Cross-border capital inflows and systemic financial risks

Abstract

Preventing cross-border capital flow risks and maintaining financial stability are important aspects of open economies participating in globalization. Based on cross-national sample data of more than 5000 financial institutions in 33 countries from 2005 to 2022, we evaluate the impact and mechanism of various types of cross-border capital inflows on systemic financial risks in various countries. The results reveal that capital inflows can increase the systemic financial risks of various countries and reduce financial stability. Among them, equity capital inflows and debt capital inflows are the main types of capital that increase systemic financial risks. This effect is mainly manifested in economies with low financial development levels and market-oriented financial systems. Furthermore, this study finds that the regulatory effects of domestic economic boom cycles and domestic and foreign asset price spreads serve to amplify the impact of debt capital inflows on systemic financial risks. Domestic credit expansion increases the aggravating effect of equity capital inflows and debt capital inflows on systemic financial risks. In addition, this study also evaluates the effect of surges in capital inflows and capital flight on financial stability and finds that abnormal capital flows will exacerbate systemic financial risks in various countries.