Notes: Chart shows the sensitivity of different capital flows to a negative "push" shock. Coefficients are standardised by each component’s share of total flows e.g. the red MBF bar shows how total Capital Flows-at-Risk would respond to a one standard deviation tightening in global financial conditions if all capital flows were accounted for by MBF. Estimates are based on the FSB’s measure of ‘collective investment vehicles with features that make them susceptible to runs’, see FSB Global Monitoring Report on Non-Bank Financial Intermediation 2018. 18 The initial version of the speech mistakenly referred to Real Estate Investment Trusts here, instead of open-ended funds. 17  14  All speeches are available online at www.bankofengland.co.uk/speeches  14  The third aspect of the pipes is the global financial safety net (GFSN). Developments in this regard have arguably further increased Capital Flows-at-Risk. The GFSN has become more fragmented over the past two decades and its core – IMF resources – has shrunk relative to the size of the global financial system (Chart 14). As a result, individual countries have chosen to self-insure at high cost to both themselves and the rest of the world. While the IMF’s nominal resources have more than tripled over the past decade, they still only represent around 1% of global gross external liabilities and have been on a downward trend from 2.5% in 1980. Other multilateral arrangements, such as Regional Financing Arrangements (RFAs) and swap lines, are only partial substitutes.
20 To limit the impact of FX reserve accumulation on the domestic money supply, most central banks sterilise their intervention through the issuance of bonds. The fiscal cost of FX reserve accumulation can be calculated as the difference between the interest paid on the sterilisation instrument and the interest received on FX reserve assets, which are typically low-yielding, low-risk foreign government bonds. The IMF estimated this wedge to be around 200 bps on average. It can crowd out domestic investment as central bank sterilisation bonds compete for domestic savings. 21 The increased demand for safe assets driven by this desire for safety – which Ben Bernanke christened a ‘savings glut’ – helped drive down the equilibrium interest rate, the interest rate central banks must deliver in order to balance demand with supply and so achieve stable inflation. 15  All speeches are available online at www.bankofengland.co.uk/speeches  15  Augmenting the Bank of England’s Capital Flows-at-Risk framework with the major structural changes in the global financial system materially changes the Bank’s assessment of the quantum of Capital Flows-at-Risk when there are push shocks.