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Cablegate: New Central Bank Reserve Requirement for Banks

VZCZCXYZ0000
RR RUEHWEB

DE RUEHCV #2322 2162218
ZNR UUUUU ZZH
R 042218Z AUG 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 5748
INFO RUEHBO/AMEMBASSY BOGOTA 6867
RUEHBU/AMEMBASSY BUENOS AIRES 1387
RUEHLP/AMEMBASSY LA PAZ AUG QUITO 2336
RUEHSG/AMEMBASSY SANTIAGO 3692
RUEHGL/AMCONSUL GUAYAQUIL 0579
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE

UNCLAS CARACAS 002322

SIPDIS

SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: EFIN PGOV VE
SUBJECT: NEW CENTRAL BANK RESERVE REQUIREMENT FOR BANKS

REF: A. CARACAS 01739

B. CARACAS 01426
C. CARACAS 00512
D. CARACAS 02067

1. (U) On July 18, 2006, in an effort to mitigate
inflationary pressures, the Central Bank (BCV) raised the
reserve requirement on deposits and money market funds for
financial institutions from 15 to 30 percent for all funds
accumulated beginning July 14, 2006 (BCV Resolution
06-07-01). The BCV allowed financial institutions to hold 15
percent reserve on funds received prior to July 14, 2006. In
its July 28th newsletter, local brokerage house BBO reported
that the Finance Ministry and the Superintendent of Banks
(SUDEBAN) did not respond to the Banking Association's
request that the measure be implemented gradually.
Highlighting existing BRV requirements directing 31.5 percent
of bank lending, BBO noted that this new requirement
constrains banks' ability to extend credit further. Since
banks do not receive interest payments on amounts held in
reserve at the BCV, bank profitability is expected to
decrease. Bank profits (return on equity) from June 2005 to
June 2006 has already decreased from 32.7 to 29.5 percent
(roughly 16 percent real profit adjusted for inflation). As
of June 2006, financial institutions hold USD 285 million
above their reserve requirement of USD 6.5 billion (or 16
percent of money supply) at the BCV.

2. (U) Money supply (M2), which equals currency, checking
accounts, savings deposits, and CDs, grew 61.4 percent since
July 2005, reaching USD 40.2 billion in July 2006. By the
end of May 2006, the increasing costs of issuing certificates
of deposits (CDs) to fight increasing liquidity had resulted
in BCV operational losses totaling USD 73 million (reftels
A-C). As of May 31, 2006, the outstanding balance of BCV
certificates of deposits (CDs) in circulation was USD 15.7
billion. (Note: The BCV has not published June 2006
financial results. End Note.) To help constrain the growing
money supply and to alleviate some financial pressure on the
BCV, the Finance Ministry has worked with the Central Bank
over the past year to undertake several measures including
selling BRV and Argentine dollar-denominated bonds.

3. (U) Comment: The BCV continues to struggle to reconcile
an increasing money supply with a BRV-imposed constraint to
maintain the current exchange rate throughout this election
year. However, this new bank reserve requirement, as much as
it promises some relief to the increasing liquidity problem,
squeezes an already tightly regulated banking industry. End
Comment.
DOWNES

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