March 2014 Quarterly Review: Emerging economies respond to market pressure 

• “The recent performance of emerging market currencies has reflected the success of central banks in defending exchange rates as well as the political uncertainty in a number of countries. External imbalances, inflation and domestic credit growth have played a much smaller role than during the depreciations in May and June last year.
• Cross-border interbank lending fell at an even faster rate in the third quarter of 2013. Banks headquartered in the euro area account for most of the decline after the financial crisis of 2007-09, and Swiss banks for much of the remainder.
• The stock of debt securities reached an estimated $100 trillion in mid-2013 on heavy post-crisis issuance by governments and non-financial corporations. Foreign investors hold a smaller share of debt securities than previously, suggesting that the globalisation of portfolios may have gone partially into reverse post-crisis. But the retreat could be temporary.
• Financial development is good for growth, but only up to a point. Leonardo Gambacorta, Jing Yang and Kostas Tsatsaronis (BIS) estimate that growth rates fall once this threshold is crossed. Economies with bank-based financial systems tend to have shallower recessions than those with market-based systems. But this reverses when a downturn coincides with a financial crisis.
• Forward guidance by major central banks has successfully lowered the volatility of expected future policy rates, conclude Andrew Filardo and Boris Hofmann (BIS). Less clear are the effects of forward guidance on the level of expected interest rates and on the responsiveness of financial markets to news.
• The gap between the credit-to-GDP ratio and its long-term trend is a valid indicator for the build-up of financial vulnerabilities, argue Mathias Drehmann and Kostas Tsatsaronis (BIS), and hence it should prove useful as a guide for setting countercyclical capital buffers.
• The markets for non-deliverable forwards (NDFs) tend to fade away when countries remove capital controls, find Robert McCauley, Chang Shu and Guonan Ma (BIS). In the case of the Chinese renminbi, deliverable forwards traded offshore are replacing established NDFs as the main hedging instrument against exchange rate volatility.
• Counterintuitively, large-scale bond buying by the Fed drew dollars into the United States from the eurodollar market. Robert McCauley and Patrick McGuire (BIS) document how non-US banks raised dollars abroad with the aim of holding them as reserves at the Fed.”