Deposit Dollarization Research Articles

Dynamics of deposit dollarization in Turkey

<p style="text-align:justify"><span style="font-size:16px"><span style="font-family:Times New Roman,Times,serif"><span dir="ltr" lang="EN-US"><span style="color:black">Deposit dollarization in Turkey has been on the rise, reaching record levels in 2022. This was caused by the worsening macroeconomic fundamentals along with the transition to the presidential system in 2018 and the associated deviation from the monetary policy stance afterward. The unique case of Turkey presents an excellent natural experiment to explore the dynamics of deposit dollarization and how it is affected by the changes in the institutional structure as well as various social, economic, and financial shocks in a relatively short time. This study examines the time varying reactions of deposit dollarization for the period between 2013 and 2022 based on rolling window maximum entropy bootstrap estimates. Our findings reveal that all the model variables had significant and sometimes asymmetric effects on deposit dollarization during the different stages of this turbulent period. In particular, we observe diminishing effects of real exchange rate, policy credibility and consumer confidence over time. The findings provide ample new evidence regarding the dynamics of deposit dollarization in general, and how it is affected by loss of monetary policy credibility.</span></span></span></span></p>

ASSESSMENT OF THE LEVEL OF STRUCTURE AND CENTRALIZATION OF THE BANKING SYSTEM IN AZERBAIJAN

The purpose of the research is to assess the current state of the structure and level of concentration of the banking system in Azerbaijan based on relevant indicators. The methodology of the research - comparative analysis, logical generalization, syste­matic approach, and mathematical analysis methods were used in the research work. The practical importance of the research - the fundamental analysis inves­tigated in the research can be used to improve economic efficiency and regulate interbank com­petitive relations. The results of the research - the structure of the banking system and the issue of com­pe­ti­tion are important in the regulation of economic relations. Therefore, taking into account the cur­rent trends can be important for stimulating the national economy. The originality and scientific novelty of the research - large, medium and small banks were determined, the level of dollarization of deposits and the level of credit distri­bu­tion in the sectors of the economy were determined.

THE LONG TERM IMPACT OF DEPOSIT DOLLARIZATION ON STOCK MARKETS IN MIST ECONOMIES

With the globalization and financial liberalization, deposit dollarization and increasing use of foreign currency deposits by households and firms have garnered significant attention and become an important subject in recent years. In this study, we tried to uncover the relationship between deposit dollarization, which is a form of financial dollarization, and stock market in MIST economies for the period between 2003Q1 and 2022Q2. With the help of second-generation methods of panel econometrics, we have identified a significant, adverse long-term influence of deposit dollarization on stock markets. This outcome has been substantiated through the utilization of three distinct estimation methodologies. Moreover, our Granger non-causality test demonstrates the presence of a causal relationship emanating from deposit dollarization to the stock market.

Peculiarities of financial dollarization during martial law: case of Ukraine

The article evaluates the peculiarities of banking sector dollarization in Ukraine with the use of econometric tools and a systems approach, conducts a scenario analysis for dollarization dynamics during martial law, and develops a framework for recommendations with the consideration of long-term financial stability goals.The study finds that the inflation-targeting regime has gradually reduced the dollarization of loans and deposits, but levels remain high. During the full-scale invasion of Russia in Ukraine, the record-low levels of dollarization and NBU restrictions prevented the rapid increase in dollarization as was previously observed during economic crises. The study also finds that loan dollarization is highly dependent on deposit dollarization and that economic agents tend to choose a more stable currency during periods of high inflation and exchange rate volatility. The scenario analysis forecasts that deposit dollarization will continue to grow during the crisis period and high uncertainty, while loan dollarization will stabilize on a new, higher level.To ensure financial stability on a long-term horizon, the de-dollarization strategy should include monetary policy, vertical development of the financial market, in particular, the development of the bonds market and alternative hryvnia instruments, as well as the use of macroprudential tools.
 JEL classification: E52, E58, E63, C30, C53

A measurement of dollarization

Purpose- Dollarization refers to the use of foreign currency instead of domestic currency by citizens as a result of macroeconomic instabilities. Generally, due to the instability caused by inflation, the local currency loses its functions as a unit of account, a store of value, and in the last stage, a medium of exchange. Partial dollarization is the fulfillment of any of the three functions of money by a foreign currency. The purpose of this study is to measure the dollarization level of the Turkish economy between 2000 and 2022 (a 23-year period). This study employs the most comprehensive definition of portfolios of Turkish Lira and foreign currency to measure the degree of asset and liability dollarization. This study measures the dollarization degree of the Turkish economy by using the composite dollarization index developed by Reinhart et al., (2003). Methodology- The composite dollarization index based on the definition by Reinhart et al., 2003, has two components; asset dollarization and liability dollarization. This study measures the level of dollarization by using Reinhart's definition of the Turkish economy between 2000 and 2022. We construct the asset dollarization as a ratio of the foreign currency portfolio to the total portfolio. Liability dollarization is defined as the sum of the ratio of foreign currency credit to the total credit, the ratio of the domestic debt in foreign currency to the total domestic debt, and the ratio of total external debt to the GDP. The composite dollarization index is the sum of asset dollarization and liability dollarization. Findings- The dollarization in bank deposits rose to 57%in 2001 and then dropped to 27% in 2010. The dollarization in bank deposits has started to rise again since 2013. The increase in dollarization in bank deposits has accelerated since 2021. It reached 70% by the middle of 2022. Asset dollarization has a similar path to the dollarization in bank deposits. The level of the asset dollarization is generally lower than the level of the deposit dollarization for all years examined. The liability dollarization also follows a similar path. As the degree of asset dollarization increases, the degree of liability dollarization also increases. Finally, the composite dollarization index has been rapidly increasing since 2010. Conclusion- As discussed extensively in the literature, the degree of dollarization is an important indicator of a healthy economy. The literature supports that there is a strong link between the degree of dollarization and macroeconomic indicators. When economic instabilities are on the screen, the use of a stable foreign currency instead of domestic currency increases. Some previous studies measured the dollarization by considering only asset dollarization or only liability dollarization may have deficiencies in the comprehensive definition of dollarization. Therefore, a comprehensive measurement of dollarization should better consider both the assets and liabilities of the balance sheets. The empirical findings of this study indicate that the degree of dollarization has been increasing since 2013 and the rate of increase accelerated especially after 2021 based on the comprehensive dollarization index constructed. Keywords: Dollarization, Turkish economy, composite dollarization index, inflation, macroeconomic instabilities JEL Codes: E31, F31, G01

Asymmetric Effect of Exchange Rate on Deposit Dollarization

Bu çalışmanın amacı, Türkiye örneğinde döviz kurunun mevduat dolarizasyonu üzerindeki simetrik/asimetrik etkisini kısa ve uzun dönem itibariyle araştırmaktır. Çalışmada analize tabi tutulan veriler aylık olup 2012:12-2021:01 dönemini kapsamaktadır. Ampirik analizde doğrusal Gecikmesi Dağıtılmış Otoregresif (ARDL) sınır testi yaklaşımı ile doğrusal olmayan ARDL modeli kullanılmıştır. Doğrusal olmayan ARDL sınır testi sonuçlarına dayanılarak, mevduat dolarizasyonu ile döviz kuru ve tüketici güven endeksi arasında uzun dönem ilişkinin varlığı tespit edilmiştir. Mevduat dolarizasyonu uzun dönemde hem döviz kur artışlarından hem de düşüşlerinden doğru yönlü etkilenmektedir. Döviz kurunun mevduat dolarizasyonu üzerindeki etkisi uzun dönemde asimetriktir. Mevduat dolarizasyonunun döviz kurundaki düşüşlere verdiği tepki, artışlara verdiği tepkiden yaklaşık 2.5 kat daha fazladır. Ayrıca, tüketici güven endeksi mevduat dolarizasyonunu uzun dönemde ters yönde etkilemekte fakat kısa dönemde etkilememektedir.

EFFECTS OF DOLLARIZATION ON BANK PERFORMANCE: ANALYSIS FOR TURKEY

Dollarization has significant effects on the real sector, monetary policy, and financial system. In this study, the effects of dollarization on banks’ performance in Turkey for the period of 2012-2017 are investigated by using both static and dynamic panel data analyses. Our Generalized Method of Moments (GMM) results indicate the statistical significance of the negative impact of deposit dollarization on return on assets (ROA). Both the random effects regression and GMM results show a negative and significant effect of deposit dollarization on return on equity (ROE). On the credit dollarization side, while random effects regression results indicate a negative and significant impact of credit dollarization on ROA and one-step system GMM results indicate the negative effect of credit dollarization on ROE, the rest of our estimations do not show any significant effect of credit dollarization on bank performance.

Measuring the speed of currency substitution

ABSTRACT Financial dollarization is a prevalent and persistent phenomenon among emerging and developing economies. This paper uses data on deposit dollarization in 173 countries between 1975 and 2018 to present stylized facts on the speed of currency substitution, which has not previously been systematically measured. In doing so, the paper casts a wide net in defining what constitutes a currency substitution episode. Overall, when currency substitution happens, it happens fast: the share of total deposits that is denominated in foreign currency rises by 6.5 percentage points per year during an average episode.

Devaluations, Deposit Dollarization, and Household Heterogeneity

We study the aggregate and re-distributive effects of currency devaluations in a small open economy heterogeneous households model with leverage-constrained banks. Our framework captures three stylized facts about liability dollarization in emerging economies: i) banks and firms borrow in foreign currency; ii) households save in dollar-denominated local bank deposits; and iii) such deposits are mainly held by wealthier households. The resulting currency mismatch causes an erosion of banks' net worth during a devaluation, depressing credit supply. The ensuing macroeconomic downturn is amplified by a strong reduction of consumption among poorer households in response to rising borrowing costs and falling labor income. Richer households are partially insured, as they are holding a larger share of their wealth in foreign currency denominated assets. We show that a larger currency hedging by wealthier households deepens the recession and amplifies the negative spillovers for poorer agents. When deposit dollarization is high, welfare gains can arise if monetary policy dampens a depreciation.

REGIONAL DOLLARIZATION DIFFERENCES AND DETERMINANTS: THE CASE OF TURKEY

This study investigates the determinants of deposit dollarization within 81 cities of Turkey for the period of 2007:Q4 – 2019:Q1. Within this scope, exchange rate, CDS premiums, city inflation, city export and import are used to model deposit dollarization. As an econometric approach both fixed and random effect panel data methods are implemented using relevant libraries in Python programming language to measure the impact of independent variables. As a result, all independent variables have statistically significant and positive effect on deposit dollarization within cities. When evaluated according to the effect sizes, inflation, import, export, exchange rate and CDS premiums are considered to be determinant, respectively, on deposit dollarization in Turkish cities. On the other hand, when the two models are tested with the Hausman test, which has a null hypothesis “random effect estimator is true”, it is concluded that the random effect model is more suitable for our model. In addition, to see if citizens living abroad that have registered in the cities have an impact on the dollarization, Pearson correlation is conducted and it is found that there is relatively strong correlation between the number of expatriate citizens and deposit dollarization in the city.

ПОРІВНЯЛЬНИЙ АНАЛІЗ ДОЛАРИЗАЦІЇ ЕКОНОМІКИ ПОЛЬЩІ ТА УКРАЇНИ

The problem of dollarization of the economy is one of the main features of the Ukrainian economy for a long time. It is necessary to find effective ways to decrease it, so the positive experience of other countries, in particular, the countries of Central and Eastern Europe can be very useful. It is obvious that dollarization in Ukraine after the start of a Russian aggressive war will increase significantly and will have an impact on the functioning of the economy. The purpose of the article is to analyze the dynamics of unofficial dollarization in Poland and Ukraine, which will make it possible to compare the trajectory and causes of this phenomenon in the two countries with similar initial conditions. The article provides estimations and a comparative analysis of indicators of unofficial dollarization in Poland and Ukraine. The main indicators of dollarization were calculated – deposit dollarization (ratio of deposits in foreign currencies to all deposits), credit dollarization (ratio of loans in foreign currencies to all loans) and dollarization by monetary aggregate M3 (ratio of deposits in foreign currencies to «broad money»), using official statistical data of the central banks of both countries. The results showed that Poland and Ukraine had a similar situation in the early 1990s, but later dollarization trends began to diverge. The Ukrainian economy can be classified as a highly dollarized, with a traditionally high level of dollarization and a large-scale volatility of its indicators. The dollarization of the Ukrainian economy significantly increased due to frequent currency and financial crises, mistrust of the national currency, lack of reforms and often political crises. The Polish economy shows a positive trend in the long term and does not belong to dollarized countries. In Poland dollarization gradually decreased and now does not threaten the monetary policy of the National Bank of Poland. However, after the beginning of the Russian aggression, the growth of the indicators of dollarization can be clearly seen in both countries, but dollarization is growing much faster in Ukraine. It is quite obvious that the consequences of the war will be long-term.

TÜRKİYE’DE FİNANSAL DOLARİZASYONUN ENFLASYON VE İSTİHDAM İLE OLAN ETKİLEŞİMİ

Son yıllarda gelişmekte olan ülkelerde yaşanan döviz kuru krizleri, dolarizasyon süreçlerinin artmasına neden olmuştur. Ortaya çıkan bu süreç, finansal sistemdeki çeşitliliğin bir sonucu olarak farklı türlere ayrılabilmektedir. Bunlardan biri ise finansal dolarizasyondur. Büyük döviz kuru dalgalanmalarının varlığında finansal dolarizasyonun makroekonomik ve finansal istikrar için ciddi tehditler oluşturabileceği konusunda literatürde geniş bir fikir birliği vardır. Bu çerçevede çalışmanın amacı Türkiye’de finansal dolarizasyonun enflasyon ve istihdam ile olan etkileşimini Aralık 2005 – Kasım 2020 dönemi aylık verilerini kullanarak incelemektir. Çalışmada finansal dolarizasyonun ölçümünde mevduat dolarizasyonu ve kredi dolarizasyonu kullanılmıştır. Serilerin durağanlıkları ADF, PP ve Lee-Strazicich birim kök testleri ile test edilmiştir. Değişkenler arasındaki nedensellik ilişkisi ise Toda-Yamamoto nedensellik analizi ile test edilmiştir. Ayrıca değişkenler arasındaki ilişkinin gücünü ölçmek amacıyla etki tepki fonksiyonları da incelenmiştir. Araştırma bulgularına göre mevduat dolarizasyonundan enflasyon ve istihdama, istihdamdan kredi dolarizasyonuna ve kredi dolarizasyonundan enflasyona doğru bir nedensellik ilişkisi olduğu bulunmuştur.

Financial dollarization of households and firms: How does it differ by level of economic development?

AbstractUsing a newly compiled and comprehensive database from International Financial Statistics, and applying panel‐regression techniques, this paper documents the evolution of households’ and firms’ dollarization over the past decade and assesses its macroeconomic determinants. Households’ and firms’ dollarization have much in common. Structural factors are more relevant than macroeconomic stability. Regarding differences, deposit dollarization, better institutions and lower inflation are relevant for households but not firms, whereas the exchange rate movements seem to play a role only for firms, particularly in higher‐income countries. In terms of loan dollarization, financial deepening is a critical driver for households only.

Financial Dollarization: Efficient Intranational Risk Sharing or Prescription for Disaster?

This paper pushes back against two views about the effects of dollarization. First, there is a view that the dollar is a device by which rich countries provide business cycle insurance to emerging market (EME) countries. We find that the dollar is important for risk sharing, but the evidence suggests that it is primarily a device to shift business cycle risk across different people within individual EMEs and within rich countries rather than across countries. Second, there is a widespread view that dollarization raises the risk of systemic banking and other crises. Although we identify sources of fragility in some aspects of dollarization, the common view that financial dollarization is a source of fragility is over-stated. Our insurance view about financial dollarization and the lack of risks to financial stability emerges from a study of a large cross-country dataset, as well as case studies for Peru and Armenia. We develop a simple model which formalizes the insurance view, which is consistent with the key cross-country facts on interest rate differentials, deposit dollarization and exchange rate depreciations in recessions.

DEPOSIT DE-DOLLARIZATION IN THE POST 2000’S RUSSIA

ABSTRACT In this study, we examine the relationship between the household-debt-to-GDP ratio and deposit de-dollarization in Russia in 2000s. We test if the decreased deposit dollarization (de-dollarization) can be explained by the increased household-debt-to-GDP (nominal) ratio in the post 2000s Russia. We analyze information on Russian economy over the period of 227 months using data from resources such as Russian Federal State Statistics Service, the Central Bank of Russia, and the World Bank etc. We find out that for the Russian emerging economy, increased household indebtedness is a significant factor that contributes to the levels of deposit de-dollarization. Keywords deposit de-dollarization, currency substitution, household-debt-to-GDP ratio

Impact of Remittances on Natural Rate of Dollarization—Trends in Caucasus and Central Asia

This paper discusses migration and remittances trends, and calculates the natural (or benchmark) level of dollarization in Caucasus, Central Asia and others in the region. This natural level of dollarization is conceptually linked to the currency allocation in a portfolio of deposits to maximize welfare, in line with Ize and Levy Yeyati (2003). The fall in remittances due to the economic slowdown since the spread of COVID-19 affects the macroeconomic fundamentals that determine demand for foreign currency deposits. We calculate the natural dollarization level by integrating structural macroeconomic characteristics. We show that despite the reduction in deposit dollarization, there is still a gap with respect to the natural level of dollarization, especially in a scenario of (persistent) lower remittance inflows.

Determinants of Dollarization of Savings in the Turkish Economy

This study aims to analyze the nature of the dollarization that takes place in the Turkish economy and to decompose the factors that have contributed to its increase in recent years. With this purpose, we first identify the events that have significantly affected the dollarization trend in Turkey using the Iterative Cumulative Sum of Squares (ICSS) and Markov Switching Dynamic Regression (MS-Dynamic) structural break models. Then, we proceed to analyze the relationship between the percentage of Forex deposits of the residents over total deposits of the residents and the TRY/USD exchange rate using the Johansen cointegration test. USD, EUR, and TRY interest rates are also added to the model as independent variables to account for the effects of the difference between exchange rates. Long-term and short-term effects are tested with the Vector Error Correction Model, and causality is tested using the Granger causality test. The results of the study indicate that speculative trading is not the cause of the dollarization of deposits in Turkey. Additionally, results suggest that the political events have a stronger influence over dollarization compared to economic events. Collectively, our findings suggest that domestic citizens dollarize their deposits with the motivation to protect against political ambiguity rather than economic volatility. The results of the study are in line with the literature in the sense that they support the claim that dollarization can be averted in the short run with an increase in interest rates.

ВПЛИВ ІНОЗЕМНОГО КАПІТАЛУ НА БАНКІВСЬКУ СИСТЕМУ УКРАЇНИ В УМОВАХ ГЛОБАЛІЗАЦІЇ

Modern globalization and integration processes, introduction of the latest information technologies, competition in the banking sector, increasing of foreign banking capital share, lack of comprehensive legal regulation of banking activities, lack of development of Ukrainian financial markets, tense criminal challenges lead to new threats to financial security of the banking sector in general and of individual banks in particular. In turn, the efficient functioning of the banking system is impossible without maintaining high level of financial security of each commercial bank. The aim of the research is deepening the theoretical and methodological foundations of commercial bank financial security assessing and to development practical recommendations for improving its level. The subject of the research is theoretical and methodological principles and practical aspects of analysis and assessment of bank financial security level . The methods of the research: logical and meaningful method, method of comparison, method of analysis and synthesis, method of expert estimation, method of coefficients, integral method, etc. The hypothesis of the research. The investigation of the current state of a bank's financial security should be conducted in several stages: questioning of typical (external and internal) threats to the bank's financial security; express analysis of commercial bank financial security level; calculation of the integral index of bank financial security level. The statement of basic materials. The survey conducted typical external and internal threats to bank financial security, the results of which showed that the investigated bank is protected from external threats to financial security by 60% (9 points out of 15 possible) and from internal threats by 100% (15 points out of 15 possible). In the second stage of the process of financial security research, express analysis of financial security was carried out on the bases of the coefficients method, which includes four groups of basic banking indicators: bank financial stability indicators, bank business activity indicators, bank liquidity indicators, efficiency of bank activity indicators. The results of the rapid financial security diagnostics showed that in 2014-2015 the bank had low level of financial security, and in 2016-2018 it was sufficient. In addition, the integral financial security index of the bank is calculated, including the following indicators: financial and economic standards, credit and deposit dollarization, banking performance (ROA, ROE), profitability indicators and others. Integrated financial security indicators show that the highest level of financial security was in 2016, and in 2018 it was sufficient. It also proposes measures to enhance various components of the bank's financial security, the practical implementation of which will improve the efficiency of managing of banking institution financial security. The originality and practical significance of the research is development an approach to assessing commercial bank financial security and implementation it on the example of Raiffeisen Bank Aval. Conclusions and perspectives of further research. The approach to the assessment of the financial security level is proposed, which involves carrying out the evaluation in several stages, namely, the questioning of external and internal threats to bank financial security, express analysis of the financial security level of a commercial bank and calculation of an integral indicator of bank financial security level, which makes possible to assess the bank financial security level. It also proposes measures to enhance various components of the bank's financial security, the practical implementation of which will improve the efficiency of managing of banking institution financial security. As part of the further study it is planned to evaluate the effectiveness of the proposed measures of bank financial security level increasing.

An Empirical Behavioral Model of Households’ Deposit Dollarization

We use the behavioral concept to endogenously model the evolution of the link between households’ deposit dollarization and exchange rate developments in Russia. We estimate the model empirically and show that the reaction of households to exchange rate appreciation weakens when exchange rate developments become more volatile. The proposed model outperforms the contemporary nonlinear time series models in forecasting the changes in dollarization during the Bank of Russia’s transition to a flexible exchange rate regime.

INCREASING CONFIDENCE IN THE BANKING SYSTEM OF UKRAINE

Introduction. Maintaining confidence in the banking system of Ukraine is a key factor in ensuring the successful operation of banks. Furthermore, confidence is the basis on which the activities of financial intermediaries are based. The purpose of the article is to conduct analysis of the level of confidence in the banking system using a number of indicators and to provide recommendations for increasing its level. Results. The concept of trust is more psychological than purely economic has been justified. With number of indicators it is possible to estimate its level has been determined, namely: growth rate and maturity structure of the deposit portfolio, dollarization of deposits, volume and share of cash in money supply. Various rating agencies, which also determine the level of public trust in financial institutions, are considered. According to the results of the analysis during 2008-2020 it is concluded that the level of public confidence in banks is increasing, albeit at a slow pace, which is confirmed by the annual growth rate of the deposit portfolio since 2017. In order to ensure confidence in banks, a comprehensive approach should be applied, involving measures taken by banks, the NBU and the state. Stable macroeconomic situation, sustained economic growth, financial stability of the banking system, lower inflation, and improving the well-being of citizens are the key factors for improving confidence in the banking system.