Cross-Sectional Determinants of Bank Performance under Deposit Dollarization

Fordham University Department of Economics Discussion Paper No. 2010-07

23 Pages Posted: 12 Sep 2010 Last revised: 14 Jun 2011

See all articles by Erick W. Rengifo

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Ali M. Kutan

Southern Illinois University at Edwardsville

Emre Ozsoz

Fordham University - Department of Economics - Center for International Policy Studies (CIPS)

Date Written: June 1, 2011

Abstract

Dollar-denominated deposits constitute a large proportion of deposits in many developing economies. This may result in currency mismatches on banks' balance sheets as is suggested by recent literature. In general, having dollar-denominated deposits and loans could increase financial fragility, create balance sheet problems and affect bank profitability. In particular, this currency mismatch does not only increase banks' currency risk when the proportion of dollar-denominated loans with respect to local-denominated loans increases but also it increases their clients' default risk if depreciation occurs. This paper investigates the profitability of 36 dollarized banking systems. Our results suggest that after controlling for some macroeconomic and institutional variables, dollarization, as currency mismatch hypothesis suggests, depresses bank performance and lowers bank profitability. Moreover, our results show that the effect of institutions more than offset the negative impact of dollarization on banks' profitability.

Keywords: Dollarization, bank performance, bank profitability

JEL Classification: F31, G21, 024

Suggested Citation

Rengifo, Erick W. and Kutan, Ali M. and Ozsoz, Emre, Cross-Sectional Determinants of Bank Performance under Deposit Dollarization (June 1, 2011). Fordham University Department of Economics Discussion Paper No. 2010-07. Available at SSRN: https://ssrn.com/abstract=1675879

Erick W. Rengifo

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

United States
0017188174061 (Phone)
0017188173518 (Fax)

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Emre Ozsoz (Contact Author)

Fordham University - Department of Economics - Center for International Policy Studies (CIPS) ( email )

Dealy Hall 5th Floor
441 East Fordham Rd
New York, NY 10458
United States

HOME PAGE: http://www.fordham.edu/academics/office_of_research/research_centers__in/cips/

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