VZCZCXYZ0000
PP RUEHWEB

DE RUEHQT #2672/01 3551859
ZNR UUUUU ZZH
P 211859Z DEC 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8222
INFO RUEHBO/AMEMBASSY BOGOTA 7201
RUEHCV/AMEMBASSY CARACAS 2806
RUEHLP/AMEMBASSY LA PAZ DEC LIMA 2237
RUEHGL/AMCONSUL GUAYAQUIL 3159

UNCLAS QUITO 002672 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EC
SUBJECT:  Public and Private Sectors Discuss Possible Banking 
Reforms 
 
Ref.  Quito 1655 
 
¶1.  (SBU) Summary.  GOE representatives and the banks have agreed on 
an outline for a second round of banking sector reforms.  The banks 
said that the agreed upon package is reasonable and would not 
undermine the banking sector, but caution that President Correa or 
the Constituent Assembly still need to approve the package and might 
make unacceptable changes.  End summary. 
 
¶2.  (SBU) In May President Correa sent a draft banking law to 
Congress, seeking to greatly increase governmental control over the 
banking sector.  Congress significantly walked back the proposal and 
approved a banking sector reform that imposed some restrictions 
(eliminated commissions, set maximum interest rates) but that was 
acceptable to the banking sector (ref a).  At the time, Correa 
stated that he would seek additional changes that he would submit to 
the Constituent Assembly.  In practical terms, real effective 
interest rates have not changed appreciably since the law was 
implemented. 
 
¶3.  (SBU) In the following months, the private sector has held a 
series of meetings with GOE officials to discuss possible additional 
reforms to the banking sector.  In several meetings from December 
12-14, Central Bank officials and several private sector bankers 
discussed with Embassy and visiting Treasury officials the basic 
outcome of the meetings, with all making the same basic points. 
 
Interest rate caps 
------------------ 
 
¶4.  (SBU) The two sides agreed to restructure the methodology for 
calculating maximum interest rates.  In the recently approved 
banking law, maximum interest rates are set by market segment (e.g., 
housing, commercial, microcredit), based on the market average for 
the segment, plus a margin.  Currently the margin is two standard 
deviations from average.  Bankers believe that over time interest 
rates will converge toward the average, reducing the standard 
deviation and therefore the margin.  That would bring down the 
interest rate cap and prevent banks from differentiating products 
within a market segment. 
 
¶5.  (SBU) The GOE and bankers agreed to use a new methodology to set 
the margin that will establish the maximum interest rate, using 
averages instead of standard deviations.  (For example, if the 
adjustment factor were 20% and the average interest were 10%, then 
the maximum interest rate would be 12%.)  Initially with banks 
argued for a large adjustment factor (and therefore a higher cap), 
while and the government sought a lower factor.  One banker said 
that he expects the final factor to be a compromise between the two 
positions, probably around 15-20%.  The banker explained that the 
new approach could have benefits for both the government and banks. 
Initially the new methodology will establish a lower interest cap 
than the current approach (which the government wants), but over the 
medium term it will be more stable (which is what the banks want). 
 
 
Liquidity Fund 
-------------- 
 
¶6.  (SBU) The two sides agreed to establish a liquidity fund to 
support banks that experience a run on deposits.  Currently, since 
Ecuador is dollarized, there is no lender of last resort, and all 
banks maintain large reserves (held largely offshore) to shelter 
themselves from a sudden outflow of deposits.  The GOE 
representatives and bankers agreed that the liquidity fund would be 
made up of a combination of required reserves (currently held by the 
Central Bank), bank contributions, and a government contribution. 
The two sides agreed the funds should be jointly managed, but 
disagreed on whether the government or the private sector should 
have control. 
 
New Deposit Insurance Fund 
-------------------------- 
 
¶7.  (SBU) The bankers and the GOE also agreed to establish a new 
deposit insurance fund, although our interlocutors did not discuss 
any specifics.  Ecuador currently has a deposit guarantee agency, 
but all of the banks' current contributions are used to compensate 
depositors who lost their savings in the 1999 banking crisis, so in 
effect there is no fund to shelter current depositors. 
 
Improve Efficiency 
------------------ 
 
¶8.  (SBU) Neither the GOE nor our private sector interlocutors 
thought that the agreed package would produce a notable drop in 
interest rates, which is what Correa is looking for.  They said that 
 
they also agreed on a modest package of measures that would lower 
costs (such as ending some mandated fees paid by the banks) and 
improve efficiency (for example, the liquidity fund might free up 
more bank resources for lending, and one banker hinted that the GOE 
might consider a better bankruptcy law that would allow banks to 
more easily claim loan guarantees). 
 
¶9.  (SBU) However, all the people that we talked to thought that 
these medium-term measures also would not have a dramatic affect on 
interest rates.  One banker said that the key factor in lowering 
interest rates on loans is more competition.  Even before the Correa 
government took office, foreign banks had not expressed interest in 
entering the Ecuadorian market, and he asserted that the uncertainty 
generated by the Correa administration will only increase their 
reluctance to invest in Ecuador. 
 
Correa to Decide 
---------------- 
 
¶10.  (SBU) Our private sector contacts agreed that the discussion 
that they had with the GOE representatives was professional and 
technical.  They also said that if the package of agreed measures 
goes forward without major substantive changes, that the new reform 
package would not create broad risks for the banking sector. 
However, they stressed that Correa will make the final decision on 
the to  by his representatives, they cautioned that the reforms 
might create fear among depositors which could affect some 
institutions.  One banker said that one of Correa's biggest fears is 
a banking crisis, which he said is the banks' "biggest ally" in the 
reform process. 
 
Constituent Assembly to Approve 
------------------------------- 
 
¶11.  (SBU) The GOE plans to present the banking reform legislation 
to the Constituent Assembly.  The package would probably also 
include other measures, such as the proposed merger of the Central 
Bank and Superintendency of Banks.  At this time, it is not clear 
when the GOE plans to submit the package to the Constituent 
Assembly.  However, the private sector bankers also cautioned that, 
even if the GOE package as approved by Correa is acceptable, there 
is also a risk that the Constituent Assembly could make unacceptable 
changes. 
 
Comment 
------- 
 
¶12.  (SBU) As the bankers have emphasized, there is still 
uncertainty as to the final shape of the next round of banking 
sector reforms.  However, it is a hopeful sign that the reform 
process started with discussions between the government and banks 
(which had not happened before the first law was introduced in May), 
and that the parties agreed to a reasonable framework, even if they 
disagreed on several key details. 
 
Jewell