Mr. Armando Méndez Morales and Maria del Mar Cacha
Bank borrowers' currency mismatches often result from unhedged foreign currency borrowing in economies where there is significant dollarization, exposing the financial sector to disguised credit risk. In the absence of standard tools or guidelines to counteract this risk, countries have resorted to outright regulatory limits in cases of moderate dollarization and to undesirable exchange controls in other cases. This paper proposes a "specific-to-group" provision rule based on the effective borrowing cost differential between domestic and foreign currency. Such a rule would help internalize the corresponding risks for banks and their borrowers in line with internationally accepted prudential and accounting standards.
International Monetary Fund. External Relations Dept.
The Group of Seven Finance Ministers and Central Bank Governors met in Canada on February 8–9 to discuss the global economy, the importance of fostering development, and ongoing efforts to combat the financing of terrorism. The Managing Director of the IMF participated in the meeting.