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" ... To illustrate the important features of dollarization, let’s take a look at Panama, the granddaddy of Latin American dollarizations. Panama officially adopted the dollar in 1903, and with that, it became part of the dollar bloc. Consequently, the exchange rate risks and the possibility of currency crises vis-à-vis the U.S. dollar disappeared. In addition, the possibility of banking crises is largely mitigated because Panama’s banking system is integrated into the international financial system. The nature of the banks that hold general licenses provides the key to understanding how the system as a whole functions smoothly. When these banks’ portfolios are in equilibrium, they are indifferent at the margin between deploying their liquidity (creating or withdrawing credit) in the domestic market or internationally. As the liquidity (credit-creating potential) in these banks changes, they evaluate risk-adjusted rates of return in the domestic and international markets and adjust their portfolios accordingly. Excess liquidity is deployed domestically if domestic risk-adjusted returns exceed those in the international market and internationally if the international risk adjusted returns exceed those in the domestic market. This process is thrown into reverse when liquidity deficits arise. ... "