Considering This: “The Shifting Drivers Of Global Liquidity”

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While stability of global liquidity is key to growth for both emerging and developed markets, the Global Financial Crisis (GFC) changed the role and influence of its key drivers. A paper by Bank of International Settlements’ Stefan Avdjiev, Leonardo Gambacorta, Linda S. Goldberg and Stefano Schiaffi, defines the main components of global liquidity as cross-border bank loans and international bond issuance, distinguishing also between local (pull) and global (push) factors. AXA IM experts have summarised this work.

Pull factors are described as national output growth, sovereign credit risk, and the degree of capital account openness. Push factors include monetary policies of advanced economies, global risk aversion and global output growth. The authors emphasise the impact of banking systems composition to sensitivity variations across economies. It also demonstrates that crossborder bank loans became less sensitive to global risk following the GFC and more influenced by US monetary policy changes.

In particular, all types of flow became much more sensitive to US monetary policies in the aftermath of the GFC. Cross-border bank loans sensitivity increased, so that a 25-bp decline of the Fed fund rate (FFR) now imply a 200-bp acceleration in the quarterly growth rate of cross-border bank lending compared to only 80 bps before the crisis. This estimated impact is found to be comparable for bond issuances, where a 25-bp cut in FFR increases bond issuance by roughly 200 bps, compared to 36 bps before the GFC.

Yet, the 2013 taper tantrum saw sensitivities revert to pre-crisis levels, particularly for cross-border bank loans. Experts from The impact of a 25-bp FFR cut since the GFC is now estimated to lift cross-border bank loans quarterly growth by 92bps. The GFC also reduced the estimated effect of the VIX index (a common proxy for global risk conditions) on cross-border bank loans: an increase of one standard deviation in the VIX before the crisis translated into a 134-bp contraction of cross-border bank loans, versus 11 bps after the GFC. Meanwhile, aggregated global liquidity flows witnessed a heightened sensitivity to US monetary policy between the GFC and the 2013 taper tantrum, but returned towards previous levels since. Part of this increased responsiveness to US monetary policy may come down to an increased synchronisation of monetary policies across advanced economies after the GFC.

According to AXA IM summary, BIS’ experts’ study also looks at components of national banking systems lending. It shows that increased sensitivity of banking systems to US monetary policy changes reflects a change in the national banking systemspecific sensitivities to global factors (a behavioural component) and not a shift in the composition of international creditors (a compositional component; see graph). The strongly negative behavioural components for all three borrowing sectors –banks, public and non-bank private sectors – substantially increases the estimated sensitivity to US monetary policies.

Finally, the comparison of banking systems demonstrates that those better capitalised before the crisis exhibit much less change in relation to US monetary policy after the GFC. Jurisdictions with light local reserve requirements similarly experienced smaller sensitivity changes. In addition and confirming the intuition, the ex-ante reliance on foreign lending was found to significantly impact this stability: the higher the ratio of local to foreign lending, the lower the impact on post-GFC sensitivity changes.