VZCZCXYZ0006
RR RUEHWEB

DE RUEHQT #0831/01 2491627
ZNR UUUUU ZZH
R 051627Z SEP 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 9338
INFO RUEHBO/AMEMBASSY BOGOTA 7720
RUEHCV/AMEMBASSY CARACAS 3161
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 2780
RUEHGL/AMCONSUL GUAYAQUIL 3772

UNCLAS QUITO 000831 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EC
SUBJECT:  Ecuador Lowers Interest Rate Ceilings 
 
Reftel:  07 Quito 1655 
 
¶1.  (SBU) Summary.  Empowered by a slightly modified year-old 
banking law, the Central Bank has steadily lowered maximum allowable 
interest rates for the banking sector since January 2008. 
Ironically, the Constitutional Court struck down a provision of the 
2007 banking law that provided transparent guidelines for 
establishing interest rate ceilings.  Without that provision, the 
Central Bank has continued to set interest rate ceilings, but is not 
using any publicly understood criteria and appears to be guided by a 
political desire to lower interest rates.  Despite the pressure on 
interest rates, large banks remain profitable.  However, 
micro-lending is taking a hit, as banks focus on more profitable 
corporate lending.  End summary. 
 
¶2.  (U) Ecuador's banking law entered into force in July 2007, 
establishing new guidelines for maximum lending rates (reftel).  The 
law stipulated that the Central Bank would establish maximum 
interest rates by market segment, based on the average of prevailing 
loan rates in the previous month for the segment plus a margin of 
two standard deviations.  The law also banned loan commissions, 
which had been an important source of income for many banks. 
However, by dividing the industry into market segments, and 
providing a reasonably large margin over the average prevailing 
interest rates, the new law allowed for banks to continue offering a 
wide range of products within each segment. 
 
 
¶3.  (SBU) In December, the Constitutional Court declared the 
methodology for setting maximum interest rates unconstitutional, but 
otherwise left the July banking law intact.  With that change, the 
Central Bank maintained its authority to set maximum interest rates, 
but was not bound by an established methodology.  Starting in 
January, the Central Bank has begun to steadily lower the maximum 
interest rates across all market segments.  Bankers complain that 
they are not aware of any methodology followed by the Central Bank, 
beyond a political objective of forcing down interest rates. 
 
¶4.  (U) Following are the maximum interest rates for  different 
market segments in January and August, showing a steady decline in 
each segment.  (Note:  The Central Bank establishes maximum interest 
rates each month.  For convenience we have left out the rates for 
the intervening months, each of which has been marginally lower than 
the preceding month.) 
 
Month                  January 2008    August 2008 
 
Commercial                 11.81           9.66 
Personal consumption       21.19          17.26 
Housing                    13.55          11.66 
Microcredit                27.98          25.50 
Subsistence microcredit    39.98          35.20 
 
¶5. (SBU) According to Cesar Robalino, President of the Ecuadorian 
Bankers' Association, the overall banking sector remains strong, 
even with lower interest rates.  However, given overall uncertainty, 
coupled with lower interest rates, banks are taking a more defensive 
position by increasing liquidity and building capital while slowing 
down lending.  As part of that retrenchment, they are beginning to 
shift business from high cost microcredit lending to low cost 
corporate lending.  Robalino noted that the large banks can more 
easily make those adjustments, while smaller banks have less 
flexibility.  In addition, smaller banks usually have higher 
marginal operating costs and are therefore particularly vulnerable 
to falling income as a result of lower interest rates and 
eliminating commissions. 
 
¶6.  (SBU) Comment:  President Correa took office determined to push 
down interest rates and bank commissions, which had been, on 
occasion, abusively high.  The 2007 banking law was drafted by 
Congress after it rejected a more draconian version submitted by the 
Correa Administration.  It did impose more limits on the banking 
sector, but also provided a relatively predictable and flexible 
interest rate cap system.  By overturning one provision of the law, 
the Constitutional Court effectively gave the Central Bank a free 
hand to set interest rates as it sees fit, without any constraining 
methodology.  At about the same time, turnover at the Central Bank 
board allowed Correa to appoint a majority of the board.  The board 
had taken what appears to be a political decision to squeeze down 
interest rates, although the process has been gradual and thus far 
has not been a threat to overall banking system. 
 
¶7.  (SBU) Comment, continued.  Ironically, a second objective of the 
Correa Administration has been to promote more competition in the 
banking sector and to encourage microcredit lending.  By moving 
forward with one objective, lowering interest rates, the government 
is undermining its other objective, since the lower rates favor the 
large banks and suppress microcredit loans. 
 
HODGES