Publication: El Salvador Financial Sector Assessment Program: Safety Nets and Crisis Management Arrangements
Date
2010-11
ISSN
Published
2010-11
Author(s)
International Monetary Fund
World Bank
Abstract
In El Salvador, the banking safety net
emergency liquidity assistance, resolution and deposit
insurance- faces particular challenges given it operate in
the context of official dollarization. The economy was
officially dollarized in 2000 with the adoption of the law
on financial integration and of the United States (US)
dollar as legal tender. Dollarization constrains a central
bank's ability to act as a lender of last resort (LOLR)
and provide emergency liquidity assistance (ELA). This note
discusses the weaknesses of the current framework and
recommendations to ensure the safety net functions more
effectively and efficiently. To address systemic liquidity
risk in the context of official dollarization, the Banco
Central de Reservas (BCR) should be provided with more
powers and funds to provide emergency liquidity assistance
to banks. The bank resolution scheme, which has not been
tested, and the deposit insurance fund, which has
insufficient funds, both need to be strengthened.
Appropriate roles and formal mechanisms to monitor and
manage systemic risk and events should be put in place.
However the roles and responsibilities of the various
institutions involved in the safety net are not always
consistent with their objectives, powers, and mandates,
while a well-specified strategy to preserve the stability of
the system (e.g., with clear responsibilities for monitoring
systemic risks and taking macro prudential decisions) and
definition or formal measurement of systemic risk have not
yet been established. Furthermore, coordination with foreign
supervisors of international banks does not include
designing contingency plans to address a possible
cross-border event. This paper is divided into following
four parts: part one is introduction; part two gives
systemic liquidity management and emergency liquidity
assistance; part three is bank resolution and deposit
insurance; and part four gives crisis management arrangements.
Citation
“International Monetary Fund; World Bank. 2010. El Salvador Financial Sector Assessment Program: Safety Nets and Crisis Management Arrangements. © Washington, DC. http://hdl.handle.net/10986/27766 License: CC BY 3.0 IGO.”