Managing Systemic Liquidity Risk in Financially Dollarized Economies

31 Pages Posted: 3 Mar 2006

See all articles by Alain Ize

Alain Ize

World Bank

Miguel A. Kiguel

Independent

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Date Written: September 2005

Abstract

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.

Keywords: Dollarization, Systemic Liquidity, Banking Crises

JEL Classification: E58, G21, G33

Suggested Citation

Ize, Alain and Kiguel, Miguel A. and Levy-Yeyati, Eduardo Levy, Managing Systemic Liquidity Risk in Financially Dollarized Economies (September 2005). IMF Working Paper No. 05/188, Available at SSRN: https://ssrn.com/abstract=888057

Alain Ize (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Miguel A. Kiguel

Independent ( email )

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

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