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The removal of government guarantees in borrowing countries does not eliminate the moral hazard problem posed by the existence of deposit guarantees in lender countries. The paper shows that, after restrictions on international capital flows are lifted, banks in low-risk developed countries benefit from lending funds captured in home markets at low deposit rates to high-risk/high-yield projects in emerging economies, even though these projects command lower expected returns. This, in turn, has a negative impact on bank profitability in the borrowing country, even when foreign funds are intermediated through domestic banks. The results are consistent with the surge in international bank lending flows that led to recent banking crises in Asia.

Banks and Banking --- Exports and Imports --- Finance: General --- Financial Risk Management --- Asymmetric and Private Information --- International Finance: General --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: Government Policy and Regulation --- Financial Institutions and Services: Government Policy and Regulation --- Current Account Adjustment --- Short-term Capital Movements --- Banking --- Finance --- Economic & financial crises & disasters --- International economics --- Deposit rates --- Moral hazard --- Deposit insurance --- Capital account liberalization --- Financial services --- Financial sector policy and analysis --- Balance of payments --- Commercial banks --- Financial institutions --- Financial crises --- Banks and banking --- Interest rates --- Financial risk management --- Crisis management --- United States

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Theoretical and empirical analysis of de jure dollarization.With the persistent instability of international financial markets, emerging economies are exploring new ways to reduce exposure to capital flow volatility. Some analysts argue that financially open economies are best served by more flexible regimes, while others argue in favor of extreme exchange rate regimes that have a strong commitment to a fixed parity or dispense with an independent currency. The successful launch of the euro has made more realistic the prospect of replacing a national currency with a strong foreign one. Recent examples include the adoption of the US dollar by Ecuador and El Salvador.The introduction of a foreign currency as sole legal tender, termed full (de jure) dollarization, has been the center of much political and academic debate. This book provides a comprehensive analysis of the issues from both theoretical and empirical perspectives. The topics discussed include the role of balance sheet effects, the linkage between currency risk and country risk, the impact of dollarization on trade, financial integration and credibility, the implications of dollarization for the lender of last resort, and the institutional and political economy aspects of dollarization.

Money. --- Dollar, American. --- Foreign exchange. --- Currency question. --- International finance. --- Dollarization --- Dollar, American --- Foreign exchange --- Currency question --- International finance --- Finance --- Business & Economics --- Money --- International monetary system --- International money --- Fiat money --- Free coinage --- Monetary question --- Scrip --- Cambistry --- Currency exchange --- Exchange, Foreign --- Foreign currency --- Foreign exchange problem --- Foreign money --- Forex --- FX (Finance) --- International exchange --- American dollar --- Currency --- Money, Primitive --- Specie --- Standard of value --- International economic relations --- Currency crises --- Finance, Public --- Legal tender --- Monetary policy --- Exchange --- Value --- Banks and banking --- Coinage --- Gold --- Silver --- Silver question --- Wealth --- Dollarization. --- ECONOMICS/Finance --- ECONOMICS/Political Economy

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This paper shows that a central bank, by announcing and committing ex-ante to a bailout policy that is contingent on the realization of certain states of nature (for example on the occurrence of an adverse macroeconomic shock), creates a risk-reducing “value effect” that more than outweighs the moral hazard component of such a policy.

Banks and Banking --- Finance: General --- Financial Risk Management --- Asymmetric and Private Information --- Financial Markets and the Macroeconomy --- Central Banks and Their Policies --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: Government Policy and Regulation --- Financial Institutions and Services: Government Policy and Regulation --- Interest Rates: Determination, Term Structure, and Effects --- Banking --- Finance --- Economic & financial crises & disasters --- Moral hazard --- Deposit rates --- Lender of last resort --- Deposit insurance --- Banks and banking --- Financial risk management --- Interest rates --- Crisis management

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This paper analyzes the behavior of closed-end country fund discounts, including evidence from the Mexican and East Asian crises. We find that the ratio of fund prices to their fundamental value increases dramatically during a crisis, an anomaly that we denote the “closed-end country fund puzzle.” Our results show that the puzzle relates directly to the fact that international investors are less (more) sensitive to changes in local (global) market conditions than domestic investors. This asymmetry implies that foreign participation in local markets can both help dampen a crisis in the originating country, and amplify the contagion to noncrisis countries.

Finance: General --- Financial Risk Management --- Investments: Stocks --- Macroeconomics --- General Financial Markets: General (includes Measurement and Data) --- Financial Crises --- Price Level --- Inflation --- Deflation --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Finance --- Economic & financial crises & disasters --- Investment & securities --- Stock markets --- Financial crises --- Emerging and frontier financial markets --- Asset prices --- Stocks --- Financial markets --- Prices --- Financial institutions --- Stock exchanges --- Financial services industry --- Mexico

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This paper studies the impact of competition on the determination of interest rates and banks’ risk-taking behavior under different assumptions about deposit insurance and the dissemination of financial information. It finds that lower entry costs foster competition in deposit rate sand reduce banks’ incentives to limit risk exposure. Although higher insurance coverage amplifies this effect, two alternative arrangements (risk-based contributions to the insurance fund and public disclosure of financial information) help to reduce it. Moreover, uninsured but fully informed depositors and risk-based full deposit insurance yield the same equilibrium risk level, which is independent of entry costs. The welfare implications of the different arrangements are also explored.

Banks and Banking --- Finance: General --- Financial Risk Management --- Insurance --- Asymmetric and Private Information --- Information and Market Efficiency --- Event Studies --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Interest Rates: Determination, Term Structure, and Effects --- General Financial Markets: General (includes Measurement and Data) --- Insurance Companies --- Actuarial Studies --- Banking --- Finance --- Economic & financial crises & disasters --- Insurance & actuarial studies --- Deposit insurance --- Deposit rates --- Competition --- Financial crises --- Financial services --- Financial markets --- Financial institutions --- Bank deposits --- Banks and banking --- Crisis management --- Interest rates --- New Zealand