Crisis Reshapes Cross-Border Financial Flows
The global financial crisis had a significant impact on the flow of investors' funds around the world, according to a recent study from the Federal Reserve Board. Once the financial crisis hit, U.S. cross-border financial flows indicated a "flight-to-safety" shift, with foreign investors selling U.S. securities other than U.S. Treasury securities. Similarly, U.S. investors sold more foreign securities, especially in the second half of 2008.
The flow of funds to the United States typically comes from sources including foreigners' purchases of U.S. securities and foreign direct investment in the United States. The financial crisis, however, significantly altered the composition of this inflow.
Cross-border flows affected from three angles
Looking at the shift in flows
Cross-border banking flows tend to be stable over time, but they revealed unusual patterns during the financial crisis. The crisis was reflected in cross-border bank flows, specifically the flow of liquidity to banks' home countries to shore up the parent bank. European banks generated the strongest net flows from U.S. offices, the authors write, to meet unusually high demand for U.S. dollars in Europe.
Finally, the increased aversion to risk during the financial crisis led to notable flight-to-safety flows in securities portfolios. Cross-border trading in U.S. securities fell sharply in fall 2008 as the crisis gathered intensity, signaling further investor caution. Trading has been slow to recover since then but has picked up in recent months for Treasury securities, the authors' data show.
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December 28, 2009