Is There a Link between Dollarization and Banking Crises?

I estimate a multivariate probit model to identify key variables that are predictive of banking crises. To add to the literature on this subject, I focus on the role played by unofficial dollarization of domestic banking systems. Unofficial dollarization is a source of vulnerability for emerging markets as large depreciations render both domestic firms and banks unable to pay dollar-denominated debt. Surprisingly, I find only weak evidence that unofficial dollarization affects the probability of a banking crisis. This finding casts doubt on the widely held belief that liability dollarization is a significant source of risk for emerging markets and developing nations, although there are still reasons to believe that dollarization remains a significant source of risk.