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The Role of Supervisory tools in Addressing Bank Borrowers' Currency Mismatches

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  • Mr. Armando Méndez Morales
  • Maria del Mar Cacha

Abstract

Bank borrowers' currency mismatches often result from unhedged foreign currency borrowing in economies where there is significant dollarization, exposing the financial sector to disguised credit risk. In the absence of standard tools or guidelines to counteract this risk, countries have resorted to outright regulatory limits in cases of moderate dollarization and to undesirable exchange controls in other cases. This paper proposes a "specific-to-group" provision rule based on the effective borrowing cost differential between domestic and foreign currency. Such a rule would help internalize the corresponding risks for banks and their borrowers in line with internationally accepted prudential and accounting standards.

Suggested Citation

  • Mr. Armando Méndez Morales & Maria del Mar Cacha, 2003. "The Role of Supervisory tools in Addressing Bank Borrowers' Currency Mismatches," IMF Working Papers 2003/219, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/219
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    References listed on IDEAS

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    2. Honohan, Patrick & Shi, Anging, 2001. "Deposit dollarization and the financial sector in emerging economies," Policy Research Working Paper Series 2748, The World Bank.
    3. Mr. Adolfo Barajas & Mr. Armando Méndez Morales, 2003. "Dollarization of Liabilities: Beyond the Usual Suspects," IMF Working Papers 2003/011, International Monetary Fund.
    4. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    5. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 2001. "Hedging and financial fragility in fixed exchange rate regimes," European Economic Review, Elsevier, vol. 45(7), pages 1151-1193.
    6. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-272, January.
    7. Mr. Adam Bennett & Mr. Eduardo Borensztein & Mr. Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 1999/003, International Monetary Fund.
    8. Claudio Borio & Philip Lowe, 2001. "To provision or not to provision," BIS Quarterly Review, Bank for International Settlements, September.
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    Cited by:

    1. Mr. Christoph Duenwald & Nikolay Gueorguiev & Ms. Andrea Schaechter, 2005. "Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine," IMF Working Papers 2005/128, International Monetary Fund.
    2. International Monetary Fund, 2007. "Ukraine: Selected Issues," IMF Staff Country Reports 2007/047, International Monetary Fund.

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