Cablegate: Ecuador Lowers Interest Rate Ceilings


DE RUEHQT #0831/01 2491627
R 051627Z SEP 08



E.O. 12958: N/A
SUBJECT: Ecuador Lowers Interest Rate Ceilings

Reftel: 07 Quito 1655

1. (SBU) Summary. Empowered by a slightly modified year-old
banking law, the Central Bank has steadily lowered maximum allowable
interest rates for the banking sector since January 2008.
Ironically, the Constitutional Court struck down a provision of the
2007 banking law that provided transparent guidelines for
establishing interest rate ceilings. Without that provision, the
Central Bank has continued to set interest rate ceilings, but is not
using any publicly understood criteria and appears to be guided by a
political desire to lower interest rates. Despite the pressure on
interest rates, large banks remain profitable. However,
micro-lending is taking a hit, as banks focus on more profitable
corporate lending. End summary.

2. (U) Ecuador's banking law entered into force in July 2007,
establishing new guidelines for maximum lending rates (reftel). The
law stipulated that the Central Bank would establish maximum
interest rates by market segment, based on the average of prevailing
loan rates in the previous month for the segment plus a margin of
two standard deviations. The law also banned loan commissions,
which had been an important source of income for many banks.
However, by dividing the industry into market segments, and
providing a reasonably large margin over the average prevailing
interest rates, the new law allowed for banks to continue offering a
wide range of products within each segment.

3. (SBU) In December, the Constitutional Court declared the
methodology for setting maximum interest rates unconstitutional, but
otherwise left the July banking law intact. With that change, the
Central Bank maintained its authority to set maximum interest rates,
but was not bound by an established methodology. Starting in
January, the Central Bank has begun to steadily lower the maximum
interest rates across all market segments. Bankers complain that
they are not aware of any methodology followed by the Central Bank,
beyond a political objective of forcing down interest rates.

4. (U) Following are the maximum interest rates for different
market segments in January and August, showing a steady decline in
each segment. (Note: The Central Bank establishes maximum interest
rates each month. For convenience we have left out the rates for
the intervening months, each of which has been marginally lower than
the preceding month.)

Month January 2008 August 2008

Commercial 11.81 9.66
Personal consumption 21.19 17.26
Housing 13.55 11.66
Microcredit 27.98 25.50
Subsistence microcredit 39.98 35.20

5. (SBU) According to Cesar Robalino, President of the Ecuadorian
Bankers' Association, the overall banking sector remains strong,
even with lower interest rates. However, given overall uncertainty,
coupled with lower interest rates, banks are taking a more defensive
position by increasing liquidity and building capital while slowing
down lending. As part of that retrenchment, they are beginning to
shift business from high cost microcredit lending to low cost
corporate lending. Robalino noted that the large banks can more
easily make those adjustments, while smaller banks have less
flexibility. In addition, smaller banks usually have higher
marginal operating costs and are therefore particularly vulnerable
to falling income as a result of lower interest rates and
eliminating commissions.

6. (SBU) Comment: President Correa took office determined to push
down interest rates and bank commissions, which had been, on
occasion, abusively high. The 2007 banking law was drafted by
Congress after it rejected a more draconian version submitted by the
Correa Administration. It did impose more limits on the banking
sector, but also provided a relatively predictable and flexible
interest rate cap system. By overturning one provision of the law,
the Constitutional Court effectively gave the Central Bank a free
hand to set interest rates as it sees fit, without any constraining
methodology. At about the same time, turnover at the Central Bank
board allowed Correa to appoint a majority of the board. The board
had taken what appears to be a political decision to squeeze down
interest rates, although the process has been gradual and thus far
has not been a threat to overall banking system.

7. (SBU) Comment, continued. Ironically, a second objective of the
Correa Administration has been to promote more competition in the
banking sector and to encourage microcredit lending. By moving
forward with one objective, lowering interest rates, the government
is undermining its other objective, since the lower rates favor the
large banks and suppress microcredit loans.


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