The BOE Haldane explains the flow of global capital risk of stability

April 09, 2011, 2: 59 am EDT by Jennifer Ryan

April 9 (Bloomberg) - official of the Bank of England Andrew Haldane said financial stability may be threatened by capital flows from developed countries which are too large to absorb emerging and fast.

"The global flow of funds could become a generator in most powerful global financial instability," Haldane, Executive Director of the Bank for financial stability, said in a speech delivered today at Bretton Woods in New Hampshire. "Pressure could mount on the decision makers to protect themselves against the rising tide of capital instability induced by the flows, including capital restrictions and macro-prudential measures."Haldane, said that a "big fish small pond" problem when investors in developed countries transfer funds to the economies of small and less developed markets. To illustrate the scale, he said that a decrease of 0.1 to one index investment "home bias" for developed countries in 2007 would be reallocated approximately 4.5 billion to foreign markets. That compares with a market capitalization of $ 6.8 billion of emerging economies among the Group of 20 nations.This dynamic could be seen last year, when investors abandoned markets developed for emerging economies the fastest growing. Own capital inflows resulting "were large" relative to the size of markets, and with the restrictions on flows of capital and other measures, the officials responded Haldane said. "Home Bias'The trend may increase as investors developed nation increasingly reduce their"home bias", although the progress in the depth of financial markets in emerging countries prove"rather gradual. " Haldane projections show the average inflows, over capitalization, the G-20 economies will reach 8% per year through 2050, more than the peak seen recently, including 2010. "If capital operated effectively, these flows of portfolio market will not cause waves in credit emerging markets assets,"he says. "In practice, friction in the functioning of these markets mean that asset-market overflows appear very likely to persist." "In other words, big fish splashes are likely causing waves as large and potentially superior, to those who have seen recently,"he says.

-Editors: Fergal O'Brien, Eddie Buckle

To contact the reporter on this story: Jennifer Ryan at the jryan13@bloomberg.net London

To contact the editor responsible for this story: Craig Stirling cstirling1@bloomberg.net

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