II Implications of Dollarization for Financial Stability
Author:
Ms. Anne Marie Gulde
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,
Mr. David S. Hoelscher
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Mr. Alain Ize
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Mr. Dewitt D Marston
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Mr. Gianni De Nicolo
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Language:
English
Print Publication Date:
15 Jun 2004
Keywords:
OP; currency; dollar; deposit; market reform; dollar deposit; dollarization risk; dollar liquidity; flight to quality; dollar intermediation; Currencies; Dollarization; Depreciation

Abstract

Empirical evidence suggests that financial dollarization may increase the vulnerability of financial systems to solvency and liquidity risks. Simple cross-country estimates of the impact of dollarization on some key financial soundness indicators, while controlling for changes in underlying macro-volatility, are consistent with the hypothesis that increased dollarization may increase financial vulnerability. In particular, the variance of deposit growth is positively and significantly correlated with dollarization, suggesting that dollarized financial systems may be more exposed to credit cycles and liquidity risk (Table 3). Based on estimates of non-performing loans (NPLs) or a composite systemic risk measure, the Z-index, which measures the probability of insolvency of a firm, dollarized economies also may be more exposed to solvency risk (Box 3 and Table 4).

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Cover Financial Stability in Dollarized Economies
Financial Stability in Dollarized Economies
ISBN:
9781589062962
ISSN:
0251-6365
Publication Date:
15 Jun 2004
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781589062962.084
Pages:
35

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