Bank profitability in dollarized economies

The primary focus of this dissertation is on the banking sectors of economies where a high level of bank deposits is held in foreign currencies. Our aim is to understand if and how a high level of foreign exchange deposits influences the performance of banks in such economies and contributes to the financial development of such countries. We conduct our analysis on three levels: In the first chapter we evaluate the explanatory power of two important views on dollarization, currency substitution and institutional views. Our findings suggest that neither theory is sufficient by itself to fully explain the dollarization phenomenon. In chapter two, we use the existing models in the literature on bank performance to evaluate the effect of dollarization on bank performance. By using two different measures of bank profitability we test empirically to see whether bank performance in dollarized economies is affected as a result of then phenomenon. Our results indicate that dollarization has a significant positive impact on bank profitability especially under low inflation economies. We also investigate the impact of financial asset dollarization on the financial deepening of dollarized economies. We provide a theoretical framework that explains the link between dollarization and financial deepening and empirically test the predictions of the theory. Our results support the findings on bank performance; we show that dollarization especially under low inflation increases the amount of domestic credit extended by the banking system in a dollarized economy