What is 'Capital Control'
Capital control represents any measure taken by a government, central bank or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, outright legislation and volume restrictions, as well as market-based forces. Capital controls can affect many asset classes such as equities, bonds and foreign exchange trades.
BREAKING DOWN 'Capital Control'Capital controls are put in place specifically to regulate financial flows from capital markets into and out of a country's capital account. These controls can be economy-wide or specific to either a sector or industry. Capital controls are enacted by government policy and work to restrict domestic citizens from acquiring foreign assets or restrict foreigners from acquiring domestic assets. The former is referred to as capital outflow controls and the latter is known as capital inflow controls. Tight controls are most often found in developing economies, where the capital reserves are lower and more susceptible to volatility.
The Debate over Capital Controls
Capital controls are the subject of much debate because some feel they inherently limit economic progress and efficiency while others see them as prudent, adding a measure of safety to the economy. Most of the largest economies have liberal capital controls policies and have phased out stricter rules from the past.
However, most of these same economies have basic stopgap measures in place to prevent against a mass exodus of capital outflows during a time of crisis or a massive speculative assault on the currency. Global factors, like globalization and the integration of financial markets have contributed to an overall easing of capital controls. Opening up an economy to foreign capital generally allows for companies to have easier access to capital, and can raise overall demand for domestic stocks.
An Example of Capital Controls
Capital controls are most often put in place after an economic crisis, to prevent domestic citizens and foreign investors from pulling funds out of a country. For example, the European Central Bank (ECB), on June 29, 2015, froze support to Greek banks in light of the European debt crisis. Greece responded by closing its banks and implementing capital controls on July 7, 2015, out of fear that Greek citizens would cause a run on domestic banks. The controls put limits the daily cash withdrawals at banks and placed restrictions on monetary transfers and overseas credit card payments.
Roughly one year later, on July 22, 2016, Greece's Finance Minister reported that Greece would ease the country's capital controls to help increase confidence in Greek banks. The easing is expected to increase the amount of money held at Greek banks.