Mark Weisbrot, Jake Johnston and Stephan Lefebvre -- Ecuador’s New Deal: Reforming and Regulating the Financial Sector

Ecuador’s New Deal: Reforming and Regulating the Financial Sector
by Mark Weisbrot, Jake Johnston and Stephan Lefebvre
Center for Economic and Policy Research (CEPR)

Since President Correa took office in January of 2007, the government has embarked on a series of reforms to transform and regulate the financial system. Some of these reforms and goals were included in the 2008 Constitution, which was overwhelmingly approved with 64 percent of the vote; others were embodied in laws and regulations described below.

The government built up a liquidity fund for banking system emergencies that is funded by taxes on the banks themselves, which is now at $1.2 billion dollars. It also established procedures for resolving insolvent banks. The Central Bank, which had previously been independent of the government, was made part of the executive branch’s economic team. This also included a new Economic Planning Ministry (Ministerio Coordinador de la Política Económica), created by President Correa during the second month of his administration. These changes, especially with regard to the accountability of the Central Bank, have proven very important to the implementation and coordination of new economic policies in Ecuador.

The Correa administration wanted the Central Bank to regulate interest rates, and this was achieved at the end of 2007. Average real (inflation-adjusted) lending rates have come down considerably during the Correa Administration, from a high of 8.28 percent in April 2007 to 3.85 percent today.

The new constitution defined the financial sector as composed of the public, private, and popular and solidarity-based sector, which includes cooperatives, credit unions, savings and loan associations and other member-based organizations. The government set a goal of expanding the popular and solidarity-based financial sector, creating the Programa de Finanzas Populares in 2008 to expand lending to smaller financial cooperatives, so that they could lend more to small businesses. In January 2007 co-op loans stood at 11.1 percent of private bank lending; by July 2012 this percentage had nearly doubled, to 19.6 percent. Co-op loans have also seen a large increase in the absolute total amount, tripling in real (inflation-adjusted) terms during this period.

A number of regulatory measures were adopted to protect consumers and the public interest, for example placing maximum fees on various financial transactions.

In May of 2009 the government established a Domestic Liquidity Coefficient, which required that 45 percent of all banks’ liquid assets had to be held domestically. This was increased to 60 percent in August of 2012. The purpose was to require Ecuador’s banks to keep more of their assets in the country; some hundreds of millions of dollars were brought back as a result of this regulation during the first year. This proved to be extremely important in the government’s response to the 2009 world recession.

The government also placed a tax on capital leaving the country. Since its implementation, this has become a key source of transparency and also a significant share of government revenue, increasing from less than 1 percent of revenue in 2008 to over 10 percent in 2012.

The government also took measures to limit the economic and political power of the financial sector. Before Correa’s election, banks owned most of the major TV media; this was prohibited.

Also, a Glass-Steagall-type provision in the Anti-Monopoly Law from October of 2011 prohibited combining multiple banks or different types of financial institutions, so deposit institutions, investment banks and insurance firms had to be separate. A regulatory body was also created to enforce anti-trust legislation.

These and other reforms described below appear to have contributed greatly to the economic success of the Correa government, as well as improvements in various social indicators.

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