Managing Systemic Liquidity Risk in Financially Dollarized Economies

By Eduardo Levy Yeyati, Alain Ize, Miguel A. Kiguel

September 1, 2005

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Eduardo Levy Yeyati, Alain Ize, and Miguel A. Kiguel Managing Systemic Liquidity Risk in Financially Dollarized Economies, (USA: International Monetary Fund, 2005) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.

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

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/188
Stock No:

WPIEA2005188
ISBN:

9781451862072
ISSN:

1018-5941

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