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DE RUEHQT #1655/01 2041717
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O 231717Z JUL 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7430
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6766
RUEHCV/AMEMBASSY CARACAS PRIORITY 2613
RUEHLP/AMEMBASSY LA PAZ JUL 0657
RUEHPE/AMEMBASSY LIMA PRIORITY 1783
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UNCLAS QUITO 001655 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR MEWENS AND MMALLOY 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EC
SUBJECT: Congress Rolls Back Correa's Controversial Banking Law 
 
REF: A. Quito 999 
 
     ¶B. Quito 1422 
      ¶C. Quito 1424 
 
¶1.  (SBU) Summary.  The Ecuadorian Congress rejected for the third 
time proposals by Correa to impose strong political control over 
interest rates, bank fees, reserve requirements, and a liquidity 
fund.  The Congress substantially modified Correa's bill to 
establish more limited controls, which the banking sector found 
relatively acceptable.  When Correa used his partial veto authority 
to again seek stronger controls, Congress mustered the two-thirds 
majority necessary to override the veto and restore the key measures 
from its version of the bill.  End summary. 
 
Correa Seeks to Politicize Banking Regulation 
--------------------------------------------- 
 
¶2.  (SBU) On May 18, President Correa sent a draft law to Congress 
to reform key institutions and regulations for the banking sector. 
The highly ambitious law attempted to implement Correa's campaign 
promises to limit the cost of loans and force banks to repatriate 
their overseas holdings.  The key element of the bill was to give 
greatly increased power over the banking sector to the Bank Board, 
taking those powers away from the autonomous Central Bank and the 
Superintendency of Banks.  The Banking Board is in effect a 
political institution, since Correa has directly appointed two of 
its five members and effectively appointed a third (reftel a). 
Among its many provisions, the law would have given the Banking 
Board the authority to set interest rates and reserve requirements 
and control over a liquidity fund. It would have also eliminated the 
bank's ability to charge commissions in addition to interest rates, 
and would have allowed the Banking Board to set bank service fees. 
 
¶3.  (SBU) The banking community strongly lobbied in Congress against 
the bill, joined by the Central Bank and Superintendency of Banks, 
who also argued that the bill would reduce lending, particularly to 
small borrowers.  (Ecuador has one of the region's most dynamic 
microcredit industries, and the interest rate caps would likely have 
dramatically curbed activity in that sector.)  Representatives from 
the Superintendency of Banks presented scenarios showing how 
Correa's proposed law would affect the stability of the financial 
sector and cause some institutions to fail.  They claimed the law 
would greatly increase the possibility of a systemic failure if 
depositors panicked and withdrew their savings and investments from 
the banks. 
 
Congress Moderates the Bill 
--------------------------- 
 
¶4.  (U) On June 14, Congress substantially changed the legislation, 
rejecting most of the new authorities that would have gone to the 
Banking Board.  It left the power to set maximum interest rates with 
the Central Bank.  It modified Correa's proposal to set maximum 
interest rates segmented by national accounts (for example, 
agriculture, industry, commerce, mining) to one divided by 
commercial, housing, consumer and microfinance segments.  This would 
give the financial sector greater flexibility to differentiate 
between types of loans.  Congress also defined the methodology the 
Central Bank should use in setting the maximum interest rate (the 
weighted average of the loan rates by segment plus two standard 
deviations) instead of giving it discretional authority to modify 
the methodology as Correa had proposed. 
 
¶5.  (U) Congress's version of the law also left with the Central 
Bank its authority to set reserve requirements, and gave the private 
sector the authority to create and manage a liquidity fund since 
there is no lender of last resort.  It also stipulated that fees for 
other services (checks, ATM withdrawals, etc) would have a maximum 
price equivalent to the average charged by the system plus two 
standard deviations.  Congress accepted Correa's proposal to 
eliminate commissions on loans. 
 
Correa Seeks to Reimpose Stronger Controls 
------------------------------------------ 
 
¶6.  (U) On June 25, Correa exercised his right to partially veto the 
bill approved by Congress, and attempted to restore some of the 
authorities that Congress had stripped from his draft.  Most notably 
he sought to reduce the maximum interest rate by limiting it to the 
average interest rate plus only one standard deviation.  He also 
sought to restore greater power to the Banking Board, including the 
ability to further control interest rates, establish maximum banking 
fees, and to oversee a liquidity fund. 
Congress Overturns Most of Correa's Vetos 
----------------------------------------- 
 
¶7.  (SBU) Banks once again lobbied Congress strongly against the 
partial veto, and urged Congress to exercise its right to insist 
upon the version that it had approved.  This time around, the 
Superintendency of Banks and the Central Bank remained silent (note: 
the Superintendent of Banks was under a congressional censure 
motion, which failed on July 4, while Central Bank management was 
changing following the resignation of the Central Bank Manager). 
Even so, a number of banking contacts were skeptical that Congress 
could overturn Correa's partial veto, since that would require a 
two-thirds majority. 
 
¶8.  (U) On July 5, after previously failing to override all of 
Correa's changes in one vote, Congress considered Correa's changes 
item-by-item, and for the most important measures (maximum interest 
rates, liquidity funds, bank fees) secured the two-thirds majority 
necessary to restore the version that had been approved by Congress. 
 On July 18, Congress reached consensus on the final controversial 
measure, how to set the maximum interest rate, overturning the 
President's partial veto. 
 
¶9.  (SBU) The banking sector responded in both the media and to 
embassy contacts that while it had reservations with the version 
passed by Congress, it believes that it could live with the 
provisions.  The Executive President of the Banking Association said 
he had reached agreement with members of Congress to lower the costs 
of financial services in exchange for their support on the law. In a 
meeting with USAID June 19, Ecuador's four financial associations 
informed us that they have already started an aggressive campaign to 
reduce interest rates in the financial institutions that they 
represent. They believe that if interest rates are not reduced in 
the short term, Correa will use the Constituent Assembly to take 
control the financial sector and make changes, as he has publicly 
stated. 
 
Comment 
------- 
 
¶10.  (SBU) Correa had a legitimate beef about overly high rates and 
commissions in certain loan segments, but his proposed prescription 
exceeded the diagnosis and would have created a new set of problems 
and concerns.  Congress rejected three times the key provisions that 
Correa sought in order to impose greater political control over the 
banking sector.  This follows earlier Congressional measures to 
reject Correa initiatives (reftels b and c).  The banking sector has 
breathed a sigh of relief that it was able to find enough allies in 
Congress who share its arguments that Correa's provisions would harm 
small borrowers and potentially damage the sector.  However, the 
sector is still concerned about the law's lack of clarity regarding 
the methodology to establish the maximum interest rate.  Banks are 
also concerned that under the existing formula interest rates would 
move towards a fixed rate within six to eight months.  Since 
commissions are no longer permitted, some institutions might show 
losses until they are able to adjust their cost structures, 
requiring intervention by the Superintendency of Banks.  The banks 
also believe that this is a temporary truce, since Correa has 
already stated that he will bring the banks under control through 
the upcoming Constituent Assembly. 
 
JEWELL