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This paper reviews some of the recent studies on international capital flows with a focus on the role of European global banks. It presents a revision to the commonly held "global saving glut" view that East Asian economies (along with oil-rich nations) were the dominant suppliers of capital that fueled the asset price boom in many parts of the world in the early 2000s. It argues that the role of funding costs and a "liberal" regulatory regime that allowed for an unprecedented expansion of the balance sheets of European banks was no less important. Finally, we describe the aftermath of the crisis in terms of some of the challenges faced by Europe as a whole and European banks in particular. [ABSTRACT FROM AUTHOR]

The article presents the author's insight regarding challenges for monetary policy that the European Monetary Union (EMU) faces. He states that EMU will find it difficult to ensure monetary policy stability if membership requirement will not be met in the union. He mentions that in order for the policy not continually be challenged by financial crisis, the central bankers should take into consideration the implication of monetary policy in the financial stability as well as the price stability.

The article discusses the sovereign debt crisis in the European countries to finance increased consumption and housing investment. The Target2 system which offsets much of the capital flight with credits extended collectively by euro area central banks to central banks in the periphery is stated. The risk of a country's dependence on borrowed money as its imports exceed its exports is cited. A graph depicting the Periphery Current Account Balances is presened.