Capital Account Liberalization is the process of removing regulatory restrictions, taxes, and quotas on cross-border asset flows, allowing international investors to move capital in and out of a domestic economy freely.

[Strengthen Banking Supervision] ---> [Deepen Domestic Credit Markets] ---> [Gradually Open Capital Accounts]

Macroprudential supervisors emphasize that liberalization must be sequenced carefully. If a developing nation opens its capital accounts before strengthening domestic banking controls and deepening local financial markets, it exposes its economy to severe hot-money volatility, cross-border capital flights, and abrupt asset bubbles that can trigger systemic currency crises.