the global financial cycle, capital flows, and policy responses remarks by luigi federico signorini senior deputy governor of the bank of italy g20 rbwc workshop towards a more resilient international financial architecture online event, 10 may 2021 the covid - 19 crisis gave rise to a synchronised sudden capital stop in march 2020, whose magnitude exceeded that observed during the global financial crisis. fortunately, this episode was short - lived and concentrated in the early stages of the pandemic. the pressure on emerging market capital flows eased after the unprecedented policy interventions carried out by both advanced economies ( aes ) and emerging market economies ( emes ). an important factor in the scale of the outflows seen at the outset of the pandemic was the shift that had occurred over the previous decade in the composition of capital flows, towards non - bank financial intermediaries ( nbfis ), and in particular, investment funds. this is the first of two main points i want to make. nbfis tend to be more volatile than other sources of finance, such as bank lending and foreign direct investment. this was apparent during the march 2020 ‘ dash - for - cash ’ stage. investment funds accounted for around half of the portfolio outflows observed, even though they ( by some accounts ) only represent a third of the stock of global portfolio liabilities. why has nbf intermediation and cross - border activity grown so much? several factors have contributed, but let me mention just two that are especially relevant to global flows : – first, the basel reforms adopted after the global financial crisis led banks to deleverage, thereby reducing non - core assets and cross - border lending ; – second, low interest rates in developed markets encouraged investors to diversify their assets by investing in emerging markets, often through dedicated funds ( or through increased allocations to emerging markets by globally active funds ). the growth of market - based finance is, on balance, a welcome development, notably because it increases the diversification of funding sources. this is particularly important for those countries and systems, such as italy and much of continental europe, that are overly dependent on banks. while funds may increase the size and liquidity of markets in peacetime, they are also known to be a potential channel for shock amplification in the event of stress. because of redemption pressures coming from end - investors, fund managers may find themselves forced to sell assets, contributing to price - liquidity spirals. this

##ms and cfms. this is an ambitious and welcome project that will offer guidance on the optimal selection of policy tools and their calibration, depending on the nature of the shocks as well as on the cyclical and structural characteristics of individual countries. we at the bank of italy shall be happy to contribute to the debate, following our well - established tradition of research on the issue of the optimal choice of policy tools. 5 for instance, p. angelini, s. neri, and f. panetta ( ‘ monetary and macroprudential policy ’, banca d ’ italia, working paper no. 801 ( march, 2011 ) ) show that mpms are useful when financial or housing market shocks are a key source of instability ; by contrast, in ‘ normal ’ times, the benefits of mpms are modest. v. nispi landi, ( ‘ capital controls, macroprudential measures and monetary policy interactions in an emerging economy ’, banca d ’ italia working paper no. 1154 ( december 2017 ) ), explores the interaction of capital controls and mpms with monetary policy in emes and shows that, assuming banks are indebted in foreign currency, capital controls and mpms can mitigate the adverse effects of an increase in the foreign interest rate, depending on the source of shocks. designed by the printing and publishing division of the bank of italy