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Cablegate: Public and Private Sectors Discuss Possible Banking

VZCZCXYZ0000
PP RUEHWEB

DE RUEHQT #2672/01 3551859
ZNR UUUUU ZZH
P 211859Z DEC 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8222
INFO RUEHBO/AMEMBASSY BOGOTA 7201
RUEHCV/AMEMBASSY CARACAS 2806
RUEHLP/AMEMBASSY LA PAZ DEC LIMA 2237
RUEHGL/AMCONSUL GUAYAQUIL 3159

UNCLAS QUITO 002672

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EC
SUBJECT: Public and Private Sectors Discuss Possible Banking
Reforms

Ref. Quito 1655

1. (SBU) Summary. GOE representatives and the banks have agreed on
an outline for a second round of banking sector reforms. The banks
said that the agreed upon package is reasonable and would not
undermine the banking sector, but caution that President Correa or
the Constituent Assembly still need to approve the package and might
make unacceptable changes. End summary.

2. (SBU) In May President Correa sent a draft banking law to
Congress, seeking to greatly increase governmental control over the
banking sector. Congress significantly walked back the proposal and
approved a banking sector reform that imposed some restrictions
(eliminated commissions, set maximum interest rates) but that was
acceptable to the banking sector (ref a). At the time, Correa
stated that he would seek additional changes that he would submit to
the Constituent Assembly. In practical terms, real effective
interest rates have not changed appreciably since the law was
implemented.

3. (SBU) In the following months, the private sector has held a
series of meetings with GOE officials to discuss possible additional
reforms to the banking sector. In several meetings from December
12-14, Central Bank officials and several private sector bankers
discussed with Embassy and visiting Treasury officials the basic
outcome of the meetings, with all making the same basic points.

Interest rate caps
------------------

4. (SBU) The two sides agreed to restructure the methodology for
calculating maximum interest rates. In the recently approved
banking law, maximum interest rates are set by market segment (e.g.,
housing, commercial, microcredit), based on the market average for
the segment, plus a margin. Currently the margin is two standard
deviations from average. Bankers believe that over time interest
rates will converge toward the average, reducing the standard
deviation and therefore the margin. That would bring down the
interest rate cap and prevent banks from differentiating products
within a market segment.

5. (SBU) The GOE and bankers agreed to use a new methodology to set
the margin that will establish the maximum interest rate, using
averages instead of standard deviations. (For example, if the
adjustment factor were 20% and the average interest were 10%, then
the maximum interest rate would be 12%.) Initially with banks
argued for a large adjustment factor (and therefore a higher cap),
while and the government sought a lower factor. One banker said
that he expects the final factor to be a compromise between the two
positions, probably around 15-20%. The banker explained that the
new approach could have benefits for both the government and banks.
Initially the new methodology will establish a lower interest cap
than the current approach (which the government wants), but over the
medium term it will be more stable (which is what the banks want).


Liquidity Fund
--------------

6. (SBU) The two sides agreed to establish a liquidity fund to
support banks that experience a run on deposits. Currently, since
Ecuador is dollarized, there is no lender of last resort, and all
banks maintain large reserves (held largely offshore) to shelter
themselves from a sudden outflow of deposits. The GOE
representatives and bankers agreed that the liquidity fund would be
made up of a combination of required reserves (currently held by the
Central Bank), bank contributions, and a government contribution.
The two sides agreed the funds should be jointly managed, but
disagreed on whether the government or the private sector should
have control.

New Deposit Insurance Fund
--------------------------

7. (SBU) The bankers and the GOE also agreed to establish a new
deposit insurance fund, although our interlocutors did not discuss
any specifics. Ecuador currently has a deposit guarantee agency,
but all of the banks' current contributions are used to compensate
depositors who lost their savings in the 1999 banking crisis, so in
effect there is no fund to shelter current depositors.

Improve Efficiency
------------------

8. (SBU) Neither the GOE nor our private sector interlocutors
thought that the agreed package would produce a notable drop in
interest rates, which is what Correa is looking for. They said that

they also agreed on a modest package of measures that would lower
costs (such as ending some mandated fees paid by the banks) and
improve efficiency (for example, the liquidity fund might free up
more bank resources for lending, and one banker hinted that the GOE
might consider a better bankruptcy law that would allow banks to
more easily claim loan guarantees).

9. (SBU) However, all the people that we talked to thought that
these medium-term measures also would not have a dramatic affect on
interest rates. One banker said that the key factor in lowering
interest rates on loans is more competition. Even before the Correa
government took office, foreign banks had not expressed interest in
entering the Ecuadorian market, and he asserted that the uncertainty
generated by the Correa administration will only increase their
reluctance to invest in Ecuador.

Correa to Decide
----------------

10. (SBU) Our private sector contacts agreed that the discussion
that they had with the GOE representatives was professional and
technical. They also said that if the package of agreed measures
goes forward without major substantive changes, that the new reform
package would not create broad risks for the banking sector.
However, they stressed that Correa will make the final decision on
the to by his representatives, they cautioned that the reforms
might create fear among depositors which could affect some
institutions. One banker said that one of Correa's biggest fears is
a banking crisis, which he said is the banks' "biggest ally" in the
reform process.

Constituent Assembly to Approve
-------------------------------

11. (SBU) The GOE plans to present the banking reform legislation
to the Constituent Assembly. The package would probably also
include other measures, such as the proposed merger of the Central
Bank and Superintendency of Banks. At this time, it is not clear
when the GOE plans to submit the package to the Constituent
Assembly. However, the private sector bankers also cautioned that,
even if the GOE package as approved by Correa is acceptable, there
is also a risk that the Constituent Assembly could make unacceptable
changes.

Comment
-------

12. (SBU) As the bankers have emphasized, there is still
uncertainty as to the final shape of the next round of banking
sector reforms. However, it is a hopeful sign that the reform
process started with discussions between the government and banks
(which had not happened before the first law was introduced in May),
and that the parties agreed to a reasonable framework, even if they
disagreed on several key details.

Jewell

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