Central Bank Financial Strength in Central America and the Dominican Republic
IMF Working Papers, May 13, 2014
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Bibliographic details
- Authors: Andrew J Swiston, Florencia Frantischek, Przemek Gajdeczka, Alexander Herman
- Published: May 13, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484387368.001
Summary findings
- The paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR).
- Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s.
- Net income has improved owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers.
- Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this.
- Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements.
- Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks.
- The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from:
- increased emphasis on low inflation as the primary objective of monetary policy, and
- a stronger commitment by governments to recapitalization.
Context and scope
- Geographic focus: Central America and the Dominican Republic (CADR).
- Subject areas: Banking, Central bank balance sheet, Central bank bills, Central banks, Currencies, Financial statements, International reserves, Money, Public financial management (PFM).
- Keywords highlighted by the paper include: CADR central banks, CADR country, Central America, central bank, Central bank balance sheet, Central bank bills, central bank financial strength, Costa Rica, Currencies, Dominican Republic, economic value, Financial statements, foreign currency, Guatemala, Honduras, International reserves, liquidity support, monetary base, money demand, Nicaragua, policy objective, recapitalization, WP.
Policy implications and recommendations
- Strengthen the emphasis on low inflation as the primary monetary policy objective to enhance the capacity for macroeconomic stabilization.
- Governments should commit more strongly to recapitalization to address negative capital positions after adjusting for below-market reimbursements on claims on the government.
- Monitor gradual capital increases and consider policies to accelerate balance-sheet repair to reduce vulnerability to macroeconomic shocks.
Andrew J Swiston, Florencia Frantischek, Przemek Gajdeczka, and Alexander Herman. "Central Bank Financial Strength in Central America and the Dominican Republic", IMF Working Papers 2014, 087 (2014).