Cross-border flows stalling in euro area: ECB paper

A European Central Bank paper, published on Wednesday, shows the decline in cross-border financial flows during the financial crisis may have negative implications on growth in the euro area.

Katrin Forster, Melina Vasardani and Michele Ca' Zorzi, the paper's authors, analyse the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends.

Forster, Vasardani and Ca' Zorzi note that from 2008 the private sector undertook a sizeable deleveraging of external financial exposures as banks significantly changed the composition of cross-border portfolio flows. Although this trend started to reverse in 2009, as financial and non-financial corporations restructured their balance sheets, the authors say cross-border financial flows have remained well below pre-crisis levels.

The authors argue that the degree of resumption and volatility of cross-border financial activity may have a major bearing on growth prospects for the euro area and matter for financial stability. They conclude that policymakers should enhance the monitoring of developments in cross-border financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed.

Click here to read the paper.