The political economy of Panama's dollarized interbank market

Andrés Arauz

Chapter 7 in Central Banking, Monetary Policy and the Political Economy of Dollarization, 2025, pp 182-215 from Edward Elgar Publishing

Abstract: Panama has the oldest de jure dollarized financial system. This chapter uses the pyramid of liabilities – which maps the hierarchical nature of the Panamanian banking system – as its analytical and theoretical framework. After going over the history of Panama's dollarized banking system – which is closely intertwined with its national history of foreign interference – it recounts its only major financial crisis event in the late 1980s, which has its origin in US financial sanctions and its transmission mechanisms specifically attributable to Panama's banking system dependence on US-based correspondent banks. The hierarchical structure of the domestic banking system is further discussed, including how the Banco Nacional de Panamá functions as a central bank: a bank of the state and a bank of banks. Crucially, Panamanian banks’ assets abroad – mainly at JPMorgan and Citibank – are key to understanding the offshore nature of Panama's dollarized interbank payment systems. Finally, this chapter presents a quantification of Panama's unique pyramid of liabilities and briefly explores policy alternatives to increase the potential of monetary creation given Panama's specific characteristics.

Keywords: Dollarization; Central banking; Monetary policy; Panama; Central America; Offshore banking (search for similar items in EconPapers)
Date: 2025
ISBN: 9781803925325
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