Ecuador Requires Banks to Repatriate Some Offshore Assets

C O N F I D E N T I A L QUITO 000408 SIPDIS E.O. 12958: DECL: 06/01/2019 TAGS: EFIN ECON EC SUBJECT: Ecuador Requires Banks to Repatriate Some Offshore Assets Classified by Ambassador Heather Hodges. Reason: 1.4 b and d. ¶1. (C) S... id: 209795 date: 6/2/2009 21:39 refid: 09QUITO408 origin: Embassy Quito classification: CONFIDENTIAL destination: header: VZCZCXYZ0019 OO RUEHWEB DE RUEHQT #0408/01 1532139 ZNY CCCCC ZZH O 022139Z JUN 09 FM AMEMBASSY QUITO TO RUEHC/SECSTATE WASHDC IMMEDIATE 0426 INFO RUEHBO/AMEMBASSY BOGOTA 8167 RUEHCV/AMEMBASSY CARACAS 3566 RUEHLP/AMEMBASSY LA PAZ JUN LIMA 3224 RUEHBR/AMEMBASSY BRASILIA 4189 RUEHGL/AMCONSUL GUAYAQUIL 4350 RUEHSO/AMCONSUL SAO PAULO 0230 RUEATRS/DEPT OF TREASURY WASHDC -------------- header ends -------------- C O N F I D E N T I A L QUITO 000408 SIPDIS E.O. 12958: DECL: 06/01/2019 TAGS: EFIN ECON EC SUBJECT: Ecuador Requires Banks to Repatriate Some Offshore Assets Classified by Ambassador Heather Hodges. Reason: 1.4 b and d. ¶1. (C) Summary. On May 29, the Central Bank issued a measure requiring Ecuadorian banks to hold an increased share of their funds in Ecuadorian assets. The government asserted that this would require banks to repatriate $1.2 billion in offshore assets. One banker estimates that the required adjustment will be much less, around $300 million. Prior to this measure, on May 21, Central Bank officials privately noted to EconCouns concerns that one large bank was moving an unusually large portion of its assets offshore, which may be the reason behind the new measure. End summary. ¶2. (U) On May 30, President Correa announced that the Central Bank issued a measure that would require banks to repatriate some of the funds that they have overseas. The measure had been issued by the Central Bank on May 29. According to media reporting, banks would have to return $1.2 billion, or 45% of their offshore assets. Correa is quoted as saying that these repatriated funds would instead be invested in Ecuador. Complying with the New Measure -------------- ¶3. (C) A banker from Citibank explained to EconCouns that banks are required to maintain their own liquidity reserves, with short-term deposits requiring a high degree of coverage and longer-term deposits (over 180 days) requiring a lower degree of coverage. He said that the new measure requires that 45% of these minimum liquidity reserves must now be placed in Ecuadorian investments. Options include the Central Bank of Ecuador, cash holdings, other Ecuadorian banks, or other domestic commercial instruments. He said that it remains to be seen how the measure would affect Ecuadorian banking practices, but he said that some banks would probably not have to make large adjustments to comply with the measure. ¶4. (U) The banker said that this new measure is not a directed lending requirement. He noted that the intent of liquidity reserves is to have readily available funds and therefore reserves cannot be issued as loans. ¶5. (C) A second banker from Banco de Guayaquil said that to comply with the measure, his bank would have to increase its investment in domestic assets by about $38 million (of which $8 million would go into a government-owned bank, and another $30 million to privately-issued Ecuadorian securities). He said that was a relatively small and manageable portion of its roughly $600 million in overseas assets. He said that he thought the headline figure of $1.2 billion in repatriated assets was highly exaggerated, and he guessed that banks would have to bring back approximately $300 million. (Rough Embassy calculations, based on publicly available data from April, suggest banks might need to bring back $500 million.) ¶6. (U) The 45% requirement will be implemented in phases. Banks will need to have 40% of the liquidity reserves invested in Ecuadorian assets at the end of June, rising to 45% by the end of August. ¶7. (U) Background note: Since Ecuador is a dollarized economy, the Central Bank cannot act as a lender of last resort. Instead, the private banks hold a significant portion of their assets, currently worth around $4 billion, in off-shore short-term assets, such as U.S. Treasury bonds, to ensure they have sufficient liquidity to cover a sudden withdrawal of deposits. Limited Implications -------------- ¶8. (C) Neither banker anticipated significant negative consequences for the banking sector as a result of this measure. One banker affirmed that his bank will continue to hold a large offshore balance to maintain liquidity. Both said that they had not seen any notable change in depositor confidence, although one said that such a measure might make large depositors even less inclined to retain assets in Ecuador and said that banks will need to remind depositors that they have sufficient liquidity. One banker said that large banks have sufficient liquidity and can easily meet the new requirements, but thought that some smaller banks might have to sell assets to meet the new requirement. One banker said that while this measure itself is manageable, it is representative of the Correa Administration's tendency to increase regulation over the sector. Measure Aimed at One Large Bank? -------------- ¶9. (C) On May 21, EconCouns met with Central Bank General Manager Karina Saenz for an introductory meeting. Saenz gave an overview of the macroeconomic and financial situation in Ecuador. As part of the presentation, Saenz showed a series of slides on the financial sector which had been used in a cabinet meeting with President Correa the day before. One slide showed a large jump in offshore assets for the financial sector in May; the Central Bank officials said that jump was due to one bank, Banco Pichincha, Ecuador's largest bank. Subsequent slides showed that Pichincha's increase in offshore assets and decline in domestic lending was significantly sharper than that of other large Ecuadorian banks. One Central Bank official asserted that Banco Pichincha was playing political games with these developments. ¶10. (C) However, an Embassy analysis of publicly available April data on the offshore holdings of Ecuadorian banks shows that Produbanco, Ecuador's fourth largest bank, holds the highest portion of its liquidity reserve outside of Ecuador (71%). (Note: this data may not reflect the most recent developments cited by the Central Bank.) Comment -------------- ¶11. (C) The Correa government has had a confrontational relationship with the banking sector, increasing regulatory control and lowering interest rates and fees. At the same time, it appears to be aware that it can push only so far before putting the sector at risk of insolvency or a bank run. For example, with the banking sector under pressure because of the international economic crisis, it recently increased maximum interest rates and sought to increase liquidity for the banking sector by using funds from the Ecuadorian Social Security Institute. ¶12. (C) Correa Administration officials have occasionally complained that banks maintain sizeable offshore holdings, but until this latest measure had not taken action to force the banks to repatriate the funds, presumably in recognition of the important role those funds play. The latest measure appears to be aimed at one bank. Two bankers we contacted suggested that the measure will have limited implications for their institutions, but we suspect that it will require a larger adjustment for Banco Pichincha and, perhaps incidentally, Produbanco. It may not be a coincidence that Banco Pichincha is owned by Fidel Egas, who also owns the Teleamazonas TV station, which is a persistent burr to Correa and his administration. Ecuadorian regulators appear to be targeting Teleamazonas (septel). Hodges =======================CABLE ENDS============================