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The lender of last resort function under a currency board : the case of Argentina

  • Caprio, Gerard Jr.
  • Dooley, Michael
  • Leipziger, Danny
  • Walsh, Carl

Within the current rules of the game, Argentina's central bank (BCRA) is charged with being the lender of last resort as well as providing full convertibility between pesos and U.S. dollars - two objectives with one instrument, namely, reserves. Within those rules, it may be well that the balance of responsibilities needs to shift. Complete dollarization can significantly reduce risks but not entirely eliminate them. If the BCRA can concentrate more on building up reserves and helping to ward off crises of confidence in the currency, perhaps the banking system can protect itself better from liquidity shocks. But this will require, among other things, consolidation of the sector (which could give it greater access to outside liquidity) and prudential strengthening of the system. Triage of weaker banks should continue and not await another crisis. More experience with the new liquidity policy is needed and so is reform of the settlement system, as it affects the functioning of the interbank market, which is essential for containing crises. Essentially, however, no grand solution seems to exist for the problems that seem inevitable in a system where the central bank is also the currency board. Argentina's strategy must therefore turn on actively strengthening its banking systems to reduce the risks of insolvency.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1648.

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Date of creation: 30 Sep 1996
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Handle: RePEc:wbk:wbrwps:1648
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