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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:
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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 

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