Twin crisis and fixed-exchange-rate regimes: Theory and related empirical studies

In recent years, currency crises have often happened simultaneously with banking crises (e.g. Chile 1982, Mexico 1994, East Asian Crises 1997, and Argentina 2001). This phenomenon has been termed "twin crises". This dissertation underlines the importance of studying banking and currency crises together.; On the theoretical side, I develop a model that highlights the circular link between banking and currency crises generated by the impact of a fiscal banking sector bailout on the government budget and depositors' reactions to a devaluation. The model suggests that the abandonment of a fixed-exchange-rate is more plausible when one takes into consideration the possibility of twin crises. It also supports the intuition that dollarization and currency boards might offer more protection than soft pegs against currency crises in terms of fiscal fundamentals. Nevertheless, these two hard pegs might further increase the degree of currency mismatch in the banks' balance sheets, raising the possibility of twin crises due to worse banking fundamentals.; On the empirical side, I focus on understanding some determinants of depositors' behavior and foreign banks' preferences regarding the operation of foreign branches or subsidiaries in host countries. Using Argentinean data for Dee 1994-Dec 2001, I find that, as assumed in the model, increases in devaluation expectations, especially at high levels, tended to lead to withdrawals of both domestic and foreign-currency denominated deposits. I uncover the existence of important levels of currency mismatch among the non-tradable sector, but there is no conclusive evidence about depositors' reactions to changes in the level of currency mismatch exposure. Evidence is also inconclusive on the question of whether the presence of foreign banks helps avoid bank crises. The results suggest that foreign banks, especially foreign branches, gained proportionally more deposits during most bank runs but not all. Finally, using data on the operations in Latin America and Eastern Europe of the top 100 international banks. I find that differences in the parent bank's responsibility for the liabilities of branches and subsidiaries play an important role in the choice of organizational form. Banks prefer to operate as branches in host countries characterized by relatively low economic risk.