PRESSURE IN OVERNIGHT INTERBANK MARKET AS SOME

C O N F I D E N T I A L CARACAS 000004 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE NSC FOR JSHRIER COMMERCE FOR 4431/MAC/WH/JLAO E.O. 12958: DECL: 12/31/2018 TAGS: ECON EFIN VE SUBJECT: PRESSURE IN OVERNIGHT INTERBANK MARKET AS SOME BANKS FEEL LIQUIDITY SQUEEZE REF: CARACAS 566 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (U) The overnight market for interbank loans has come under increasing pressure in the last two months, with the loan amounts negotiated and average interest rates more than doubling. In 2007, the average daily total negotiated in the interbank overnight market was 1,212 billion bolivars (Bs; USD 564 million at the official exchange rate of 2.15 Bs per USD) and the average interest rate was 10.7 percent. In 2008, amounts and average rates fluctuated roughly around these same averages through October 2008. The averages jumped in November and have steadily climbed in December; on December 29, the daily total negotiated was Bs 6,538 billion at an average rate of 33 percent. ¶2. (SBU) Our contacts indicate the primary reason for this pressure is withdrawal of public sector deposits from the banking sector by the Government of the Bolivarian Republic of Venezuela (GBRV). These withdrawals are causing increasing liquidity problems at a number of smaller and medium-sized banks which are more dependent than their larger counterparts on government deposits (reftel). A similar phenomenon occurred at the end of 2007, with the average daily amount negotiated and average interest rate spiking to Bs 2500 billion and 18 percent, respectively, in December 2007 and January 2008. At that time, the GBRV appeared to be moving deposits to the state-owned Banco del Tesoro in an effort to force private banks to convert dollar assets into bolivars to meet liquidity needs and thus bring down the parallel exchange rate. Several of our contacts believe the current episode is more a consequence of GBRV institutions not getting the inflow of funds from the National Treasury necessary to meet their year-end obligations (including bonuses and expenses related to the November 23 elections) and thus being forced to draw down existing deposits. (Note: Statistics on individual banks are available only through October 31, making it impossible to pinpoint which banks are in most trouble. End note.) ¶3. (C) Comment: As noted in reftel, the Venezuelan banking sector is concentrated (in that the top five banks have 50 percent of market share) but has a large number of banks (39 commercial or universal banks) relative to the size of the economy. Several of the smaller and medium sized banks are not healthy: they do not meet the solvency standards imposed by the Superintendency of Banks (SUDEBAN, the sector's primary regulator) and have intermittent liquidity problems. If the GBRV, which as of October accounted for 18 percent of deposits in the sector, continues to draw down its deposits to cover budgetary shortfalls, there is a possibility several banks - especially those most dependent on GBRV deposits - may fail. As noted in reftel, this prospect does not appear to present a systemic risk to the sector. How this situation plays out depends on what the GBRV does with its deposits and on how SUDEBAN handles its regulatory responsibilities. One indication of the former may be a report from one bank, which we have been unable to confirm, that the Ministry of Finance issued in late December a regulation requiring banks to return to the National Treasury all public sector deposits they have been holding for more than four months. SUDEBAN's response is an open question, as press reports indicate the GBRV announced the appointment of a new SUDEBAN head in the December 30 Official Gazette. End comment. CAULFIELD