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Official dollarization and the banking system in Ecuador and El Salvador

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  • Myriam Quispe-Agnoli
  • Elena Whisler

Abstract

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.

Suggested Citation

  • Myriam Quispe-Agnoli & Elena Whisler, 2006. "Official dollarization and the banking system in Ecuador and El Salvador," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 55-71.
  • Handle: RePEc:fip:fedaer:y:2006:i:q3:p:55-71:n:v.91no.3
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    References listed on IDEAS

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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 312-334, May.
    2. Anne Marie Gulde & David S. Hoelscher & Alain Ize & Dewitt D Marston & Gianni De Nicolo, 2004. "Financial Stability in Dollarized Economies," IMF Occasional Papers 230, International Monetary Fund.
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    Cited by:

    1. repec:eaa:aeinde:v:17:y:2017:i:1_6 is not listed on IDEAS
    2. María Lorena Marí del Cristo & Marta Gómez-Puig, 2013. "“Fiscal sustainability and fiscal shocks in a dollarized and oil-exporting country: Ecuador”," IREA Working Papers 201306, University of Barcelona, Research Institute of Applied Economics, revised Apr 2013.
    3. Ali M. Kutan & Erick W. Rengifo & Emre Ozsoz, 2010. "Evaluating the Effects of Deposit Dollarization in Bank Profitability," Fordham Economics Discussion Paper Series dp2010-07, Fordham University, Department of Economics.
    4. Roberto Frenkel & Martin Rapetti, 2010. "A Concise History of Exchange Rate Regimes in Latin America," UMASS Amherst Economics Working Papers 2010-01, University of Massachusetts Amherst, Department of Economics.
    5. Kutan, Ali M. & Ozsoz, Emre & Rengifo, Erick W., 2012. "Cross-sectional determinants of bank performance under deposit dollarization in emerging markets," Emerging Markets Review, Elsevier, vol. 13(4), pages 478-492.
    6. Escribano, Gonzalo, 2013. "Ecuador's energy policy mix: Development versus conservation and nationalism with Chinese loans," Energy Policy, Elsevier, vol. 57(C), pages 152-159.

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    Keywords

    Dollar ; Ecuador ; El Salvador ; Latin America;

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