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Cablegate: Congress Rolls Back Correa's Controversial Banking Law


DE RUEHQT #1655/01 2041717
O 231717Z JUL 07





E.O. 12958: N/A
SUBJECT: Congress Rolls Back Correa's Controversial Banking Law

REF: A. Quito 999

B. Quito 1422
C. Quito 1424

1. (SBU) Summary. The Ecuadorian Congress rejected for the third
time proposals by Correa to impose strong political control over
interest rates, bank fees, reserve requirements, and a liquidity
fund. The Congress substantially modified Correa's bill to
establish more limited controls, which the banking sector found
relatively acceptable. When Correa used his partial veto authority
to again seek stronger controls, Congress mustered the two-thirds
majority necessary to override the veto and restore the key measures
from its version of the bill. End summary.

Correa Seeks to Politicize Banking Regulation

2. (SBU) On May 18, President Correa sent a draft law to Congress
to reform key institutions and regulations for the banking sector.
The highly ambitious law attempted to implement Correa's campaign
promises to limit the cost of loans and force banks to repatriate
their overseas holdings. The key element of the bill was to give
greatly increased power over the banking sector to the Bank Board,
taking those powers away from the autonomous Central Bank and the
Superintendency of Banks. The Banking Board is in effect a
political institution, since Correa has directly appointed two of
its five members and effectively appointed a third (reftel a).
Among its many provisions, the law would have given the Banking
Board the authority to set interest rates and reserve requirements
and control over a liquidity fund. It would have also eliminated the
bank's ability to charge commissions in addition to interest rates,
and would have allowed the Banking Board to set bank service fees.

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3. (SBU) The banking community strongly lobbied in Congress against
the bill, joined by the Central Bank and Superintendency of Banks,
who also argued that the bill would reduce lending, particularly to
small borrowers. (Ecuador has one of the region's most dynamic
microcredit industries, and the interest rate caps would likely have
dramatically curbed activity in that sector.) Representatives from
the Superintendency of Banks presented scenarios showing how
Correa's proposed law would affect the stability of the financial
sector and cause some institutions to fail. They claimed the law
would greatly increase the possibility of a systemic failure if
depositors panicked and withdrew their savings and investments from
the banks.

Congress Moderates the Bill

4. (U) On June 14, Congress substantially changed the legislation,
rejecting most of the new authorities that would have gone to the
Banking Board. It left the power to set maximum interest rates with
the Central Bank. It modified Correa's proposal to set maximum
interest rates segmented by national accounts (for example,
agriculture, industry, commerce, mining) to one divided by
commercial, housing, consumer and microfinance segments. This would
give the financial sector greater flexibility to differentiate
between types of loans. Congress also defined the methodology the
Central Bank should use in setting the maximum interest rate (the
weighted average of the loan rates by segment plus two standard
deviations) instead of giving it discretional authority to modify
the methodology as Correa had proposed.

5. (U) Congress's version of the law also left with the Central
Bank its authority to set reserve requirements, and gave the private
sector the authority to create and manage a liquidity fund since
there is no lender of last resort. It also stipulated that fees for
other services (checks, ATM withdrawals, etc) would have a maximum
price equivalent to the average charged by the system plus two
standard deviations. Congress accepted Correa's proposal to
eliminate commissions on loans.

Correa Seeks to Reimpose Stronger Controls

6. (U) On June 25, Correa exercised his right to partially veto the
bill approved by Congress, and attempted to restore some of the
authorities that Congress had stripped from his draft. Most notably
he sought to reduce the maximum interest rate by limiting it to the
average interest rate plus only one standard deviation. He also
sought to restore greater power to the Banking Board, including the
ability to further control interest rates, establish maximum banking
fees, and to oversee a liquidity fund.
Congress Overturns Most of Correa's Vetos

7. (SBU) Banks once again lobbied Congress strongly against the
partial veto, and urged Congress to exercise its right to insist
upon the version that it had approved. This time around, the
Superintendency of Banks and the Central Bank remained silent (note:
the Superintendent of Banks was under a congressional censure
motion, which failed on July 4, while Central Bank management was
changing following the resignation of the Central Bank Manager).
Even so, a number of banking contacts were skeptical that Congress
could overturn Correa's partial veto, since that would require a
two-thirds majority.

8. (U) On July 5, after previously failing to override all of
Correa's changes in one vote, Congress considered Correa's changes
item-by-item, and for the most important measures (maximum interest
rates, liquidity funds, bank fees) secured the two-thirds majority
necessary to restore the version that had been approved by Congress.
On July 18, Congress reached consensus on the final controversial
measure, how to set the maximum interest rate, overturning the
President's partial veto.

9. (SBU) The banking sector responded in both the media and to
embassy contacts that while it had reservations with the version
passed by Congress, it believes that it could live with the
provisions. The Executive President of the Banking Association said
he had reached agreement with members of Congress to lower the costs
of financial services in exchange for their support on the law. In a
meeting with USAID June 19, Ecuador's four financial associations
informed us that they have already started an aggressive campaign to
reduce interest rates in the financial institutions that they
represent. They believe that if interest rates are not reduced in
the short term, Correa will use the Constituent Assembly to take
control the financial sector and make changes, as he has publicly


10. (SBU) Correa had a legitimate beef about overly high rates and
commissions in certain loan segments, but his proposed prescription
exceeded the diagnosis and would have created a new set of problems
and concerns. Congress rejected three times the key provisions that
Correa sought in order to impose greater political control over the
banking sector. This follows earlier Congressional measures to
reject Correa initiatives (reftels b and c). The banking sector has
breathed a sigh of relief that it was able to find enough allies in
Congress who share its arguments that Correa's provisions would harm
small borrowers and potentially damage the sector. However, the
sector is still concerned about the law's lack of clarity regarding
the methodology to establish the maximum interest rate. Banks are
also concerned that under the existing formula interest rates would
move towards a fixed rate within six to eight months. Since
commissions are no longer permitted, some institutions might show
losses until they are able to adjust their cost structures,
requiring intervention by the Superintendency of Banks. The banks
also believe that this is a temporary truce, since Correa has
already stated that he will bring the banks under control through
the upcoming Constituent Assembly.


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