Download PDF by Patrick Honohan, James A. Hanson, Giovanni Majnoni: Globalization and National Financial Systems (World Bank

Risk Management

By Patrick Honohan, James A. Hanson, Giovanni Majnoni

Given the convenience with which capital flows among international locations and the influence such flows may have on international locations with susceptible nationwide monetary platforms, it's transparent that finance is a basic size of globalization.. although, till a monetary concern erupts, analysts and policy-makers usually stay keen on the family monetary marketplace, overlooking the worldwide impression in their offerings. the result's that they behave reactively and belatedly to the pressures from abroad.

Globalization and nationwide monetary structures breaks new flooring by way of exploring the demanding situations, constraints, and possibilities of nationwide monetary platforms in constructing nations, whereas noting that each one such structures needs to be thought of small whilst seen within the context of worldwide finance. Banking, securities, contractual discount rates, and systemic macroeconomic features are all thought of. The unique attention of markets and associations in an international context takes the reader a ways past the traditional research of both regionally orientated finance or the macroeconomic implications of capital flows.

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16. Note that much of the credit risk depends on national economic instability rather than on the loan being denominated in foreign currency as such. If borrowers were forced to take domestic currency loans instead of foreign currency loans (and assuming matching of deposits), then the institution would still have a large credit risk because of the high, variable domestic currency interest rates that prevail in unstable countries in which devaluation may occur. 17. Moreover, hedging would reduce the gains from borrowing in foreign currency.

Egypt provides a further example of a decline. The data certainly suggest that substantial movements in the dollarization percentage are possible, but because there may be a number of hidden breaks in the series definition, these movements need to be viewed with especial caution. 9 Source: See table A1. 1 Trends in Deposit Dollarization, Selected Countries, 1995 and 1999–2000 (foreign exchange deposits as a percentage of M2) 100 1999–2000 80 60 40 20 0 0 20 40 1995 Source: See table A1. 15 Evidence from Regression Results This section reports on initial attempts to assess the empirical sign and size of the five remaining relationships (aside from ratchet effects, which have already been considered) highlighted in the introduction.

6 The degree of correlation between the two is thus an empirical question. Hysteresis or the Ratchet Effect While the initial impetus for dollarization often comes from disruption or extreme volatility in financial markets, observers note that the share of dollarization often remains high even when domestic financial conditions settle down. For one reason or another, once depositors become used to holding foreign currency–denominated deposits, they are slow to divest themselves of them even if the initial cause that triggered the holdings is reversed.

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