Managing Systemic Liquidity Risk in Financially Dollarized Economies

Eduardo Levy Yeyati, Alain Ize and Miguel Kiguel

No 2005/188, IMF Working Papers from International Monetary Fund

Abstract: This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.

Keywords: WP; dollar LOLR; liquidity holding; LOLR facility; dollar deposit; dollar liquidity; liquidation cost; Dollarization; Systemic Liquidity; Banking Crises; bank resolution system; dollar bank; bank liquidation cost; peso bank; bank resolution mechanism; liquidity levels bank; Liquidity; Commercial banks; Lender of last resort; Insurance; Correspondent banking; Europe; Africa (search for similar items in EconPapers)
Pages: 31
Date: 2005-09-01
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Citations: View citations in EconPapers (11)

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