Although the global financial crisis of 2008 took root in advanced economies, its shocks spread through emerging economies, reflecting the increasingly interconnected global financial system. In this paper, we test the contagion effect at the country level using bilateral data on bank claims between countries. Direct and indirect exposures of emerging economies to crisis countries are empirically measured by using bilateral foreign claims from the Bank for International Settlements, and whether these exposures matter for capital outflows from emerging economies is tested. The findings show that emerging market economies more exposed to banks in the crisis-affected countries, both directly and/or indirectly, suffered more capital outflows during the global financial crisis. We also find that an emerging economy’s financial vulnerability can be influenced by its region’s overall exposure to crisis countries, indicating contagion effects at the regional level. Evidence also suggests that same-region lenders exhibited more favorable behavior toward the regional borrowers during the crisis, with important policy implications.

A severe economic downturn brought on by the COVID-19 pandemic, combined with high debt levels globally, raises the specter of mounting nonperforming loans (NPLs) in global banking systems. This paper investigates the impact of higher NPL ratios on the availability of bank credit among international lenders and emerging market borrowers. The paper finds that a rise in NPL ratios in both lender and borrower countries is positively associated with higher banking outflows from emerging market economies. Two additional features emerge in the patterns of cross-border banking flows when NPL ratios rise that are related to international credit market imperfections. First, lenders are more responsive to a rise in NPL ratios of same-region borrowers. This is consistent with the “reversion to the mean’’ effect given their generally high exposures to the same-region borrowers. Second, while a high share of US-dollar-denominated debt is generally positively associated with withdrawals of funds from emerging market borrowers, lenders are less responsive to a rise in NPL ratios in emerging market economies if their liabilities are denominated more in US dollars. The results are in line with the “original sin redux” hypothesis.

The global financial crisis of 2008–2009 illustrates how financial turmoil in advanced economies could trigger severe financial stress in emerging markets. Previous studies dealing with financial crises and contagion show the linkages through which financial stress are transmitted from advanced to emerging markets. This paper extends the existing literature on the use of financial stress index (FSI) in understanding the channels of financial transmission in emerging market economies. Using FSI of 25 emerging markets, our panel regression estimates show that not only advanced economies FSI, but also regional and nonregional emerging market FSIs significantly increase domestic financial stress. Our findings also suggest that there is a common regional factor significantly affecting domestic FSI in emerging Asia and emerging Europe. Furthermore, the results from a structural vector autoregression model with contemporaneous restrictions indicate that although a domestic financial shock still accounts for most of the variation in domestic FSI, regional shocks play an important role in emerging Asia.

Central banks around the world are exploring the possibility of Central Bank Digital Currencies (CBDCs) for retail and wholesale use. While no major economy is yet to fully introduced a CBDC, some countries have begun pilot programs. The purpose of this paper is to highlight the potential benefits and risks associated with CBDCs, including challenges and opportunities associated with proposed CBDC regulation in the United States and the European Union. The paper also discusses the CBDC landscape in Asia. It highlights some of the key findings of the research presented in this special issue on FinTech and CBDCs. Lastly, the paper offers thoughts for potential future research in areas such as the actual designs of CBDCs and their uses, ‘DeFi’ versus ‘CeFi’, their interoperability and stability, and concerns over cybercrime.