Economies can flourish when there are little restrictions for trade, finance and spending. The theory of neoliberalism stimulates a free market economy with a focus on free-market capitalism, deregulation and limitations on government spending. It is alleged that the absence of restrictions allows capital to flow freely to places in society where it is needed most. The results are positive returns for investors and economic growth to benefit society and its citizens. Capital controls restrict such an open economy and do not match with this neoliberal approach. Consumers prefer to operate in a free market but would like to be protected when things go wrong.

Capital flows are volatile and impose risk to financial stability. As such, governments seek a balance between economic growth and systemic protection. Even though capital controls to regulate a countries finances are a last resort, these can be imposed in exceptional circumstances.

Similar to corporations and individuals, countries can also experience financial difficulties. When such challenges endanger the functioning of the local economy, governments may restrict the cross-border outflow of capital. Capital controls may come in different forms and such measures may impose charges on international transfers. Capital controls often have a limited timeframe mostly until the domestic economy and financial stability is improved.

In times of economic decline, or when the banking system is under pressure, governments may regulate the internal financial market to avoid a hazardous capital outflow to other countries. Such controls may be imposed throughout the local economy, specific sectors or an industry. It is most common that during these crises, bank customers and investors are unable to massively sell their shares and largely transfer their assets out of the country. Capital controls then come in the form of taxes, levies, limitations or prohibitions and are often applicable for a limited period of time.

Cross border bank failure and liquidation often involves non-resident creditors willing to secure their bank deposit or investment. The international clientele of the failed institution often wishes to transfer their belongings to safer havens. In particular during the first stages of bank resolution, where a regulator is still unaware of the consequences of a particular failure. The systemic character of bank failure may have adverse effects on society. As such, keeping capital and liquidity in the jurisdiction can be beneficial for the stability of the country and its financial system.