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The authors are grateful to Paul Cashin, Benedict Clements, Catherine Pattillo, Alain Ize, Sir Dwight Venner, Wendell Samuel and participants in the First ECCB/IMF Research Policy Review Seminar (held at the Eastern Caribbean Central Bank), for helpful comments.
In many developing countries additional requirements are needed to reduce moral hazard and protect the LOLR from undue political pressure, including well designed lending procedures, clearly laid out authority and accountability (He, 2000).
In practice the ECCB backing ratio expanded from around 83 percent in 1983 to fluctuate at over 95 percent since 1995. Despite the quasi-currency board arrangement, the ECCB is permitted to provide credit to its members under specified limits and within the reserve cover requirement (IMF, 2004, 2008).
In the early 2000s, out of a group of six modern currency board arrangements (CBAs), only Bosnia and Herzegovina explicitly ruled out a LOLR facility. Hong Kong, Argentina and Bulgaria had provisions that explicitly collateralized emergency lending, up to the excess foreign reserves available. Estonia and Lithuania had no formal provisions but may provide support on a case by case basis (Ho, 2002).
Article 24 of the Eastern Caribbean Central Bank Agreement Act 1983 does not specify if the external reserve to cover demand liabilities refers to a gross or net concept. To compute the backing ratio, some CBAs like Bulgaria and Lithuania use a gross concept of foreign assets that does not take into account the central bank’s long-term external obligations coming, for instance, from the IMF and/or the World Bank.
By law the ECCB is required to maintain a minimum foreign exchange cover of 60 percent of demand liabilities. The remaining 40 percent “excess” foreign reserves over demand liabilities could be lent to banks or member governments. Credit to individual member governments is restricted to their share in total regional recurrent revenue. Beyond their individual credit allocation potential, member governments must seek residual financing from commercial banks or abroad (van Beek, 2000; Williams, 2001).
Article 7 of the Eastern Caribbean Central Bank Agreement Act 1983 states that the Board of Directors may request Monetary Council members to vote without meeting on urgent matters, and reach decisions by this method by a simple majority of all the Council members.
The model assumes a fixed exchange rate regime, and therefore the liquidity assistance reduces international reserves, and raises the devaluation risk; total liquidity is measured by xt = x1 x2.
Includes Benin, Burkina, Cote d’ Ivoire, Mali, Niger, Senegal and Togo.
Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea, and Chad.