Abstract
The paper revisits the causes and consequences of financial dollarization in Ukraine during the past decade (monthly data). Dollarization in emerging markets plays a dual role: positive and negative. This study of financial dollarization is in the context of resident household holdings of foreign currency-denominated bank deposits and loans. If exchange rates are stable, deposit dollarization allows the withdrawal of money from the shadow economy, and loan dollarization allows the lending of long-term money, which is not possible with domestic currency due to inflation expectations. At the same time, the instability and lack of supply of foreign currencies in the market result in the collapse of household and bank finances, leading to currency risk, credit risk, and liquidity risk. Therefore, the study uses estimate indicators, the deposit dollarization index (DDI), household foreign currency deposits and loans, loan to deposit ratio (LTD), and inflation to find out the tendencies in the context of a changing domestic currency exchange rate. We present three models to reveal the influence of financial dollarization on banking stability. The first one explains the real value of domestic currency deposits through indicators such as M2 (positive), exchange rate (negative), domestic currency deposits (positive), and panic effects (negative). The second one describes the influence of the exchange rate (negative) and panic effects (negative) on foreign currency deposits. The third one explains the DDI through such the exchange rate, M2, and interest rates. The combined models provide an insight about the time necessary to stabilize the Ukrainian banking system.
Highlights
Dollarization, and dollarization of the banking system, is not a new idea; it is not even an idea of the twentieth century
Foreign exchange rates were not as low as in 1996, but after the crisis of 1998–1999, when the domestic currency lost 80% in 1998 and 57% in 1999, the hryvnia gradually revaluated against the US dollar and devaluated against the euro, and foreign exchange rates did not change dramatically before two last crises in 2008 and in 2014
We focus on the deposit dollarization index (DDI) as well as FCD and FCL, and their equivalents in the domestic currency to explain their dramatic role both for banks and households
Summary
Dollarization, and dollarization of the banking system, is not a new idea; it is not even an idea of the twentieth century. This paper contributes to the research on financial dollarization in several ways It attempts to explain the causes and consequences of financial dollarization in Ukraine, based on data on household deposits and loans in foreign currencies during the past decade: (2005–2014). This period has been chosen for two reasons: 1) the existence of detailed statistic of household deposits & loans in foreign currencies (it was not detailed before 2005); 2) the covering of the pre-crisis (2005 – September 2008), crisis (October 2008–2009), post-crisis (2010–2013) and new-crisis (2014) periods).
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
