VZCZCXYZ0000
RR RUEHWEB

DE RUEHCV #2322 2162218
ZNR UUUUU ZZH
R 042218Z AUG 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 5748
INFO RUEHBO/AMEMBASSY BOGOTA 6867
RUEHBU/AMEMBASSY BUENOS AIRES 1387
RUEHLP/AMEMBASSY LA PAZ AUG QUITO 2336
RUEHSG/AMEMBASSY SANTIAGO 3692
RUEHGL/AMCONSUL GUAYAQUIL 0579
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE

UNCLAS CARACAS 002322 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV VE
SUBJECT: NEW CENTRAL BANK RESERVE REQUIREMENT FOR BANKS 
 
REF: A. CARACAS 01739 
 
     ¶B. CARACAS 01426 
     ¶C. CARACAS 00512 
     ¶D. CARACAS 02067 
 
¶1.  (U) On July 18, 2006, in an effort to mitigate 
inflationary pressures, the Central Bank (BCV) raised the 
reserve requirement on deposits and money market funds for 
financial institutions from 15 to 30 percent for all funds 
accumulated beginning July 14, 2006 (BCV Resolution 
06-07-01).  The BCV allowed financial institutions to hold 15 
percent reserve on funds received prior to July 14, 2006.  In 
its July 28th newsletter, local brokerage house BBO reported 
that the Finance Ministry and the Superintendent of Banks 
(SUDEBAN) did not respond to the Banking Association's 
request that the measure be implemented gradually. 
Highlighting existing BRV requirements directing 31.5 percent 
of bank lending, BBO noted that this new requirement 
constrains banks' ability to extend credit further.  Since 
banks do not receive interest payments on amounts held in 
reserve at the BCV, bank profitability is expected to 
decrease.  Bank profits (return on equity) from June 2005 to 
June 2006 has already decreased from 32.7 to 29.5 percent 
(roughly 16 percent real profit adjusted for inflation).  As 
of June 2006, financial institutions hold USD 285 million 
above their reserve requirement of USD 6.5 billion (or 16 
percent of money supply) at the BCV. 
 
¶2.  (U)  Money supply (M2), which equals currency, checking 
accounts, savings deposits, and CDs, grew 61.4 percent since 
July 2005, reaching USD 40.2 billion in July 2006.  By the 
end of May 2006, the increasing costs of issuing certificates 
of deposits (CDs) to fight increasing liquidity had resulted 
in BCV operational losses totaling USD 73 million (reftels 
A-C).  As of May 31, 2006, the outstanding balance of BCV 
certificates of deposits (CDs) in circulation was USD 15.7 
billion.  (Note: The BCV has not published June 2006 
financial results. End Note.)  To help constrain the growing 
money supply and to alleviate some financial pressure on the 
BCV, the Finance Ministry has worked with the Central Bank 
over the past year to undertake several measures including 
selling BRV and Argentine dollar-denominated bonds. 
 
¶3.  (U) Comment:  The BCV continues to struggle to reconcile 
an increasing money supply with a BRV-imposed constraint to 
maintain the current exchange rate throughout this election 
year.  However, this new bank reserve requirement, as much as 
it promises some relief to the increasing liquidity problem, 
squeezes an already tightly regulated banking industry.  End 
Comment. 
DOWNES