Credit Dollarization in Transition Economies: Is it Firms’ or Banks’ “Fault”?

The existing empirical literature on credit dollarization has not reached agreement on its causes. Most studies that analyze financial dollarization start from the presumption that credit dollarization is supply-determined. If this were the case, then policies that attempt to reduce dollarization should aim to affect behavior in the banking sector. We use a newly constructed dataset for twenty-two transition economies and test this hypothesis, by grouping the potential determinants of dollar credit into bankand firm-specific (financial and mainly real) factors. Bank-specific factors include indicators of asset and liability management and currency matching, profitability, concentration, and risk management. As firm-specific factors, we use measures of real dollarization and access to alternative financing sources. We include specific indicators of overall hedging opportunities, liberalization and deregulation of the foreign exchange market, uncertainty and lack of credibility of domestic policies, and persistence effects. Empirical results provide evidence that bank currency matching is the main driving force of credit dollarization. In addition, there is some evidence that real dollarization causes financial dollarization. However, currency mismatches seem to be concentrated in the real sector, and this indirectly exposes the economy to financial and currency crises.