Managing Systemic Liquidity Risk in Financially Dollarized Economies
IMF Working Papers, September 1, 2005
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- Managing Systemic Liquidity Risk in Financially Dollarized Economies
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Bibliographic details
- Authors: Eduardo Levy Yeyati, Alain Ize, Miguel A. Kiguel
- Published: September 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451862072.001
Authors and Publication
- Authors: Eduardo Levy Yeyati, Alain Ize, Miguel A. Kiguel
- Publication type: IMF Working Papers
- Series: Working Paper No. 2005/188
- Issue: 188
- Volume: 2005
- Pages: 31
- Publication date: September 1, 2005
- DOI: https://doi.org/10.5089/9781451862072.001
- Stock No: WPIEA2005188
- ISBN: 9781451862072
- ISSN: 1018-5941
Research Objective and Context
- Evaluates ways to protect highly dollarized banking systems from systemic liquidity runs.
- Motivating examples: recent runs in Argentina, Uruguay, and Paraguay (as referenced in the paper).
- Topics covered: Asset and liability management, Banking, Commercial banks, Correspondent banking, Financial crises, Financial institutions, Financial services, Insurance, Lender of last resort, Liquidity.
Core Findings
- Available private or official insurance schemes have limitations in protecting highly dollarized systems from systemic liquidity runs.
- Central bank lending of last resort (LOLR) can introduce distortions into the financial system when used in dollarized contexts.
- Decentralized liquid foreign asset requirements on dollar deposits are favored by the authors as a protective measure.
- A complementary "circuit breakers" scheme is proposed to manage convertibility pressure on dollar deposits.
Circuit Breakers Mechanism (as described)
- Combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits.
- Includes an automatic mechanism that limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.
Policy Recommendations
- Implement decentralized requirements for holding liquid foreign assets against dollar deposits.
- Supplement liquidity requirements with a predetermined circuit-breaker mechanism that:
- Ensures transactional deposit convertibility using limited dollar liquidity provisions.
- Automatically restricts convertibility of dollar term deposits when banks' liquidity falls below a preset trigger.
Subject Tags and Keywords (as provided)
- Subject: Asset and liability management, Banking, Commercial banks, Correspondent banking, Financial crises, Financial institutions, Financial services, Insurance, Lender of last resort, Liquidity
- Keywords: Africa, bank liquidation cost, bank resolution mechanism, bank resolution system, Banking Crises, Commercial banks, Correspondent banking, dollar bank, dollar deposit, dollar liquidity, dollar LOLR, Dollarization, Europe, Insurance, Lender of last resort, liquidation cost, Liquidity, liquidity holding, liquidity levels bank, LOLR facility, peso bank, Systemic Liquidity, WP
Content based on "Managing Systemic Liquidity Risk in Financially Dollarized Economies", IMF Working Paper No. 2005/188 (September 1, 2005).