Financial Dollarization: An Overview

Armas, Adrián; Ize, Alain; Yeyati, Eduardo Levy

doi:10.1057/9780230380257_1

Cited by 12 publications

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“…Even when financing from abroad is not available, there is a widespread practice of denominating capital in foreign currency even when raised locally. Dollarization can become pervasive, most notably in countries that have suffered high inflation (see, e.g., Armas, Ize, and Levy Yeyati 2006, Chan‐Lau and Santos 2006, Havrylyshyn and Beddies 2003). 1 People place their savings in foreign currency assets, and many companies and households even prefer to borrow in foreign currency.…”

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confidence: 99%

Credit Risk Spreads in Local and Foreign Currencies

Galai

Wiener²

2012

J of Money Credit Banking

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Governments, corporations, and even small firms raise and denominate capital in different currencies. We examine the micro‐level factors that should be considered by a borrower when structuring debt denominated in various currencies. This paper will show how the currency composition of debt affects the cost of debt through the interaction with the risk of company's assets. We look at the currency mismatch in the firm and analyze its credit spread within a Merton's type model with bankruptcy. We show that foreign currency borrowing is cheaper when the exchange rate is positively correlated with the return on the company's assets. The determining factor is not just whether a given company is an exporter or importer, but rather the statistical correlation between the rate of return on the firm's assets and changes in the exchange rate.

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confidence: 99%

Credit Risk Spreads in Local and Foreign Currencies

Galai

Wiener²

2012

J of Money Credit Banking

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“…From our estimations we conclude that the quantitative real interest rate gains of the policy of allowing Brazilians to hold dollar deposits domestically (0.011 percentage points on impact and 0.023 percentage points in the long run for a 1 percentage point increase in deposit dollarization) would not seem to justify the costs associated to this move. In fact, the dollarization literature (Armas et al (2006), for example) provides many reasons associated to financial stability on why de-dollarization of the type achieved by Brazil is an object of desire for many emerging market countries. What our model shows is that much better for Brazil would be, for example, moving towards a strong fiscal consolidation as a means of speeding up its access to investment-grade status and thus being able to achieve real interest rate reductions of 2 percentage points or more according to our estimates.…”

Section: Discussionmentioning

confidence: 99%

“…1 See also Armas et al (2006); Barajas and Morales (2003);De Nicoló et al (2003); Galindo and Leiderman (2005); IADB (2005); Rennhack and Nozaki (2006);and Reinhart et al (2003). We use indifferently the terms 'dollarization', 'financial dollarization', and 'deposit dollarization' to express the same empirical concept, namely, the ratio of foreign currency deposits to total banking deposits in a given country.…”

Section: Introductionmentioning

confidence: 99%

A panel-data analysis of interest rates and dollarization in Brazil

Bacha¹,

Holland²,

Gonçalves³

2009

Rev. Bras. Econ.

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We investigate the role of financial dollarization and systemic risks in the determination of real interest rates in Brazil. In a simple currencychoice portfolio model, we show that a strategy of reducing dollarization, if it fails to address fundamental macroeconomic risks, leads to higher domestic real interest rates. We confirm this prediction in an empirical panel-based model, involving systemic risk variables, but find that the effect is small after controlling for the risks of dilution and default. We apply our empirical estimates to the case of Brazil -a natural case study given its low degree of financial dollarization and very high real interest rates. The estimated model is unable to explain the high interest rate levels in the aftermath of Brazil's 1994 inflation stabilization. However, since the adoption in 1999 of inflation targeting and floating exchange rates, Brazil's real interest rates are found to be gradually converging to the model's predicted values. The estimation also shows that further reductions in Brazil's real interest rates could be achieved through sound fundamentals that led to investment-grade status rather than financial dollarization. Analisamos o papel da dolarização financeira e do risco sistêmico na determinação da taxa real de juros no

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“…Also, A. Armas, A. Ize and E. Levy Yeyati (2006) mention return volatility -credit risk correspondence depending on currency resilience. We attempt to use this concept in developing dollarization risk management tools for the banking sector.…”

Section: Literature Reviewmentioning

confidence: 99%

Risk Management of Dollarization in Banking: Case of Post-Soviet Countries

Kaminskyi¹,

Versal²

2018

Montenegrin Journal of Economics

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Dollarization of bank assets and liabilities is a typical phenomenon with multi-faceted effects. Primarily, this phenomenon raises risks of imbalance in assets and liabilities following a sharp local currency devaluation. However, dollarization may deliver additional returns. This calls for development and implementation of strategies for dollarization risk management. This study aims at designing risk management strategies for ensuring optimal currency structure of loan and deposit portfolio under an extremely high level of devaluation risk in six post-Soviet countries. The study is based on risk modeling methods and asset liability management techniques. The value-at-risk methodology is applied to measure and identify main risks banks face under dollarization. Two types of risk are identified: the strategic risk measured as a ratio of deposits in foreign currency; and the tactical risk measured as a ratio of foreign currency deposits transformed into local currency loans. Suggested effective risk management strategies are based on the optimization of these two types of risks. The first strategy deals with deposit dedollarization and non-transformation of foreign currency deposits into local currency loans. Under the second strategy, increased deposit dollarization is complemented with non-transformation of foreign currency deposits into local currency loans. The third strategy involves deposit de-dollarization and conducting transformation of foreign currency deposits into local currency loans. Each strategy entails maximization of return with subsequent minimization of risk. The study concludes that the first strategy is appropriate for Ukraine and Belarus, the second one suits Azerbaijan and Moldova, and the third one fits Armenia and Georgia. JEL classification:F31, G01, G21.

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Financial Dollarization: An Overview

Cited by 12 publications

References 0 publications

Credit Risk Spreads in Local and Foreign Currencies

Credit Risk Spreads in Local and Foreign Currencies

A panel-data analysis of interest rates and dollarization in Brazil

Risk Management of Dollarization in Banking: Case of Post-Soviet Countries

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