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.

Puritanism in banking

In his book Money: Whence it came, where it went” (1975), John Kenneth Galbraith discusses banks and banking issues which I believe may be applicable to the Venezuela of today.

In one section, he addresses the function of banks in the creation of wealth. Galbraith speculates on the fact that one of the basic fundamentals of the accelerated growth experienced in the western and south-western parts of the United States during the past century was the existence of an aggressive banking sector working in a relatively unregulated environment.

Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.

In a second section, Galbraith refers to the banks’ function of democratization of capital as they allow entities with initiative, ideas, and will to work although they initially lack the resources to participate in the region’s economic activity. In this second case, Galbraith states that as the regulations affecting the activities of the banking sector are increased, the possibilities of this democratization of capital would decrease. There is obviously a risk in lending to the poor.

In Venezuela, the last few years [the 1990s] have seen a debate, almost puritan in its fervor, relative to banking activity and how, through the implementation of increased controls, we could avoid a repeat of a banking crisis like the one suffered in 1994 at a cost of almost 20% of GDP. Up to a certain point, this seems natural in light of the trauma created by this crisis.

However, in a country in which unemployment increases daily and critical poverty spreads like powder, I believe we have definitely lost the perspective of the true function of a bank when I read about the preoccupation of our Bank Regulating Agency that “the increase in credit activity could be accompanied by the risk that loans awarded to new clients are not backed up with necessary support (guarantees)” and that as a result we must consider new restrictions on the sector.

It is obvious that we must ensure that banks do not overstep their bounds while exercising their primary functions—a mistake which in turn would result in costly rescue operations. We cannot, however, in lieu of perfecting this control, lose sight of the fact that the banks’ principal purpose should be to assist in the country’s economic development and that it is precisely with this purpose in mind that they are allowed to operate.

I cannot believe that any of the Venezuelan banks were awarded their charters based purely and simply on a blanket promise to return deposits. Additionally, when we talk about not returning deposits, nobody can deny that—should we add up the costs caused by the poor administration, sins, and crimes perpetrated by the local private banking sector throughout its history—this would turn out to be only a fraction of the monetary value of the comparable costs caused by the public/government sector.

Regulatory Puritanism can affect the banking sector in many ways. Among others, we can mention the fact that it could obligate the banks to accelerate unduly the foreclosure and liquidation of a business client simply because the liquid value for the bank in the process of foreclosure is much higher than the value at which the bank is forced to carry the asset on its books. In the Venezuela of today, we do not have the social flexibility to be able to afford unnecessary foreclosures and liquidations.

In order to comprehend the process involved in the accounting of losses in a bank, one must understand that this does not necessarily have anything to do with actual and real losses, but rather with norms and regulations that require the creation of reserves. Obviously banks will be affected more or less depending on the severity of these norms. Currently, a comparative analysis would show that Venezuela has one of the most rigid and conservative sets of regulations in the world.

On top of this, we have arrived at this extreme situation from a base, extreme on the other end of the spectrum, in which not only was the regulatory framework unduly flexible, but in which, due to the absence of adequate supervision, the regulations were practically irrelevant.

Obviously, the process of going from one extreme to the other in the establishment of banking regulations is one of the explanations for the severe contraction of our banking sector. Until only a few years ago, Venezuela’s top banks were among the largest banks of Latin America. Today, they simply do not appear on the list.

It is evident that the financial health of the Venezuelan banking community requires an economic recovery and any Bank Superintendent complying with his mission should actively be supporting said recovery instead of, as sometimes seems evident, trying to receive distinctions for merit from Basel (home of the international bank regulatory agencies).

If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.

As edited for "Voice and Noise" 2006

Originally published in The Daily Journal, Caracas, June 1997

PS. Here my 2019 letter to the Financial Stability Board

Traducción:

PURITANISMO BANCARIO

Con ocasión de una mudanza me reencontre con un libro escrito en 1975 por el reconocido economista John Keneth Galbraith titulado "Dinero. De donde vino y adonde fué" Ojeandolo me encontre con dos subrayados relativos a las funciones de la banca y los cuales creo son recordatorios oportunos en la Venezuela actual. El primer subrayado tiene que ver con la función creadora de riquezas que tiene la banca y donde Galbraith especula sobre el hecho de que una de las bases que fundamento en el siglo pasado en muy acelerado desarrollo del oeste y sur-oeste de los Estados Unidos era la existencia de una banca agresiva y no regulada que abria y cerraba puertas, quebrando con frecuencia, pero que, a consecuencia de una política de créditos agil y flexible, dejaba una estela de desarrollo. El segundo subrayado se refiere a la función democratizadora de capital que posee la banca al permitir a personas con iniciativas ideas y voluntad de trabajo pero sin recursos el participar en la actividad económica. En este último caso Galbraith indica con sagazidad que obviamente a menor grado de regulaciones que afecte la actividad bancaria, mayor es la posibilidad de democratizar el capital.

En Venezuela, durante los últimos años el debate relativo a la actividad bancaria se ha centrado con un fervor casi puritano sobre el como mediante el incremento de controles lograr evitar una repetición de la crisis bancaria. Hasta cierto punto lo anterior resulta natural ya que indudablemente la crisis bancaria venezolana fué traumática. Pero, cuando en una Venezuela donde el desempleo se incrementa a diário y la pobreza crítica se extiende como pólvora, se lee sobre una actual preocupación de la Superintendencia de Bancos por cuanto el "repunte de la actividad crediticia pueda traer consigo un riesgo en el otorgamiento de préstamos a nuevos clientes que no presenten los soportes necesarios." y por lo tanto hay que considerar nuevas restricciones, creo que definitivamente se ha perdido la perspectiva de la verdadera función de la banca.

Por supuesto se debe asegurar el que la banca no cometa excesos en el desempeño de sus funciones y que obligue acometer costosos rescates, pero en el ejercicio de dicha función controladora no puede perderse de vista de que el principal proposito de la banca debe ser coadyudar en el desarrollo económico del pais y justamente para cumplir dicha función es que se les permite operar. No creo que ninguno de los bancos venezolanos obtuvo su permiso de funcionamiento en base a una limitada promesa de devolver los depositos. Y si a la no devolución de depósitos vamos, nadie puede discutir que de sumar todos los costos de las malas administraciones, pecadillos, pecados y crimenes que toda la banca privada venezolana pueda haber acumulado en toda su historia, no llegarian ni a una fracción de haber causado perdidas en el valor del dinero comparable con los costos causados por el sector oficial. A tal fin y como simples ejemplos basta recordar los costos derivados del sistema de Recadi o simplemente aquellos derivados del manejo inadecuado de la crisis financieras y donde obviamente el costo que cobro el taller estatal por reparar el golpeado vehículo bancario venezolano, multiplico varias veces el costo original del daño.

Un puritanismo regulador puede afectar la banca de muchas formas. Entre los resultados podemos mencionar el que frecuentemente obliga la banca acelerar el proceso de liquidación de una empresa simplemente por el hecho de que el valor liquido que obtiene la banca en dicha liquidación supera los valores a los cuales se les permite mantenerlos contabilizados. En la Venezuela de hoy creo que no tenemos espacio social para permitirnos el lujo de cierres y liquidaciones no absolutamente necesarias.

Para entender el proceso del registro de las perdidas contables en un banco hay que comprender que estas a veces no tienen nada que ver con perdidas reales sino con simples exigencias normativas que obligan a la creación de reservas. De acuerdo a lo estricto de las normas la banca quedara afectado en mayor o menor grado. Actualmente cualquier analisis comparativo daria como resultado de que en Venezuela tenemos una de las normativas más rigidas y conservadoras del mundo. Para rematar, llegamos a dicho extremo, partiendo de una situación donde no solo las normativas eran muy flexibles sino que además, por la ausencia de una adecuada supervisión, eran practicamente irrelevantes.

Obviamente este proceso irracional de ir de un extremo a otro en la aplicacion de las regulaciones bancarias, y unido a la política devaluacionista de un sector fiscal ávido de recursos, implico un verdadero achicamiento del sector bancario. Hace pocos años Venezuela presentaba varios bancos entre los grandes bancos latinoamericanos, hoy en día ni siquiera aparecen en la lista.

Muchas veces y en respuesta a nerviosas interrogantes sobre la salud del sector bancario venezolano, originados sobre la cuantia de los ingresos extraordinarios, no me ha quedado otra respuesta que el indicar el hecho de que si a un banco le obligan reservar todo, pues todos sus ingresos futuros han de ser extraordinarios.

Resulta evidente que la misma salud financiera de la banca venezolana requiere de una urgente reactivación económica y una Superintendencia de Bancos que hoy estuviese cumpliendo sus funciones tendría que estar activamente apoyando dicha reactivación en vez de, como a veces se percibe, tratar de obtener distinciones al mérito emiitidos por Basilea. 

Si se persiste en mantener firme una actitud casi derrotista y que definitivamente no representa una visión de crecimiento futuro, puede que terminemos con la banca mas reservada y sólida del mundo, una banca vestida no de bluejean sino de etiqueta, pero lamentablemente no presenciando una fiesta sino el entierro económico de un pais.