Identifier
Created
Classification
Origin
05CARACAS806
2005-03-17 15:51:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

BANKS UNDER PRESSURE

Tags:  ECON EFIN PGOV VE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.

171551Z Mar 05
C O N F I D E N T I A L CARACAS 000806 

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD
BUENOS AIRES FOR TREASURY-MHAARSAGER

E.O. 12958: DECL: 03/30/2015
TAGS: ECON EFIN PGOV VE
SUBJECT: BANKS UNDER PRESSURE

REF: CARACAS 577

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

-------
SUMMARY
-------

C O N F I D E N T I A L CARACAS 000806

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD
BUENOS AIRES FOR TREASURY-MHAARSAGER

E.O. 12958: DECL: 03/30/2015
TAGS: ECON EFIN PGOV VE
SUBJECT: BANKS UNDER PRESSURE

REF: CARACAS 577

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

--------------
SUMMARY
--------------


1. (C) Government intervention in the economy has taken
another step forward with the issuance of regulations which
force the banking sector to devote 10% of its lending
portfolio to mortgage and home construction loans and which
increase from 10% to 16% the portion which must be dedicated
to the agricultural sector. 29% of bank loan portfolios are
now prescribed by the GOV, with 26% at preferential interest
rates, which could both force banks to both take on risky
loans as well as reduce lending in other areas. Meanwhile,
several private bank presidents, a former Superintendent of
Banks, and two former Central Bank presidents may face
charges of usury and fraud for having allowed loans with
interest rates indexed to inflation. While the bankers say
that they are on solid legal footing, they worry about the
outcome in the highly politicized judiciary. Banks have been
hugely profitable in recent years; the usury case may be
pressure to keep them from complaining too hard about the
increased demands being placed upon them, while focussing
public attention on another presumedly exploitative private
sector interest. END SUMMARY.

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HOW SHOULD A BANK LOAN? AS THE GOV TELLS IT
--------------


2. (SBU) Based on a 2001 housing law, the National Housing
Council (CONAVI),a GOV body, recently set a legal maximum
for interest rates on mortgages of 11.36%, which was 65% of
the average bank lending rate at the time of the decision.
Lower-income borrowers can qualify for a rate three-quarters
or even half of that maximum, and may also be eligible for
subsidies from the government. CONAVI also directed that a
minimum of 10% of each bank's lending portfolio be dedicated
to housing loans, 3% to mortgages and 7% to home
construction. In addition, the GOV recently required that
banks increase the portion of their lending portfolios
dedicated to agriculture from 10% in 2004 to 16% by June

2005, all with a maximum interest rate of 16%. These new
requirements, in combination with an existing requirement
that 3% of lending be committed to micro-loans (with no
maximum rate),mean that 29% of all private sector bank
lending is now directed by the GOV.


3. (C) Ignacio Salvatierra, President of the National Banking
Council (a group with both private and public bank members
created to advise the GOV on banking policy),pointed out to
econoff March 14 that, if one includes the existing 16%
reserve requirement, over 40% of a bank's lending ability is
now constrained by the GOV. However, he said, the minimum
lending requirements are not as big an imposition as the
preferential interest rates, and that it was "tough for
banks" to provide such a subsidy. Jose Barcia, Vice
President of economic consultancy Metroeconomica, told
econoff March 10 that he expected credit card rates,
currently between 30 and 44% annually, to rise over 50% to
compensate for the lower rates. When asked if rates would
rise, Salvatierra answered, "theory says yes, (but with)
competition, I don't know," given the enormous liquidity in
the economy due to exchange controls. Pedro Coa, Vice
President of Economic Studies at local bank Banesco, told
econoff March 14 that he expected rates provided to savers on
their accounts to drop as a consequence.


4. (C) Salvatierra also opined that it "makes little sense"
to require over twice as much funding to go to construction
loans, which last about two years, than to mortgages which
last twenty, but noted this could be adjusted at a later time
by CONAVI. Salvatierra and Barcia both observed that the 10%
requirement would, at best, make a very small dent in the
housing deficit, estimated at 1.5 million homes, since 7% of
bank lending portfolios would finance no more than 50,000

homes per year. (In a separate meeting with econcouns,
Construction Chamber President Alvaro Sucre said that while
in principle, he opposed such interference in private
economic decision, he hoped that the new lending requirements
would indeed spark a significant recovery in his sector.)

--------------
USURY - WHAT WASN'T ILLEGAL THEN IS NOW
--------------


5. (U) While they adjust to the new lending requirements,
Venezuela's bankers face pressure on another front. Though
they have not yet been charged with any crimes, seven private
bank presidents (including the heads of Banesco and Banco
Mercantil, the two top locally owned banks, and the head of
Spanish-owned Banco de Venezuela),one former head of the
Superintendency of Banking (SUDEBAN, a GOV agency),and two
former Venezuelan Central Bank Presidents (including the
recently retired Diego Castellanos, were prohibited from
leaving the country by a February 21 court decision. The
restriction was mandated because those individuals, along
with some other ex-SUDEBAN employees, are being investigated
and will possibly face charges of usury and fraud. The
investigation stems from a Supreme Court decision in January
2002, in which it ruled that loans with interest rates
indexed to inflation, and loans with balloon payments, were
unconstitutional. The Supreme Court made its ruling
retroactive. The actions upon which the charges would be
based pre-date the Supreme Court decision.


6. (C) Salvatierra, one of the bank presidents facing
charges, told econoff that he and the other presidents "feel
calm, and that we committed no crime." He claimed that the
accusation "has no solid legal or economic base" because the
loans in question were based in law, and also enabled poor
people to obtain mortgages they would not have been able to
otherwise. Salvatierra did acknowledge some doubt about the
outcome given the increased politicization of the judiciary
(reftel). He said, "there is an intent to create a negative
perception of the banking sector," perhaps not with the
intent of imprisoning anyone now, but "to send a message" for
the future. Coa agreed, saying the GOV is perhaps "going
after the banks," after destroying the independence of
state-owned oil company PDVSA, the National Electoral Council
(CNE) and other institutions which should be autonomous.

--------------
SUMMARY
--------------


7. (C) Profits in the banking sector soared 44% in 2004 over
2003, with an impressive 43.3% return on equity. In
addition, GDP in the financial services sector was up 26.6%
in 2004 (vs. 17.3% for overall GDP),after being the only
private sector to show GDP growth in 2003. The lion's share
of this growth came from investments in government securities
issued to allow free spending policies to continue.
Exchange controls, which prevent borrowers from moving their
money out of the country where they could get better returns,
have also been enormously beneficial to the banks. Thus,
they are poorly positioned to challenge these new
requirements. Nonetheless, the imposition of directed
lending and subsidized rates, historically common in Latin
America, however, is bad regulatory policy. Inevitably it
will force banks to make loans to customers who would
otherwise be too shaky to qualify, eventually damaging
portfolio quality, while driving up rates for good customers
in other sectors. We suspect that the usury case against the
bank heads constitutes pressure to make them go along with
the policy relatively quietly. It also raises yet another
populist target for the bolivarian government, which is ever
alert against exploitation and profiteering by the private
sector.
Brownfield


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2005CARACA00806 - CONFIDENTIAL