Reduction in international bank flows could hurt UK economy, says BoE's Forbes

Policymakers should shift their focus from the implications of increasing levels of financial globalisation to the implications of banking de-globalisation, said the Bank of England's (BoE) Kristin Forbes.

Forbes, an American economist and external member of the BoE's Monetary Policy Committee, warned that a reduction in international bank flows could make it more complicated and possibly even more expensive, for the UK to fund its current account deficit.

“Countries have become much more financially integrated but international capital flows fell sharply during the crisis and has shown no signs of recovering,” Forbes said during a speech at Queen Mary University.

“International capital flows are now only 1.6% of global GDP, 10 times less than the peak of 16% in 2007,” Forbes added, suggesting it was “remarkable” that capital flows have remained at such depressed levels despite the broader recovery in the global.

The MPC member said that data suggested banking was the “culprit” for the current contraction in the global banking system, as banks worldwide have resorted to reducing their foreign exposures in a bid to “bring money home”.

As a result of the major contraction in the global banking network, the banking flows related to the UK have shrunk at a rate Forbes described as “particularly striking”.

Forbes added that while banking flows tend to be more volatile than other international flows and banks generally seem to be sensitive to risk, banking flows have not responded to the decline in perceived risk since the financial crisis.

“A reduction in international bank flows could make it more difficult, and possibly even more expensive, for the UK to fund its current account deficit,” Forbes said.

“A foreign exchange crisis is unlikely however, due to changes such as the move to a flexible exchange.”

Forbes added that a de-globalisation in banking could influence the functioning of monetary policy, as global banks respond to variations to the cost of borrowing by moving funds abroad, which could “insulate” global banks from changes in domestic interest rates.

"As global banking networks contract, there may be less room for cross border banking flows to counteract the lending channel for monetary policy," the MPC member said.

"As a result, traditional monetary policy could become more effective."