A new paper by the Bank of England explores how foreign capital inflows specifically aimed at UK banks and financial institutions are channeled at home. Such flows can be large (they reached 100% of GDP pre-crisis) and volatile. The paper shows that they boost domestic lending to corporates and to other banks; pre-crisis, the funds indirectly reached households and the public sector, too. But post-crisis, patterns switched, and UK banks channeled foreign capital mostly back abroad.
Why does this matter? If FDI into the UK is to dry up, which is likely given low-interest rates and Brexit uncertainty, it’s useful to know that this won’t have any significant damage on home industry because they will probably flow back abroad.
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