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The Determinants of Banks' Liquidity Buffers in Central America

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

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.

Suggested Citation

  • Ms. Corinne C Delechat & Ms. Camila Henao Arbelaez & Ms. Priscilla S Muthoora & Svetlana Vtyurina, 2012. "The Determinants of Banks' Liquidity Buffers in Central America," IMF Working Papers 2012/301, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/301
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    7. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
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