Liquidity of the international credit market
The concept of liquidity of the international credit market is a complex economic phenomenon caused by the credit expansion of financial institutions. Moreover, in stable conditions central banks play passive roles in this process, actively joining liquidity regulation in the global credit market, only at the stage of crisis. Central banks are known to create money "increased efficiency", which is reflected in the mechanism of the money multiplier and leads to expansion of credit activity within a single country. Central banks satisfy the demand for liquidity at fixed interest rates. In the event that central bank rates are too high for residents, they can raise funds from the world financial market. This credit and financial resource is actively used by large banks, financial and non-financial corporations with access to foreign markets. Thus, in the conditions of free capital overflow, national central banks partially lose control over the volume of domestic lending, if only monetary measures of the economy are applied.
In addition, in developed countries, the interest rate policy of national central banks is able to keep the level of rates only within a single country. On the growth of loans provided in US dollars in other countries, the greater influence was exerted by local conditions, rather than the policy of the Fed. This was especially evident in the conditions of the last global financial crisis.
Liquidity risk is usually considered in two main forms:
- market liquidity risk when a firm can not sell an asset without losing part of its value;
- the risk of finding liquidity (funding), when the company is not able to attract short-term capital to meet the anticipated obligations (current and future).
These two forms of liquidity risk can mutually reinforce each other in a crisis, spiraling up a spiral of systemic liquidity shortages. Systemic liquidity risk may come quickly enough, as banks try to underestimate liquidity risks in the pre-crisis time, hoping that the central bank will intervene and provide additional liquidity to maintain the stability of banks and financial markets, and also to avoid the escalation of problems into the real sector of the economy.
Private investors play a decisive role in the international credit market. It is from their financial condition, sphere of interests, risk appetite, resource requirements, that the volumes of international credit depend. International credit markets cover banks and financial markets, local banks and securities markets determine the state of the domestic credit market, and together they constitute global liquidity. And both in domestic markets and in the world market, significant amounts of liquidity generate bubbles, a subsequent collapse and a liquidity deficit.
In addition, the overflow of global liquidity significantly increases disproportions in the development of national economies, generating bubbles assets. International lending allows national banking systems to expand the growth of domestic lending without taking into account the national resource base, not limiting themselves to local deposits and deposits, ie, domestic credit is divorced from the local currency and the national economy and is dictated by the economic needs of supranational economic agents.
According to the nature of economic relations, global liquidity is conditionally divided into official and private. Official liquidity can be represented as unconditionally available provision of monetary funds, received for monetary regulation purposes. Central banks create liquidity in local currency through monetary policy, in crisis conditions they can provide the local financial system with emergency liquidity support, providing funds in significant amounts, both in national and foreign currencies. The most effective form of support in times of crisis is the provision of funds at the expense of foreign exchange reserves. The national banking system can receive support in the form of swap agreements with other central banks. International financial institutions provide assistance to national banking systems in the form of assistance programs for the IMF and other international financial institutions, as well as by granting special drawing rights. All these methods can significantly expand the volume of official international liquidity, especially in crisis conditions, but its volumes are always significantly lower than private global liquidity.
Private investors, including various participants - transnational banks and non-bank financial institutions, as well as players of the international financial market, play a decisive role in the volumes of global liquidity. Global private liquidity can be transferred, for example, through interbank lending, and its volumes are determined by the needs of borrowers. In the pre-crisis period, the international financial market freely provided significant amounts of resources, focusing primarily on the ratings of international agencies.
The surges of global private liquidity are determined by the internal macroeconomic conditions of individual countries, the internal order of lending, depends on the nature of the monetary policy pursued, significantly weakening the latter. Private global liquidity can cause both a significant inflow of funds to local markets and provoke inadmissible outflows of resources from national economies. In addition, global liquidity has a pronounced cyclical nature, in stable conditions its volumes increase, which reduces sensitivity to risks and leads to unacceptably high levels of attracted funds from local financial intermediaries, and in times of crisis, private liquidity is significantly shrinking.
Currently, almost all countries are under the influence of global liquidity surges, therefore, when studying the dynamics of internal liquidity, it is necessary to take into account also macroeconomic variables. In a simplified form, the indicator of the level of global private liquidity is the volume of lending by non-residents to individuals and legal entities, provided in national and foreign currency. However, the indicators of early detection of the causes of significant overflows of global liquidity are various internal factors, the significance of which is determined by the characteristics of the national economy. Despite the fact that the volumes of private global liquidity are determined by transnational participants in the world financial market and their ability to redirect international credit and financial flows, the liquidity requirements are more dictated by the internal conditions of national economies (the conductors of global liquidity). There are several categories of conductors of global liquidity in the international credit market.
1. Macroeconomic conditions, including economic growth, the state of the balance of payments, the exchange rate of the national currency, the regime of monetary regulation.
2. The order of financial regulation (including the conditions for supervision of banks, non-bank financial institutions, financial markets).
3. The degree of financial integration into the world economy, the level of development of financial markets, the volume of use of financial innovations and the degree of their influence on the behavior of national economic agents.
Macroeconomic factors affect the volume of global liquidity overflow, as well as the establishment of the level of availability of local liquidity for non-residents and the acceptable level of costs for its attraction, the perception of risks by various economic agents. Monetary policy establishes an internal level of interest rates, affects the level of profitability of domestic financial transactions, in addition, it determines the dynamics of inflation expectations and stimulates economic growth. Monetary policy can facilitate both inflows of global credit and liquidity outflows. When in an open economy conditions for domestic savings and investment projects are worse than foreign counterparts, capital begins to flow out of the country.
In addition, the nature of the risks caused by international capital flows depends on the various multipliers built in the national economy, the structural features of the economy, and the degree of financial development. The use of securitization operations significantly increased the ability of foreign banks to transform their balances and attract significant amounts of capital, expanding their financial leverage. However, financial innovations have not been developed everywhere in the US and Europe, therefore, at present national financial systems are in different phases of the business cycle, and the nature of internal risks varies by country, taking into account the cyclical factors, which determines the varying level of additional liquidity requirements for developed and developing countries. National economies that have already passed the acute phase of the recession can both attract additional liquidity and place its excesses on the world financial market. Given the different nature of the cyclicality of developed and developing countries, it can be assumed that there will always be excess liquidity in the world financial market, which can flow into relatively stable economies, stimulate their warming up and generate bubbles assets.
The most effective measures of anticyclic regulation and control over global liquidity surges are the measures of macroprudential supervision of the financial system formulated by Basel III, which include both control over the state of own capital and the level of financial leverage, and monitoring of lending operations for borrowers and creditors . Monitoring of credit expansion can be carried out both in terms of the lending currency, by the "loan creators" (liquidity providers) - to external and internal creditors (banks and non-banking institutions), and by tracking the "prospect of the recipient", i.e. financial condition of borrowers.
There are various approaches to monitoring global liquidity, including an assessment:
- the share of loans granted in local and foreign currency to the non-financial sector of the economy;
- matching assets and liabilities of bank balances in terms of urgency in local and foreign currencies;
- the structure of creditors (large and small banks, banks and non-banking institutions, etc.).
The final measures macroprudential policy, controlling the spillovers of global private liquidity, are directed:
- to prevent excessive outbursts of liquidity and reduce the cyclical development of the national economy;
- determine the degree of the central bank's ability to prevent outbursts of cash flows. This condition consists both in clarifying the methods for conducting monetary and credit regulation, and in finding opportunities to increase foreign exchange reserves, as well as to improve methods for allocating currency liquidity in the national financial system, deposit insurance systems, collateral laws of banking transactions, integrated methods for managing financial risks ;
- prevention of unwinding of the liquidity spiral;
- reducing the moral hazard of conducting banking transactions.
Central banks play a key role in regulatory processes, both internal liquidity and global liquidity. The effectiveness of their policies depends on the professionalism and speed of reaction in making decisions on the developing economic situation. Therefore, at present, the work on monitoring the state of banking liquidity must be supplemented by effective measures of currency regulation and control, as well as effective macroprudential supervision.
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