The Metamorphosis of Finance and Capital Flows to Emerging Market Economies

Policy Center for the New South PP-24-21


The decade after the Great Financial Crisis (GFC) of 2007–09 saw significant changes in the volume and composition of capital flows in the global economy. Portfolio investments and other non-bank financial intermediaries (NBFIs) are behind an increasing share of foreign capital flows, while banking flows have shrunk in relative terms. This policy paper studies the implications of such a metamorphosis of finance for capital flows to emerging market economies (EMEs).

Changes in capital flows accompanied structural shifts in financial intermediation in capital-source countries, with NBFIs increasingly shaping the demand for and supply of liquidity in financial markets. The channels of systemic risk propagation have changed with the higher profile acquired by NBFIs, with leverage fluctuations through changes in margins rising in weight.

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