The payment system intraday liquidity in a dollarized economy: The Peruvian experience

Abstract

The Peruvian financial system is highly dollarized with more than 50 per cent of deposits held in dollars. The structure and operation of the payment system reflect this financial dollarization. Not only does it settle payments in local and foreign currency, but the Intraday Financial Facility (IFF), through which the Central Bank provides liquidity to assure the uninterrupted operation of the payment system, reflects as well the financial system dollarization. Thus, due to the high dollar composition of deposits in the financial system, banks keep large amounts of dollar liquidity at the Central Bank, so as to meet the marginal reserve requirement of 30 per cent, while the lower soles share of deposits as well as the minimum requirement to maintain 1 per cent deposited at the Central Bank, makes the soles liquidity of banks insufficient to settle all the transactions undertaken by the payment system, which for the most part are carried out in local currency, in spite of the financial dollarization. This situation leads the banks to utilize the IFF by means mainly of foreign currency swaps, given the ample availability of dollar liquidity. Nevertheless, the gradual dedollarization and the increasing bankarization are reducing the need to utilize the IFF. It is worth noting that at present not only foreign currency liquidity but also the holdings of Central Bank and Government securities are ensuring that the financial system is able to make use of the IFF and have the excess liquidity in order to settle total payments, both in local and foreign currency, thus enabling the payment system to run smoothly and efficiently.Sistema de pagos, liquidez intradiaria, dolarización e instrumentos de política monetaria.