Thesis (MSc) - Cyprus International University. Institute of Graduate Studies and Research International Banking and Finance Department

Includes bibliography (sheets 80-85)

ABSTRACT
In developing nations, the discussion of dollarization has been a heated subject ever since the 1970s. It has a significant influence on the financial system, the management of public debt, the financial regulatory system, monetary policy, the banking market, and the financial industry. In addition, there is an inequity between the currencies of the financial assets and liabilities that are held in local currency and those that are held in foreign currencies. Those assets and liabilities that are kept in domestic currency contribute to inequity. This is because a significant quantity of financial assets and obligations are expressed in a language other than English. This mismatch may be attributed, in large part, to the fact that a significant amount of financial assets and obligations are measured in currencies other than domestic currency. This mismatch may also be attributed, in part, to the fact that a significant amount of financial assets and obligations are hedged. Mismatched currencies contribute to financial instability, which in turn exposes the economy to the prospect of major macroeconomic risks. Banks that take on these risks by accepting deposits in a foreign currency and giving out loans in a foreign currency while acting as a middleman between depositors and creditors may face many unfavorable effects as a result of the dollarization of the economy. This is because the dollarization of the economy has led to an increase in the value of the dollar relative to other currencies. These repercussions can include a drop in the number of clients as well as an increase in the interest rates that are charged on loans. The dollar continues to have a significant amount of influence on the financial sector in many countries that are still in the process of developing. This is made abundantly clear by the fact that banks maintain a substantial number of deposits in addition to loans that are denominated in a variety of currencies. We take a look at the consequences that dollarization has had over the last 20 years on the financial depth, access, and efficiency of a diverse range of developing and emerging market countries to shed some light on these topics. This is accomplished by maintaining a strict separation between all of our deposits and loans denominated in foreign currencies. It was revealed via the use of panel regressions and the generalized method of moments (GMM) that the dollarization of deposits, on average, is adverse to the process of financial deepening.