Evaluating the Effects of Deposit Dollarization in Bank Profitability

Ali Kutan, Erick W. Rengifo and Emre Ozsoz
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Erick W. Rengifo: Fordham University, Department of Economics and Center for International Policy Studies (CIPS)

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

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 deposit 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.

Keywords: Dollarization; bank performance; bank profitability (search for similar items in EconPapers)
JEL-codes: F31 G21 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-eff
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:frd:wpaper:dp2010-07

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