Managing Systemic Liquidity Risk in Financially Dollarized Economy

Alain Ize (), Miguel Kiguel and Eduardo Levy Yeyati

Business School Working Papers from Universidad Torcuato Di Tella

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.

Pages: 31 pages
Date: 2005
New Economics Papers: this item is included in nep-cfn, nep-ias and nep-lam
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpbsdt:managsystrisk

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