Monday, August 7, 2000

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 in a country that needs to generate jobs and therefore, loans for productive purposes, however 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? 

Friday, February 18, 2000

Kafka and global banking

My partner had a problem with identity theft which forced him to “negotiate” with his bank. During his ordeal I remember thinking "thank God we still have several banks to work with". Imagine if we would have had to discuss this issue with an official of the One and Only World Bank. Without a doubt this would present us with a future full of horrendous Kafkaesque possibilities.

This led me to think about the consolidation currently going on among banks. With every day that passes we have fewer and fewer banking institutions worldwide with which to work. This trend has been marketed as one of the seven wonders of globalization. .. and I believe the trend introduces other risks which have either not been sufficiently commented on or which have simply been ignored. Among these I can identify the following:

A diminished diversification of risk. No matter what bank regulators can invent to guarantee the diversification of risks in each individual bank, there is no doubt in my mind that less institutions means less baskets in which to put one’s eggs. One often reads that during the first four years of the 1930’s decade in the U.S.A., a total of 9,000 banks went under. One can easily ask what would have happened to the U.S.A. if there had been only one big bank at that time.

The risk of regulation. In the past there were many countries and many forms of regulation. Today, norms and regulation are haughtily put into place that transcend borders and are applicable worldwide without considering that the after effects of any mistake could be explosive.

Excessive similitude. By trying to insure that all banks adopt the same rules and norms as established in Basle, we are also pushing them into coming ever closer and closer to each other in their way of conducting business. Unfortunately, however, nor are all countries the same, nor are all economies alike. This means that some countries and economies necessarily will end up with banking systems that do not adapt to their individual needs.

I remember that John K. Galbraith once wrote that the economic development of the west of USA was helped by the fact that in the eastern part of the United States, banks were big and solid but that in the west, banks tended to work with much greater flexibility. The fact that some of these banks went bankrupt from time to time was simply taken as a normal cost inherent in development. Today, Venezuela's economy might be in dire need of some Wild West banks.

The cost of global assistance. When Venezuela’s banking system went down the drain, there is no doubt that the cost of the crisis was paid integrally by the country itself. In today’s world, when we see that a series of international banks are investing in our country’s institutions, I often wonder what will happen when one of these behemoths runs into serious trouble in its own country. Will we have to pay for our part of the crisis, less than our part of the crisis or more than our part of the crisis?

As bank mergers and acquisitions increase and stock exchanges worldwide call for more consolidations, I have my doubts. Should we not be imposing the creation of special reserves for especially large banks? The larger they are, the harder they fall, and so the greater the need to avoid disaster.

Abridged version of an article published February 2000 in the Daily Journal of Caracas.