IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2012-301.html
   My bibliography  Save this paper

The Determinants of Banks' Liquidity Buffers in Central America

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=40188
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    2. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    4. Mr. Simon T Gray, 2011. "Central Bank Balances and Reserve Requirements," IMF Working Papers 2011/036, International Monetary Fund.
    5. Douglas W. Diamond & Raghuram G. Rajan, 2005. "Liquidity Shortages and Banking Crises," Journal of Finance, American Finance Association, vol. 60(2), pages 615-647, April.
    6. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    7. Agenor, Pierre-Richard & Aizenman, Joshua & Hoffmaister, Alexander W., 2004. "The credit crunch in East Asia: what can bank excess liquid assets tell us?," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 27-49, February.
    8. Arturo Galindo & Leonardo Leiderman, 2005. "Living with Dollarization and the Route to Dedollarization," Research Department Publications 4397, Inter-American Development Bank, Research Department.
    9. Micco, Alejandro & Panizza, Ugo, 2006. "Bank ownership and lending behavior," Economics Letters, Elsevier, vol. 93(2), pages 248-254, November.
    10. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    11. Ms. Mercedes Garcia-Escribano & Mr. Sebastian Sosa, 2011. "What is Driving Financial De-Dollarization in Latin America?," IMF Working Papers 2011/010, International Monetary Fund.
    12. Ms. Anne Marie Gulde & Mr. David S. Hoelscher & Mr. Alain Ize & Mr. Dewitt D Marston & Mr. Gianni De Nicolo, 2004. "Financial Stability in Dollarized Economies," IMF Occasional Papers 2004/005, International Monetary Fund.
    13. Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    14. Dinger, Valeriya, 2009. "Do foreign-owned banks affect banking system liquidity risk?," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 647-657, December.
    15. John Moore & Nobuhiro Kiyotaki, 2008. "Liquidity, Business Cycles, and Monetary Policy," 2008 Meeting Papers 35, Society for Economic Dynamics.
    16. Clarke, George R.G. & Cull, Robert & Martinez Peria, Maria Soledad, 2006. "Foreign bank participation and access to credit across firms in developing countries," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 774-795, December.
    17. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," Research Department Publications 4381, Inter-American Development Bank, Research Department.
    18. Mr. Mynor Meza & Mr. Fernando L Delgado, 2011. "Developments in Financial Supervision and the Use of Macroprudential Measures in Central America," IMF Working Papers 2011/299, International Monetary Fund.
    19. 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.
    20. Mr. Eduardo Levy Yeyati & Mr. Alain Ize & Miguel A. Kiguel, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economies," IMF Working Papers 2005/188, International Monetary Fund.
    21. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    22. Mr. Fabian Valencia & Mr. Luc Laeven, 2012. "Systemic Banking Crises Database: An Update," IMF Working Papers 2012/163, International Monetary Fund.
    23. Andreas Jobst & Ms. Laura Valderrama & Mr. Ivan S Guerra & Mr. Hemant Shah, 2007. "Public Debt Markets in Central America, Panama, and the Dominican Republic," IMF Working Papers 2007/147, International Monetary Fund.
    24. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    25. 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.
    26. 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 1-51, May.
    27. Mr. Ralph Chami & Mr. Raphael A Espinoza & Mr. Adolfo Barajas & Mr. Heiko Hesse, 2010. "Recent Credit Stagnation in the Mena Region: What to Expect? What Can Be Done?," IMF Working Papers 2010/219, International Monetary Fund.
    28. Mr. Magnus Saxegaard, 2006. "Excess Liquidity and Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa," IMF Working Papers 2006/115, International Monetary Fund.
    29. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    30. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Le Ngoc Thuy Trang & Do Thi Thanh Nhan & Nguyen Thi Nhu Hao & Wing-Keung Wong, 2021. "Does Bank Liquidity Risk Lead To Bank'S Operational Efficiency? A Study In Vietnam," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 46-88, December.
    2. Valdivia Coria, Joab Dan, 2022. "Apalancamiento, ciclo financiero y económico [Leverage, financial and business cycles]," MPRA Paper 116849, University Library of Munich, Germany.
    3. Karolina Patora, 2016. "What drives the liquidity position of foreign-owned banks? The case of Poland," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-1.
    4. Aiba, Daiju, 2023. "Bank dependency on foreign funding and global liquidity shocks: The importance of US monetary policy for a developing country," Journal of Asian Economics, Elsevier, vol. 84(C).
    5. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    6. Gombola, Michael J. & Ho, Amy Yueh-Fang & Huang, Chin-Chuan, 2016. "The effect of leverage and liquidity on earnings and capital management: Evidence from U.S. commercial banks," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 35-58.
    7. Wahida Ahmad & Nur Hazimah Amran, 2023. "Non-linear Panel Data Liquidity Model of Islamic and Conventional Banks," Information Management and Business Review, AMH International, vol. 15(4), pages 316-325.
    8. Ganić Mehmed, 2014. "An Empirical Study on Liquidity risk and its determinants in Bosnia and Herzegovina," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(52), pages 157-183, June.
    9. FERROUHI, El Mehdi & LEHADIRI, Abderrassoul, 2013. "Liquidity Determinants of Moroccan Banking Industry," MPRA Paper 59888, University Library of Munich, Germany.
    10. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    11. Amal Essayem & Wided Khiari & Azhaar Lajmi, 2020. "Liquidity buffers determinants in GCC’s Islamic banks," Bulletin of Applied Economics, Risk Market Journals, vol. 7(2), pages 129-140.
    12. AIBA, Daiju & 相場, 大樹, 2016. "Financial Dollarization: Evidence from a Survey on Branches of Cambodian Financial Institutions," Discussion Papers 2016-09, Graduate School of Economics, Hitotsubashi University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Corinne Deléchat & Camila Henao & Priscilla Muthoora & Svetlana Vtyurina, 2014. "The Determinants of Banks' Liquidity Buffers in Central America," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(1), pages 83-129, January-J.
    2. Clemens Bonner & Iman Lelyveld & Robert Zymek, 2015. "Banks’ Liquidity Buffers and the Role of Liquidity Regulation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(3), pages 215-234, December.
    3. Carmela D’Avino & Eric Girardin & Mimoza Shabani, 2022. "Bank liquidity creation: A new global dataset for developing and emerging countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 158(2), pages 529-570, May.
    4. Wang, Chih-Wei & Lee, Chien-Chiang & Chen, Ming-Chien, 2022. "The effects of economic policy uncertainty and country governance on banks' liquidity creation: International evidence," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    5. Bordo, M.D. & Meissner, C.M., 2016. "Fiscal and Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 355-412, Elsevier.
    6. Xavier Vives, 2011. "Competition and Stability in Banking," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 12, pages 455-502, Central Bank of Chile.
    7. Diamond, Douglas W. & Rajan, Raghuram G., 2001. "Banks, short-term debt and financial crises: theory, policy implications and applications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 37-71, June.
    8. Pablo Federico, 2012. "Developing an Index of Liquidity-Risk Exposure: An Application to Latin American and Caribbean Banking Systems," Research Department Publications 4811, Inter-American Development Bank, Research Department.
    9. Dietrich, Diemo & Gehrig, Thomas, 2021. "Speculative and precautionary demand for liquidity in competitive banking markets," LSE Research Online Documents on Economics 118869, London School of Economics and Political Science, LSE Library.
    10. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    11. Hye-Jin Cho, 2016. "Economics of Regulation: Credit Rationing and Excess Liquidity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01400251, HAL.
    12. Seba Mohanty & Jitendra Mahakud, 2021. "Causal Nexus Between Liquidity Creation and Bank Capital Ratio: Evidence from India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 15(2), pages 205-237, May.
    13. cho, hyejin, 2016. "Economics of Regulation: Credit Rationing and Excess Liquidity," MPRA Paper 75775, University Library of Munich, Germany.
    14. Chatterjee, Ujjal K., 2015. "Bank liquidity creation and asset market liquidity," Journal of Financial Stability, Elsevier, vol. 18(C), pages 139-153.
    15. Hyejin Cho, 2017. "Economics Of Regulation: Credit Rationing And Excess Liquidity," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01375423, HAL.
    16. Chatterjee, Ujjal K., 2018. "Bank liquidity creation and recessions," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 64-75.
    17. Elma Hasanovic & Tanja Latic, 2017. "The Determinants of Excess Liquidity in the Banking Sector of Bosnia and Herzegovina," IHEID Working Papers 11-2017, Economics Section, The Graduate Institute of International Studies.
    18. Rivero Leiva, David & Rodríguez Mendizábal, Hugo, 2019. "Self-fulfilling runs and endogenous liquidity creation," Journal of Financial Stability, Elsevier, vol. 45(C).
    19. Xavier Vives, 2006. "Banking and Regulation in Emerging Markets: The Role of External Discipline," The World Bank Research Observer, World Bank, vol. 21(2), pages 179-206.
    20. Dong Beom Choi, 2014. "Heterogeneity and Stability: Bolster the Strong, Not the Weak," The Review of Financial Studies, Society for Financial Studies, vol. 27(6), pages 1830-1867.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2012/301. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.