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The Determinants of Banks' Liquidity Buffers in Central America

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  • Corinne Delechat
  • Camila Henao Arbelaez
  • Priscilla S. Muthoora
  • Svetlana Vtyurina
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    Abstract

    Banks’ liquidity holdings are comfortably above legal or prudential requirements in most Central American countries. While good for financial stability, high systemic liquidity may nonetheless hinder monetary policy transmission and financial markets development. Using a panel of about 100 commercial banks from the region, we find that the demand for precautionary liquidity buffers is associated with measures of bank size, profitability, capitalization, and financial development. Deposit dollarization is also associated with higher liquidity, reinforcing the monetary policy and market development challenges in highly dollarized economies. Improvements in supervision and measures to promote dedollarization, including developing local currency capital markets, would help enhance financial systems’ efficiency and promote intermediation in the region.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/301.

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    Length: 43
    Date of creation: 21 Dec 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/301

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    Related research

    Keywords: Banking systems; Central America; Liquidity; Commercial banks; Cross country analysis; bank liquidity; credit; dollarization; excess liquidity; foreign banks; bank size; net interest margin; banking crisis; financial safety net; reserve ratio; reserve requirement; bank ownership; deposit insurance; liquidity ratio; bank deposits; interbank market; banking crises; liquid asset; banking supervision; private bank; banking firm; bank failures; bank assets; banking regulation; banks � assets; bank laws; banking sectors; bank balance sheets; bank runs; propensity to save; banking models; reserve account; banks assets; banking system assets; foreign currency deposit; macroeconomic stabilization; bank for international settlements; balance sheet growth; domestic liquidity; consolidated supervision; prudential requirement; state bank; bank transactions; bank reserves; macroeconomic stability; banks � balance sheet; deposit insurance scheme;

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    1. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander, 2000. "The credit crunch in East Asia : what can bank excess liquid assets tell us ?," Policy Research Working Paper Series 2483, The World Bank.
    2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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    10. Enrica Detragiache & Thierry Tressel & Poonam Gupta, 2008. "Foreign Banks in Poor Countries: Theory and Evidence," Journal of Finance, American Finance Association, vol. 63(5), pages 2123-2160, October.
    11. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-50, May.
    12. Dinger, Valeriya, 2009. "Do foreign-owned banks affect banking system liquidity risk?," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 647-657, December.
    13. Santomero, Anthony M, 1984. "Modeling the Banking Firm: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 576-602, November.
    14. Andreas Jobst & Laura Valderrama & Ivan Guerra & Hemant Shah, 2007. "Public Debt Markets in Central America, Panama, and the Dominican Republic," IMF Working Papers 07/147, International Monetary Fund.
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