Guacara is not Basel

The credit portfolio of the Venezuelan banks, which in 1982 amounted to 16,000 million dollars, by June 2002, in constant 1982 dollars, barely reached 3,300 million dollars, that is, 21% of that of 1982. Being the case that levels as low as these have not been seen since the end of 1996.

In an article that I published in June 1997, I warned about the danger that, faced with the panic of falling into another banking crisis, we would exaggerate banking regulations, forgetting the main function of banking, which should be none other than be an active agent in the economic development of the country and for which the license is granted.

Since then, I have argued in multiple articles that we have to take care of the Basel banking regulations, which as part of the globalization process, seek to be imposed throughout the world, since these, although they may be logical for a developed country, , which perhaps only seeks to take care of its money, may be too strict for a developing country like ours.

You will then understand the reason for my anguish, when in a full-page interview published in a national newspaper, the new superintendent of banks did not mention a word about how banking can promote economic growth and limited himself to testifying about restrictive aspects of the regulation, with phrases such as: “we are the strategic ally of the system to guarantee deposits…” and “I have set the objective of adapting the system's regulations to the fundamental principles of Basel.”

Given the deep economic crisis in which we find ourselves immersed, if I were superintendent, on the contrary, I would do nothing other than try to determine if the current regulations could, in some way, be unnecessarily slowing down the granting of credits and, if so, Thus, I would proceed to modify them... whatever Basel says.

In any case, it should be noted that the impact that one or another type of banking regulation may have on the health of the financial system will always be infinitely less than that on the real health of the economy in which banking operates.

If there is something worrying about globalization, it is that that category of dangerous public officials, who limited themselves to developing regulations from their air-conditioned offices in Caracas, ignoring the real world, continue doing the same today, but from even more remote offices... in Basel.

Translated from article published in TalCual, Caracas, August 14 2002

 

Local banks and global regulations

Many still have in mind the latest crisis in the banking sector in Venezuela, a memory refreshed by the recent Cavendes incident. Hence, public opinion demands from banks, first of all, greater security in their placements. Additionally, apart from being provided with an efficient service in the operational management of their funds and eventually being granted some consumer credit, there are few other expectations that a normal client has regarding their bank.

That’s why in the ensuing debate two fundamental purposes of banks are often forgotten. That to be an active agent in the process of generating economic growth and to collaborate in the function of democratizing capital. In short, to allow access to capital to those people or regions that, even lacking resources, have initiatives and the will to work.

In Venezuela, until recently, the approval of a banking license depended, at least in theory, on how it was intended to fulfill such social functions, without the solvency to repay the money in the future seeming to be more relevant. How far is this from being true today!

In constant 1982-dollar terms, the total loan portfolio of banks in Venezuela for December of that year was around 16,000 million dollars. In February 2000 it was located at just about 5,300 million dollars – including consumer loans. These figures show a real crisis of growth and although the recent process of bank mergers in Venezuela may manage to generate, at the deposit-taking level, certain operational savings, however, it is not very clear how it should contribute to reactivating the economy.

When thinking about it, I believe that it’s also necessary to question the import, from Basel, of banking regulations, more appropriate for already developed countries, than for developing countries like ours. Many of the problems arise from the mere fact that since such provisions were developed for environments of certain macroeconomic stability, when transplanted in countries with inflation or exchange rate volatility, many times they become inoperative and even counterproductive.

In 1975 John Kenneth Galbraith, in his book "Money, its Origin and Destination", advanced the thesis that one of the fundamental reasons for the economic development of the West and Southwest of the United States in the last century was achieved, it was the existence of an aggressive and poorly regulated bank, which frequently went bankrupt, causing great losses to individual depositors, but which, due to an agile and flexible credit policy, left a trail of development.

Today, when contemplating the recession that reigns in our country and without making in any way an apology for the crimes that could have been present, the temptation arises to wonder if the country was wrong to cause its fugitive bankers to seek refuge in other countries, where they spend their money and efforts. Wouldn't it have been preferable to have forced them to develop, for example, the Orinoco Apure axis?

It is also timely to question the fact that notwithstanding the country needs to generate jobs and therefore, loans for productive purposes, its regulations are more oriented to facilitate the granting of consumer credit. Regarding the democratization of capital, Galbraith himself shrewdly indicates that obviously the lower the degree of regulations that affect banking activity, the greater the possibility of democratizing capital.

The saddest thing about the entire chapter on banking regulations is that in truth the risks not only persist but sometimes, when there are mergers, they can multiply, due to the fact that "the bigger they fall, the harder they fall."

And since we're talking about mergers, I can't resist the temptation to make a comment from a global perspective. A local bank has a serious commitment to its area of influence, since it simply has nowhere to go. Speculating that the process of globalization of local banking began when the Banco de Los Llanos, from Valle la Pascua, became the Banco Principal, from Caracas - we observed that this did not help us much. Could the process that leads to managing our bank from Madrid be better? 

 In El Universal of Caracas

Banking - between mirrors and piglets

Although I have never worked in the banking sector, I do remember, during the latter part of the seventies, being proud about the development of Venezuelan banks. I thoroughly enjoyed listening to anecdotes such as the fact that the most popular software application (i.e. SAFE) for the management of on-line banking operations had been developed in Venezuela. 

I was also aware of the fact that on-line banking in the country was being applied to a much greater degree than in the United States. I loved to read in the press about the participation of Venezuelan financial institutions in international loan syndications, although while doing so I pondered about the sanity of this participation and had the same ambiguous love-hate feeling as when I flew overseas with VIASA, our flagship airline. 

Finally, the fact that Venezuelan banks routinely appeared in “The Banker” magazine’s listing of largest banks, made reading this publication in London waiting rooms quite agreeable.

Twenty years later, I cannot but feel somewhat humiliated when I am asked to feel respectful and thankful that we are now to be the beneficiaries of new banking technology that in my humble opinion for the moment merely seems to imply substituting the small mirrors used by the Conquistadores to seduce the continent’s Indians with little plastic piglets.

Let me make it clear that my possible observations as a Patriot about the strategies established by financial Neo-Royalists are certainly not based on the rejection of the presence of foreign banks in general, much less of Spanish financial institutions, which due to their high profile will undoubtedly bear the brunt of humoristic expressions so proper of the Venezuelan populace. 

On the contrary, I am certain that there is an important place for foreign banks in Venezuela, although I would have liked to see an early aperture of the financial system aimed more at strengthening than at the reconstruction, in the style of the mythical Phoenix, of a system in ruins.

What motivates me is that an excessive praise heaped on the newly arrived foreign bankers, in addition to possibly causing unnecessary damage to the egos of our local bankers (that famous patriotic cry, “Vuelvan Caras”, is already audible in banking circles), clearly tends to confuse the issues and principal causes of the collapse of our financial system.

History can be written in a few words. A series of devaluations, the breach of exchange guarantee contracts, restrictions on offshore positions, obligatory preferential treatment for certain sectors of the economy, minimized participation in the financing of petroleum industry projects and surprising macroeconomic policy decisions such as the application of exorbitantly high real interest rates. 

All these factors caused a drastic decline in the quality of bank loan portfolios and an erosion of their respective net worth values to a minimum. Responsibility for all these ills lies principally with the Central Government and their main cause is again the fundamental failing of our society, i.e. the excessive concentration of national wealth in the hands of the State.

Each case must by analyzed separately but in general terms, I’m certain that should the United States, the United Kingdom and even Spain have had to suffer through similar catastrophes, the mortality rate would have been the same or higher. Likewise, I’m sure that the future productivity of Venezuelan banks will depend more on the rectification of the State’s actions than on the masterly lessons in banking we may receive from, with all due respect, the Casa Cándido strategists (Casa Cándido is a restaurant in Segovia famous for its servings of roasted piglet).

A better supervision of the banking sector by a professional Superintendency; reasonable norms that regulate the banking activities without strangling it; development of management capabilities that would insure the proper handling of banking crises without multiplying their initial cost; and responsible, professional bankers. 

All the above certainly must exist in order to head off another financial tragedy in the future, but they are certainly not enough to avoid such disasters.

As long as the size of Venezuelan State is not reduced in proportion to the private sector and the State continues to impose its omnipresent influence over all aspects of national life, the possibility of creating and environment of economic rationality is remote. Without economic rationality there is no way to avoid another financial crisis. Today’s generation of local bankers hopefully has already learned its lesson and I sincerely hope our newly arrived visitors will not have to do so as well.