The Lender of Last Resort Function Under a Currency Board: The Case of Argentina

54 Pages Posted: 20 Apr 2016

See all articles by Gerard Caprio

Gerard Caprio

Williams College

Michael P. Dooley

University of California at Santa Cruz; National Bureau of Economic Research (NBER)

Danny Leipziger

World Bank

Carl E. Walsh

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1996

Abstract

No grand solution appears to exist for the problems that seem inevitable in the Argentine system, in which the Central Bank is both lender of last resort and currency board, providing full convertibility between pesos and U.S. dollars. Argentina's strategy therefore must turn on actively strengthening its banking systems to reduce solvency risks and on building its reserves.

Within the current rules of the game, Argentina's central bank (BCRA) is charged with being the lender of last resort as well as providing full convertibility between pesos and U.S. dollars - two objectives with one instrument, namely, reserves. Within those rules, it may well be that the balance of responsibilities needs to shift. Complete dollarization can significantly reduce risks but not entirely eliminate them. If the BCRA can concentrate more on building up reserves and helping to ward off crises of confidence in the currency, perhaps the banking system can protect itself better from liquidity shocks. But this will require, among other things, consolidation of the sector (which could give it greater access to outside liquidity) and prudential strengthening of the system. Triage of weaker banks should continue and not await another crisis.

More experience with the new liquidity policy is needed and so is reform of the settlement system, as it affects the functioning of the interbank market, which is essential for containing crises. Essentially, however, no grand solution seems to exist for the problems that seem inevitable in a system where the central bank is also the currency board. Argentina's strategy must therefore turn on actively strengthening its banking systems to reduce the risks of insolvency.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to advise member countries on financial sector policy.

Suggested Citation

Caprio, Gerard and Dooley, Michael P. and Leipziger, Danny and Walsh, Carl E., The Lender of Last Resort Function Under a Currency Board: The Case of Argentina (September 1996). World Bank Policy Research Working Paper No. 1648. Available at SSRN: https://ssrn.com/abstract=620520

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

Michael P. Dooley

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
510-459-3662 (Phone)
510-459-5900 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Danny Leipziger

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Carl E. Walsh

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
408-459-4082 (Phone)
408-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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