner_2016.pdf



Towards a New Monetary Paradigm: A Quantily Theorem of Disaggregated Credit evidence from Japan

Richard A. Werner



Click to access KK_97_Disaggregated_Credit.pdf



Do shadow Banks Create Money?

Jo Michell



Click to access PKWP1605.pdf



The political economy of repo markets

Daniela Gabor


Click to access gabor_political_economy_of_repo_markets_0.pdf

Bezemer, Dirk J.



“This is Not a Credit Crisis–It is a Debt Crisis.”

Economic Affairs 29.3 (2009): 95-97.

Click to access 0deec52ce89025980b000000.pdf



Explaining the Great Moderation: Credit and the Macroeconomy Revisited

D Bezemer



Click to access MPRA_paper_15893.pdf



Understanding financial crisis through accounting models

Dirk J. Bezemer



Click to access 00b4952ce88deab0d2000000.pdf



“No One Saw This Coming”

Understanding Financial Crisis Through Accounting Models*

Dirk J Bezemer

Click to access Study-Bezemer-No-one-saw-this-coming.pdf



Credit In Current Orthodoxy: An Appraisal

Dirk J Bezemer

Click to access Bezemer.pdf



From Boom to Bust in the Credit Cycle: the Role of Mortgage Credit


September 4, 2014

Click to access 14025_GEM_def.pdf



A Monetary Minsky model of the Great Moderation and the Great Recession

Steve Keen


Click to access JEBO_2672.pdf



Balance Sheet Recession as the Other-Half of Macroeconomics

Richard C. Koo

Chief Economist Nomura Research Institute

October 14, 2012

The World in Balance Sheet Recession: What Post-2008 West Can Learn from Japan 1990-2005


Richard C. Koo Chief Economist

Central Banks in Balance Sheet Recessions: A Search for Correct Response


Richard C. Koo

Chief Economist Nomura Research Institute

March 31, 2013












wynne godley and gennaro zezza


Click to access pn_4_06.pdf




Are Housing Prices, Household Debt, and Growth Sustainable?
Dimitri B. Papadimitriou  Edward Chilcote  Gennaro Zezza

January 2006





How Fragile is the U.S. Economy?




Click to access stratan-feb-05-draft.pdf

Foundations of Balance Sheet Economics

From  A Balance Sheet Approach to Financial Crisis

Financial markets have become increasingly integrated over the past ten years. In many countries, foreign borrowing has helped to finance higher levels of investment than would be possible with domestic savings alone and contributed to sustained periods of growth. But the opening of capital markets has also placed exceptional demands on financial and macroeconomic policies in emerging market economies. Private capital flows are sensitive to market conditions, perceived policy weaknesses, and negative shocks. Flows of private capital have been more volatile than many expected. A number of major emerging economies have experienced sharp financial crises since 1994.

The financial structure of many emerging markets economies—the composition and size of the liabilities and assets on the country’s financial balance sheet—has been an important source of vulnerability to crises. Financial weaknesses, such as a high level of short-term debt, can be a trigger for domestic and external investors to reassess their willingness to finance a country. The composition of a country’s financial balance sheets also helps to determine how much time a country might have to overcome doubts about the strength of its macroeconomic policy framework, and, more generally, how effectively a country can insulate itself from volatility stemming from changes in global market conditions.

This paper seeks to lay out a systematic analytical framework for exploring how balance sheet weaknesses contribute to the origin and propagation of modern-day financial crises. It draws on the growing body of academic work that emphasizes the importance of balance sheets. It pays particular attention to the balance sheets of key sectors of the economy and explores how weaknesses in one sector can cascade and ultimately generate a broader crisis.

What Is the Balance Sheet Approach?

Unlike traditional analysis, which is based on the examination of flow variables (such as current account and fiscal balance), the balance sheet approach focuses on the examination of stock variables in a country’s sectoral balance sheets and its aggregate balance sheet (assets and liabilities). From this perspective, a financial crisis occurs when there is a plunge in demand for financial assets of one or more sectors: creditors may lose confidence in a country’s ability to earn foreign exchange to service the external debt, in the government’s ability to service its debt, in the banking system’s ability to meet deposit outflows, or in corporations’ ability to repay bank loans and other debt. An entire sector may be unable to attract new financing or roll over existing short-term liabilities. It must then either find the resources to pay off its debts or seek a restructuring. Ultimately, a plunge in demand for the country’s assets leads to a surge in demand for foreign assets and/or for assets denominated in foreign currency. Massive outflows of capital, a sharp depreciation of the exchange rate, a large current account surplus, and a deep recession that reduces domestic absorption are often the necessary counterpart to a sudden adjustment in investors’ willingness to hold a country’s accumulated stock of financial assets.

An economy’s resilience to a range of shocks, including financial shocks, hinges in part on the composition of the country’s stock of liabilities and assets. The country’s aggregate balance sheet—the external liabilities and liquid external assets of all sectors of the economy—is vital. But it is often equally important to look inside an economy and to examine the balance sheet of an economy’s key sectors, such as the government, the financial sector, and the corporate sector.

Our framework for assessing balance sheet risks focuses on four types of balance sheet mismatches, all of which help to determine a country’s ability to service debt in the face of shocks: (i) maturity mismatches, where a gap between liabilities due in the short term and liquid assets leaves a sector unable to honor its contractual commitments if the market declines to roll over debt, or creates exposure to the risk that interest rates will rise; (ii) currency mismatches, where a change in the exchange rate leads to a capital loss;
(iii) capital structure problems, where a heavy reliance on debt rather than equity financing leaves a firm or bank less able to weather revenue shocks; and (iv) solvency problems, where assets—including the present value of future revenue streams—are insufficient to cover liabilities, including contingent liabilities. Maturity mismatches, currency mismatches, and a poor capital structure all can contribute to solvency risk, but solvency risk can also arise from simply borrowing too much or from investing in low-yielding assets.

An analytical framework that examines the balance sheets of an economy’s major sectors for maturity, currency, and capital structure mismatches helps to highlight how balance sheet problems in one sector can spill over into other sectors, and eventually trigger an external balance of payments crisis. Indeed, one of the core arguments that emerges from this approach is that the debts among residents that create internal balance sheet mismatches also generate vulnerability to an external balance of payments crisis. The transmission mechanism often works through the domestic banking system. For instance, broad concerns about the government’s ability to service its debt, whether denominated in domestic or foreign currency, will quickly destabilize confidence in the banks holding this debt and may lead to a deposit run. Alternatively, a change in the exchange rate coupled with unhedged foreign exchange exposure in the corporate sector can undermine confidence in the banks that have lent to that sector. The run on the banking system can take the form of a withdrawal of cross-border lending by nonresident creditors, or the withdrawal of deposits by domestic residents.

Many of the characteristics of a capital account crisis derive from the adjustment in portfolios that follows from an initial shock. Underlying weaknesses in balance sheets can linger for years without triggering a crisis. For example, a currency mismatch can be masked so long as continued capital inflows support the exchange rate. Consequently, the exact timing of a crisis is difficult to predict. However, should a shock undermine confidence, it can trigger a large and disorderly adjustment, as the initial shock reveals additional weaknesses and a broad range of investors, including local residents, seek to reduce their exposure to the country. Massive flows are the necessary counterpart of a sudden move toward a new equilibrium of asset holdings stemming from rapid stock adjustments. If these flows cannot be financed out of reserves, the relative price of foreign and domestic assets has to adjust. An overshooting in asset prices (including the exchange rate) is likely, as investors rarely have access to perfect information and may be prone to herding.

Policy Implications

Information about sectoral balance sheets is most useful if it is available in time to allow policymakers to identify and correct weaknesses before they contribute to financial difficulties. In practice, however, balance sheet information is often only partly available and can be obtained only with significant time lags, which limits its utility for all but ex post analysis. Balance sheet analysis starts with in-depth analysis of sector vulnerabilities; the first step is to identify gaps in country data and to develop the sources needed to provide this data. There is an obvious case for better data collection and enhanced external disclosure of key balance sheet data.

The balance sheet approach also focuses attention on policies that can reduce sectoral vulnerabilities—particularly the vulnerability to changes in key financial variables. It reinforces the importance of (i) sound debt management by the public sector to minimize the risk that weaknesses in the public sector’s balance sheet will be a source of financial difficulty and to preserve the public sector’s capacity to cushion against shocks originating in the private sector; (ii) policies that create incentives for the private sector to limit its exposure to various balance sheet risks, particularly the explosive combination of currency and maturity risks created by short-term foreign currency denominated borrowing; and (iii) the need to maintain a sufficient cushion of reserves. Flexible exchanges rates can help to limit exposure to currency risk and encourage ongoing hedging as well as facilitating adjustment to external shocks. But the balance sheet approach also underscores some of the risks that can continue to arise in a floating exchange rate regime, particularly if the public sector is the source of the financial instruments that help the private sector hedge against currency risk. While the balance sheet approach directs attention to indicators of financial strength rather than more classic macroeconomic indicators, it in no way diminishes the importance of sound macroeconomic policies. Large debt stocks emerge from persistent flow imbalances (fiscal and current account deficits), and underlying macroeconomic weaknesses are often the reason why countries can borrow only in foreign currency or with short maturities.


There are five strands in development of Balance sheet Economics.

A) Work of Prof. K Tsujimura and Prof. Mizoshita and Prof. M Tsujimura on asset-liabilities Matrices (ALM).

B) IMF’s Balance sheet Approach (BSA)

C) Prof. N Zhang’s work on the Global Flow of Funds accounts

D) Post Keynesian Economists – Mark Lavoie, Dirk Bezemer, Wynne Godley, Hyman Minsky, Steve Keen

E) Money View – Perry Mehrling, Zoltan Pozsar




Key sources for Research:

Compilation and Application of Asset-Liability Matrices: A Flow-of-Funds Analysis of the Japanese Economy 1954-1999.
 Tsujimura, Kazusuke, and Masako Mizoshita.





Tsujimura, Masako, and Kazusuke Tsujimura.

“Balance sheet economics of the subprime mortgage crisis.”

Economic Systems Research 23.1 (2011): 1-25.

Click to access tsujimura_-_balance_sheet_economics_presentation.pdf



Civil Law, Quadruple Entry System and the Presentation Format of

National Accounts

Kazusuke Tsujimura Masako Tsujimura

July 20, 2008 ver.4.1 September 11, 2007 ver.1.1

Click to access DP109.pdf



Foundations of Balance Sheet Economics

Kazusuke Tsujimura and Masako Tsujimura


Click to access TsujimuraPaper.pdf



Asset-Liability-Matrix Analysis Derived from the Flow-of –Funds Accounts: the Bank of Japan’s Quantitative Monetary Policy Examined


Kazusuke Tsujimura

Masako Mizoshita


Click to access ALM.pdf



Compilation and Application of Asset-Liability Matrices:

A Flow-of-Funds Analysis of the Japanese Economy 1954-1999

Kazusuke Tsujimura Masako Mizoshita

November 3, 2004 ver.1.1 October 15, 2004 ver.1.0

Click to access fulltext.pdf



Tsujimura, Kazusuke, and Masako Mizoshita.

“Flow of Funds Analysis.”





Does Monetary Policy Work under Zero-Interest Rate?

Kazusuke Tsujimura Masako Mizoshita

October 2003 ver.1.0 January 2004 ver.1.2


Click to access fulltext.pdf



Tsujimura, Kazusuke, and Masako Mizoshita.

“How to Become a Big Player.”





Tsujimura, Kazusuke, and Masako Mizoshita.

“European Financial Integration.”





Mizoshita, Kazusuke Tsujimura Masako.

“Flow of Funds Analysis: BOJ Quantitative Monetary Policy Examined.”





Measuring Global Flow of Funds and Integrating Real and Financial Accounts: Concepts, Data Sources and Approaches

Nan Zhang (Stanford University)

Paper Prepared for the IARIW-OECD Special Conference


Click to access zhang.pdf



An Integrated Framework for Financial Positions and Flows on a From-Whom-to-Whom Basis: Concepts, Current Status, and Prospects1

Prepared by Manik Shrestha, Reimund Mink,2 and Segismundo Fassler



Click to access wp1257.pdf




Global-Flow-of-Funds Analysis in a Theoretical Model -What Happened in China’s External Flow of Funds 


Nan Zhang


Click to access 08GFOF.pdf



Simultaneous-Equations Model for Global-Flow-Funds Analysis

Nan Zhang

Click to access 2011_dublin_48_01_zhang.pdf



Global Flow of Funds: Mapping Bilateral Geographic Flows

Authors1: Luca Errico, Richard Walton, Alicia Hierro, Hanan AbuShanab, Goran Amidzic


Click to access STS083-P1-S.pdf




The Composition of The Global Flow of Funds in East Asia

Nan Zhang Hiroshima Shudo University





What Happened in China’s External Flow of Funds?

-Global-Flow-of-Funds Analysis in a Theoretical Model

Nan Zhang


Click to access zhang_nan.pdf



Quantitative Evaluation of Foreign Exchange Intervention and Sterilization in Japan ―A Flow-of-Funds Approach


Kazusuke Tsujimura

Masako Mizoshita

April 04, 2004 March 21, 2005

Click to access fulltext.pdf




Using the Balance Sheet Approach in Surveillance: Framework, Data Sources, and Data Availability
Johan Mathisen  Anthony J. Pellechio

April 2006




A Balance Sheet Approach to Financial Crisis

Mark Allen, Christoph Rosenberg, Christian Keller, Brad Setser, and Nouriel Roubini


Click to access wp02210.pdf



A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy

Dale F. Gray, Robert C. Merton and Zvi Bodie

September 25, 2006

Click to access w12637.pdf



Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk

Dale F. Gray, Robert C. Merton and Zvi Bodie

July 3, 2007


Click to access contingentclaimsapproachfinal7-3-07.pdf




Hofer, Andrea.

“The International Monetary Fund’s Balance Sheet Approach to Financial Crisis Prevention and Resolution.”



Analyzing the Israeli economy’s resilience to exchange rate risk

Yair Haim, Roee Levy

January 2007

Click to access dp0701e.pdf




Giovanni Cozzi and
Jan Toporowski

December 2006

Click to access wp_485.pdf



Debt-Related Vulnerabilities and Financial Crises An Application of the Balance Sheet Approach to Emerging Market Countries

Christoph Rosenberg, Ioannis Halikias, Brett House, Christian Keller, Jens Nystedt, Alexander Pitt, and Brad Setser


Click to access 070104.pdf



The Balance Sheet Approach and the Public Debt Stock Analysis: the Case of Lebanon

Souaid, Sana


Click to access 2011_dublin_111_05_souaid.pdf




Balance Sheet Analysis: A New Approach to Financial Stability


By Jean Christine A. Armas


Click to access EN16-01.pdf



Balance-Sheets: A Financial/Liability Approach

A Concise Macro-Financial Framework: SNA Theory and Concepts Rapid Estimates of Market Valued Non-Financial Assets and National Wealth

Bo Bergman

Click to access bergman_paper.pdf



Macro Financial Balance Sheets. Alternative Approach. 1980 – 2011. Sweden

Bo Bergman


Click to access Bergmanpaper.pdf





June 2015

Click to access 061215.pdf






July 2015

Click to access 071315.pdf



Sectoral interlinkages in balance sheet approach

28-29 August 2012

Ryoichi Okuma

Click to access okuma.pdf



Growing fragilities? Balance sheets in The Great Moderation

Richard Barwell and Oliver Burrows


Click to access fs_paper10.pdf



Balance Sheets. A financial approach

Bo Bergman


Click to access poster1Bergman.pdf



A Closer Look at Sectoral Financial Linkages in Brazil I: Corporations’ Financial Statements

Prepared by Izabela Karpowicz, Fabian Lipinsky and Jongho Park

March 2016

Click to access wp1645.pdf





Click to access 073014.pdf



The IMF’s ‘Surveillance’: How Has It Changed since the Global Financial Crisis?

Emily Poole


Click to access bu-0315-9.pdf




Mapping the Shadow Banking System through a Global Flow of Funds Analysis


Hanan AbuShanab Goran Amidzic Luca Errico Artak Harutyunyan Yevgeniya Korniyenko Elena Loukoianova Hyun Song Shin Richard Walton


First IMF Statistical Forum Washington DC, November 12-13, 2013


Click to access Hyun-Song-Shin2.pdf