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### Viewing cable 07QUITO1655, Congress Rolls Back Correa's Controversial Banking Law

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07QUITO1655 | 2007-07-23 17:05 | 2011-05-02 00:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    VZCZCXYZ0017
    OO RUEHWEB

    DE RUEHQT #1655/01 2041717
    ZNR UUUUU ZZH
    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
    RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2564
    RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

` `

    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

`