Slides

1. New Approaches to Economic Challenges
NAEC Seminar Series, 27 November 2014
CURRENCY-BASED RESTRICTIONS-A
NEW CHALLENGE FOR FINANCIAL
OPENNESS?
Pierre Poret (Acting Deputy Director)
Angel Palerm (Lead Manager)
Annamaria de Crescenzio (Economist)
Anne-Christelle Ott (Junior Economist)
OECD Directorate for Financial and Enterprise Affairs

2. 2
Outline
Understanding currency-based measures
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to
borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital
Movements

3. 3
Why look at currency-based measures directed
at banks?
• Unconventional monetary policy (quantitative easing) in the US, Euro area and Japan
• Some emerging economies (EMEs) face financial stability concerns due to capital flows,
often channeled through banks
• A number of countries have recently enacted capital management measures directed at
banks, including currency-based measures, whose intent can be:
 macro-prudential  reduce systemic risk
 capital flow management manage the volume or structure of capital
flows
 Other (micro-prudential, monetary policy)
• G20 Coherent Conclusions for the Management of Capital Flows (2011): “Country-specific
circumstances have to be taken into account when choosing the overall policy
approach to deal with capital flows (…) An appropriate macro-prudential framework
should also be considered”.

4. 4
Outline
Understanding currency-based measures
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to
borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital
Movements

5. Currency-based measures discriminate on
the basis of the currency of an operation
5
Currency-based
measures
Discriminate
on the basis of
currency
E.g. In country
X, residents and
non-residents
cannot open
bank accounts in
foreign currency
Residency-based
measures
Discriminate
on the basis of
residency
E.g. In country
X, non-residents
cannot
open bank
accounts
Currency-based measures may also have implications on
capital flow management

6. Two datasets were built to analyse currency-based
measures between 2005 and 2013
• An OECD survey to delegations
• The IMF Annual Report on Exchange Arrangements
and Exchange Restrictions (AREAER)
• Correspondence with delegations
2005 stocktaking
database
Database of changes
from 2005 to 2013
• Introduction of new measures
• Tightening or easing adjustments of
existing measures
• Removal of measures
6
49 Countries in the sample:
• 34 OECD
• 8 non-OECD G20 countries
• 7 non-OECD non-G20 countries

7. 7
Measures were classified based on a number
of criteria
Example of criteria Options
The capital flows potentially
managed by the measures
• Inflows
• Outflows
• The net (inflows – outflows)
The “class” of measures
• Measures on banks’ assets
• Measures on banks’ liabilities
• Measures on banks’ net positions
• Other (including measures on derivatives)
Whether the measure adjusts a
previous measure
• No (it is added or removed)
• Yes (it is adjusting an existing measure)
Whether the measure “eases” or
“tightens” the restriction on the
basis of currency
• Easing
• Tightening
The self-declared intent of the
measure
• Macro-prudential
• Capital flow management

8. 8
The databases contribute to understanding the
use of currency-based measures
• All adjustments in measures are recorded
• Information at highly disaggregated level
• Look at all sections of IMF’s AREAER
• Cover post-crisis period
• Previous works in the area, include:
• Chinn and Ito, (2006 then updated): does not record adjustments in
measures, compilation of a final index of overall capital account
restrictiveness.
• Quinn et al. (2009): does not cover adjustments in measures; ends in 2005.
• Ostry et al., (2012): indices of FX-related prudential measures based on
specific sections of AREAER.

9. 9
Outline
Understanding currency-based measures
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to
borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital
Movements

10. In 2005, EMEs had more currency-based
measures in place
2005 stocktaking
10
8
7 7
6 6
8
7
6
5
4
3
2
1
Source: OECD (2014).
5 5
4 4
3 3 3 3
2 2 2 2 2
3.6
1.7
1 1 1 1 1 1 1 1 1 1 1 1
3.9
0
Number of currency-based measure per country, 2005
Number of measures Average number of measures per country
Average: OECD members Average: Non-OECD G20
Average: non-OECD non-G20

11. Limits on the net FX position of banks were
most common
2005 stocktaking
Categories of measures in force in 2005
0 5 10 15 20 25 30
27
13
8
8
7
6
3
3
3
1
1
1
1
1
1
Limit on the net FX position
Differentiated reserve requirement
Rules on FX accounts
Measure limiting lending in FX
Measure limiting trading in FX derivatives
Liquidity matching requirement
Rules on domestic currency accounts
Measure limiting lending in domestic currency to non-…
Measure limiting FX liabilities
Measure limiting investment in FX securities
Capital requirement on the net FX position
Reserve requirement on the net FX position
Limit on the FX cash position
Measure limiting domestic currency assets abroad
Limit on sureties, guarantees and financial back-up facilities
Source: OECD (2014). 11

12. 2005 stocktaking
12
OECD countries were more prone to having
measures on nets
10
Measures by types of capital flows managed, 2005
1
20
16
5
8
13
10
8
25
20
15
10
5
0
Inflows Outflows Net
OECD Non-OECD G20 Non-OECD non-G20

13. 13
From 2005-2013, easing actions peaked pre-crisis
while tightening actions peaked post-crisis
Changes, 2005-13
Adjustments account for over half of actions for both easing and tightening actions
Changes on currency-based measures, 2005-2013
2005 2006 2007 2008 2009 2010 2011 2012 2013
20
15
10
5
0
5
10
15
20
Easing adjustments 4 4 6 11 4 4 4 6 5
Easing new measures 6 6 7 3 2 5 2 1 3
Tightening adjustments -2 -2 -3 -3 -4 -10 -7 -3 -9
Tightening new measures 0 -2 -6 -3 -4 -8 -6 -2 -3
Source: OECD, (2014).

14. 14
A few OECD countries actively used currency-based
measures
• 9 OECD countries increased currency-based restrictions overall
• Non-OECD non-G20 economies liberalised significantly, in particular by adjusting
currency-based measures
49
Tightening and easing measures, 2005-2013
19
21
26
7
36
60
50
40
30
20
10
0
Tightening
actions, OECD
Easing actions,
OECD
Tightening
actions, non-
OECD G20
Easing actions,
non-OECD
G20
Tightening
actions, non
OECD non-
G20
Easing actions,
non OECD
non-G20
Total Adjustments
Measures taken
by:
13 OECD
countries (out of
34)
7 non-OECD
G20 countries
(all but Saudi
Arabia)
All 7 Non-OECD
non G20
countries
Source: OECD, (2014).
Changes, 2005-13

15. 15
Tightening actions on inflows were most
frequent
• Inflows were targeted most by both new measures and adjustments
• Actions on nets were more frequently adjustments than new measures
• Outflows were relatively eased most, followed by nets. Inflows were relatively least
eased.
Measures by type of capital flow managed, 2005-2013
54 54
Source: OECD, (2014).
19
24
17
20
60
50
40
30
20
10
0
Inflows,
tightening
Inflows, easing Outflows,
tightening
Outflows, easing Net, tightening Net, easing
Total Adjusments
Changes, 2005-13

16. 16
Measures on liabilities were most frequently
tightened, but also most frequently removed
• The large majority of actions have a self-declared macro-prudential intent
• But few tightening actions were taken on traditional prudential rules that tend to focus
on net positions (easing of limits on the net FX position of banks account for 23% of
easing adjustments and only 7% of tightening adjustments)
22
18
29
34
14
19
12 12
40
35
30
25
20
15
10
5
0
Measures on
assets,
tightening
Measures on
assets, easing
Measures on
liabilities,
tightening
Measures on
liabilities,
easing
Measures on
net positions,
tightening
Measures on
net positions,
easing
Other
measures
(including
derivatives),
tightening
Other
measures
including
derivatives),
easing
Measures by class, 2005-2013
Total Adjustments
Source: OECD, (2014).
Changes, 2005-13

17. Changes, 2005-13
17
Most actions focused on reserve
requirements and on limiting lending in FX
Source: OECD, (2014).
Actions by categories, 2005-2013
-20 -15 -10 -5 0 5 10 15 20
Differentiated reserve requirement
Measure limiting lending in FX
Limit on the net FX position
Measure limiting trading in FX derivatives
Rules on FX accounts
Rules on domestic currency accounts
Maturity requirement
Liquidity matching requirement
Capital requirement on the net FX position
Measure limiting lending in domestic currency
Limits on derivatives position
Regulation of FX assets
Limits on derivatives
Measure limiting FX liabilities
Levy on FX derivatives
Easing new measures Easing adjustments Tightening new measures Tightening adjustments

18. • 3 Asian economies, Malaysia , the Philippines and
Thailand, liberalised significantly with respectively 13, 8
and 11 easing actions.
• Turkey was active; the country made 23 adjustments to
its currency-based measures but did not increase
regulation overall
• Iceland and Korea enacted a number of new currency-based
regulations, especially post-crisis
• A number of European countries have regulated FX
lending in line with the European Stability Board’s
recommendations
18
Some trends have emerged

19. 19
Outline
Understanding currency-based measures
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to
borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital
Movements

20. Countries unable to borrow abroad in domestic
currency used more measures on banks’ FX liabilities
20
Original sin index
debt securities issues by country I in currency I / total debt securities issued by country I
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Estonia
Hungary
South Korea
Poland
Malaysia
India
Turkey
Argentina
Israel
Denmark
Czech Republic
Philippines
Russia
Chile
Mexico
Norway
Brazil
Iceland
Sweden
Australia
Thailand
Colombia
South Africa
Saudi Arabaia
Switzerland
Canada
China
United Kingdon
Luxembourg
Japan
Finland
Germany
United States
Austria
Netherlands
Ireland
France
Slovakia
Slovenia
Original Sin Index, average 2005-2013
Countries using measures on FX liabilities
Countries not using measures on FX liabilities
Source: OECD calculations based on BIS 2014 data on international debt securities.

21. A reversal in financial integration occurred post-crisis,
particularly in countries using measures on FX liabilities
1.0
0.8
0.6
0.4
0.2
0.0
(S-I) correlations are used as indicators of financial openness.
Source: OECD calculations, 2014
• For all groups of countries,
except China and India, S-I
correlations increased in
the 1990’s  capital
mobility and
integration increased
• For these groups, S-I
correlations decreased after
the 2008 financial crisis 
reversal in financial
integration
• The reversal is
particularly notable for
the group of countries
that use measures on
FX liabilities.
21
-0.2
1995 Q2-00 Q1
1996 Q1-00 Q4
1996 Q4-01 Q3
1997 Q3-02 Q2
1998 Q2-03 Q1
1999 Q1-03 Q4
1999 Q4-04 Q3
2000 Q3-05 Q2
2001 Q2-06 Q1
2002 Q1-06 Q4
2002 Q4-07 Q3
2003 Q3-08 Q2
2004 Q2-09 Q1
2005 Q1-09 Q4
2005 Q4-10 Q3
2006 Q3-11 Q2
2007 Q2-12 Q1
2008 Q1-12 Q4
2008 Q4-13 Q3
2009 Q3-14 Q2
Saving-Investment Correlations, 5-year
rolling window
Countries with original sin and measures on FX liabilities
China & India
Countries with original sin and no measures on FX liabilities

22. 22
Outline
Understanding currency-based measures
Trends in currency-based measures in 49 countries, 2005-2013
Potential impact of currency-based measures on countries' ability to
borrow internationally
Possible implications for the OECD Code of Liberalisation of Capital
Movements

23. • The only multilaterally-binding legal
instrument
• Committing adherents to progressive
liberalisation
• Subject to reservations
• With possibilities of reintroducing
restrictions
• A forum for transparency and accountability,
mutual understanding, and peer scrutiny
23
OECD Code of Liberalisation of Capital
Movements

24. • Does and should the Code apply to currency-based
restrictions?
• Does it provide adequate flexibility?
• Yes to both questions, according to the large majority of
countries that responded to a recent OECD survey
• But…
 No full consensus yet on interpretation of the scope
 Less flexibility to reintroduce restrictions on certain capital
inflows than their outflows counterparts. Does it matter?
• A review of the Code would clarify the issues
24
Does and should the Code apply to currency-based
restrictions?

25. • Calibration of the measure in the self interest of the
country. Addressing interconnectedness need not
sacrifice financial openness
• Preserving the collective interest against negative spill-overs
• International cooperation to reconcile financial openness
globally and individual financial stability
25
Benefits of a broad but balanced application of the
Code to currency-based restrictions to capital flows?

26. THANK YOU
26