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Official dollarization and the banking system in Ecuador and El Salvador

  • Myriam Quispe-Agnoli
  • Elena Whisler

In January 2000 Ecuador adopted the U.S. dollar as legal tender, and El Salvador followed suit in 2001. The two countries officially dollarized under quite different circumstances: Ecuador was suffering an economic and banking crisis, while El Salvador enjoyed economic stability and low inflation rates. This article studies the evolution of the banking system in these two countries before and after official, or full, dollarization. ; In Ecuador the reforms that ensued from full dollarization have improved transparency and banking performance and competitiveness, but the implementation and enforcement of regulations remain weak, and accounting standards still deviate from international norms. In El Salvador, whose banking regulations are comparable to international standards, full dollarization has improved bank performance despite economic deceleration, increasing the banking system’s competitiveness in Central America. ; Overall, full dollarization has enabled both Ecuador and El Salvador to modernize and improve banking regulations and the safety and soundness of the banking system, the authors conclude. They find that official dollarization, along with other macroeconomic and financial structure factors, has played a significant role in improving bank liquidity and asset quality. Bank profitability has responded to variables that are bank specific. ; It is still too early, the authors note, to predict whether dollarization’s benefits will be sustainable over the long term.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2006)
Issue (Month): Q 3 ()
Pages: 55-71

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Handle: RePEc:fip:fedaer:y:2006:i:q3:p:55-71:n:v.91no.3
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  1. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-34, May.
  2. Anne Marie Gulde & David S. Hoelscher & Alain Ize & David Marston & Gianni De Nicoló, 2004. "Financial Stability in Dollarized Economies," IMF Occasional Papers 230, International Monetary Fund.
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