BRICs Fill Global Liquidity Gap


Global cross-border capital flow has dropped by approximately a third in the past decade, but new players have stepped up to provide much-needed liquidity, according to a study by McKinsey & Company’s McKinsey Global Institute.

Since the start of the financial crisis, cross-border capital flow has gone from $12.4 trillion in 2007 to $4.3 trillion in 2016 and at the same time, international credit transactions fell by 45%, to $7.3 trillion, according to the study’s authors.

Euro banks, not surprisingly, have been the most conservative lenders since the financial crisis as they removed more than $2 trillion in assets from their balance sheets in the past decade at requests of regulators, noted Forbes contributor Kenneth Rapoza.

Where European banks have been reluctant to lend, Canadian and Japanese banks have picked up the slack and increased their foreign lending to $5.3 trillion from $2 trillion in the past decade.

However, the four largest banks in China are also getting a bigger slice of the action as they ramped up foreign lending to $1 trillion in 2016 from a relatively meager $86 billion in 2007.

Rapoza attributes the growth to China’s continued rollout of its “One Belt One Road” global economic plan. And there is more room for further liquidity from Chinese banks since foreign assets represent only 9% of bank assets compared 20% held by their European and North American counterparts.

Similarly, state-owned banks in Brazil, India, and Russia have stepped in to fill the liquidity void left by the euro banks.

The emerging markets also have been a growing source of direct foreign investment, which increased to 69% of total capital flow from 36%.

The McKinsey authors are careful not sugar coat their findings and warned that some securities markets appear overheated, which contributes to greater volatility regarding capital flows.

“With more countries participating in global finance, financial contagion remains a risk-especially for developing countries that lack deep, transparent, and liquid domestic financial markets,” they wrote.

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