Liquidity Black Holes: Why Modern Financial Regulation in Developed Countries is Making Short-Term Capital Flows to Developing Countries Even More Volatile
Since the early 1990s financial regulation has been about the spread of market-sensitive risk-management systems for banks, the spillover of this approach to other financial institutions and, in general, the retreat of regulatory ambition. There is growing evidence that these trends are leading to a more fragile financial system that is prone to concentration, crisis and ‘liquidity black holes’. This problem has not been sufficiently addressed because, although it is born of the regulation of financial institutions in developed countries, its most glaring effects are the procyclicality and volatility of capital flows to emerging markets (Griffith-Jones, 1998; Ffrench-Davis and Reisen, 1998).
KeywordsHedge Fund Capital Flow State Street Market Maker Foreign Exchange Market
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