Luigi Federico Signorini: The global financial cycle, capital flows, and policy responses

Welcome address by Mr Luigi Federico Signorini, Senior Deputy Governor of the Bank of Italy, at the G20 RBWC Workshop "Towards a more resilient international financial architecture", Online event, 10 May 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The COVID-19 crisis gave rise to a synchronised sudden capital stop in March 2020, whose magnitude exceeded that observed during the Global Financial Crisis. Fortunately, this episode was short-lived and concentrated in the early stages of the pandemic. The pressure on emerging market capital flows eased after the unprecedented policy interventions carried out by both advanced economies (AEs) and emerging market economies (EMEs).

An important factor in the scale of the outflows seen at the outset of the pandemic was the shift that had occurred over the previous decade in the composition of capital flows, towards non-bank financial intermediaries (NBFIs), and in particular, investment funds. This is the first of two main points I want to make.

NBFIs tend to be more volatile than other sources of finance, such as bank lending and foreign direct investment. This was apparent during the March 2020 'dash-for-cash' stage. Investment funds accounted for around half of the portfolio outflows observed, even though they (by some accounts) only represent a third of the stock of global portfolio liabilities.