Evaluating the Effects of Deposit Dollarization in Financial Intermediation in Transition Economies

The dollarization of batik deposits in developing economies may result in a currency mismatch in domestic banking activities, as recent literature has suggested. This may, in return, increase financial fragility, create balance sheet problems, and affect batik profitability in such economies. This paper empirically tests the effect of dollarization on bank performance in nine dollarized transition economies. We jail to find empirical evidence to support the assertions of the currency mismatch theory. Our results suggest that though there is no direct link between batik profitability and dollarization in these economies, the high level of deposit dollarizaiion lowers the level of provisions set aside for banks' loan losses.