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1、 Banking in Bolivia with Riots on the StreetsBy Jaime Dunn De AvilaOn June 17 Fitch Ratings revised its Outlook rating for Bolivia from B- Stable to B- Negative. TheresaPaz, Fitch sovereign analyst for Bolivia says “the revised Outlook reflects concerns that recent social andpolitical turmoil in tha
2、t third world country could jeopardize medium-term economic prospects”. Politicalturmoil and social unrest are nothing new in Bolivia. Widespread poverty, high unemployment, racialdiscrimination, corruption and the fatigue of the neo-liberal economic model implemented in 1985, arethe principal cause
3、s of continuous crises and instability since 1998.The Bolivian banking system is small compared to other Latin American countries, a reflection of the sizeand poverty of Bolivian economy. In the last few years, the banking sector formed by 13 banks, hassuffered five dramatic blows that caused capita
4、l flight, an increase in the levels of credit defaults and apersistent shrinkage on the level of outstanding loans. In December 1998, the banking sector had $4.2billion in loans and $3,5 billion in bank deposits. The first week of June 2005, those figures are $2.5billion (-40%) and $2,6 billion (-26
5、%) respectively. Since 1998 over a billion in bank deposits have beenwithdrawn while credit defaults have increased nearly 250%, from 6.5% to 16.3%.A good portion of the reduction on outstanding loans has been the result of policies carried out byCitibank NA and Banco Santa Cruz (since 1998 owned by
6、 Banco Santander Central Hispano of Spain).Since the year 2000, Banco Santa Cruz has gone from being the largest bank in term of assets, to the fifthplace today. And at the end of 2004, Citibank NA reduced significantly its banking operations in Bolivia,shrinking its operations to a single branch. I
7、n the meantime external financing to locally owned banks hasshrunk from $917 million in 1998 to only $98 million today. Apart from Banco Santa Cruz, the threesmallest banks in Bolivia are foreign owned. This reflects the tough banking environment in Bolivia thatcauses foreign owned banks and subsidi
8、aries to move their business elsewhere. At the same time, it showsthat having a large international presence maybe a weakness in times of crises, because foreign capitalmoves out of the country quickly, whereas locally owned banks have to endure the situation.Undoubtedly the Bolivian banking system
9、has endured many blows recently thanks to the strict bankreform and regulation that began in the nineties, and the fact that the Bolivian banking system is made outmostly of local capital. These facts had a positive impact in preparing the banking system to confrontharsh social and political times.
10、Since 1987, all banking regulation and control tasks were separated fromthe Central Bank of Bolivia (BCB) and trespassed to the Superintendence of Banks (SB). Although theBCB is on charge of issuing important norms applied to the banking system, the BCB is an autarkicinstitution and its main purpose
11、 is to maintain the monetary stability and the purchasing power of theboliviano, the local currency. The SB enforces all norms issued by the BCB.To ensure the independence of the BCB and the SB from direct government interference, the President ofthe BCB and all members of its Board of Directors are
12、 chosen by the President of Bolivia from a short listof candidates proposed by the Chamber of Deputies of the Bolivian Congress. While the Superintendentof Banks is chosen by the President from a short list proposed by the Senate.The BCB and the SB have been recognized internationally for having app
13、lied good measures of prudencethe last few years in order to preserve the health of the banking system under continuous stress. SinceMay 31 of 2005, a new norm for evaluation and scoring of credits was introduced, replacing the normestablished in 1999. Under this new norm, which also paves the road
14、towards Basel II, the SB seeks tostrengthen the baking system even more and to stimulate the generation of new loans. The new normcreates eight categories for all loans, from “A” (normal) to “H” (lost). Under the new norm, clients mustnot only have good guarantees, but must also prove enough sources
15、 of income and must have an excellentpayment record. The new norm is not without cost, all banks have to invest about 10% of their equity onimplementing it.In the pipeline more banking regulation is in place: the Law of Corporate Governance, of Liquid Assets,Leasing and legislation on tributary matt
16、ers aimed to protect and encourage more financial activity. Onthe other hand, newly signed Stand By credits with the International Monetary Funds come with eventougher banking norms that increase previsions and liquidity levels even more. In response, an analystsaid, “Bolivia is a country with the economy of a poor African nation, with a US rate of inflation and aSwiss banking regulation”. Others observe that strict norms are in fact the cause of the 40% reduction in outstanding l
