Government says new banking regulations are necessary while critics say they are a drastic overreach of power

Ecuador’s government says new banking regulation legislation is necessary to insure that the country does not suffer another banking crisis like the one that crippled the country in 1990 and 2000. Ecuador’s Minister for Economic Policy, Patricio Rivera, adds that lack of regulation of private banks puts too much power into the hands of a few and puts bank customers at risk. “We don’t want Dracula guarding the blook bank,” he said.

Critics of the legislation say it would take banking decisions away from bankers and put power in the hands of the government. They say they are particularly concerned about a proposal to create a regulatory body with broad powers to determine how private financial institutions should handle their liquidity.

Ecuador’s Minister for Economic Policy, Patricio Rivera, says the regulation will guard against financial bubbles and make sure all accounts are covered by deposit insurance. “The government will not interfere in such issues as who receives credit and who doesn’t,” added. “Banks will continue to function independently.”

One of the proposals critics, Alberto Acosta, an economist with Guayaquil-based private consulting firm Grupo Spurrier, says some government may be necessary but the new proposals is a drastic overreach. “It is important to reinforce controls in the financial system, but it is not healthy to have a super-authority to make decisions for private banks,” he said.

The proposed bill, which contains 516 articles, was sent to the National Assembly on Wednesday as “economic urgent,” which means that the legislature must vote on it within 30 days.

The assembly will likely approve the bill as President Rafael Correa’s ruling Alianza Pais party holds 100 of the 137 seats.

The bill would create a so-called Board of Monetary and Financial Regulation, which would be made up of government ministers. The board would establish minimum liquidity requirements, as well as the size of loans and the amount of credit that should be sent to each sector. It would also regulate external borrowing limits and establish conditions and limits on the holdings of foreign assets by banks.

Critics have said officials will be able to manage private bank liquidity to meet government objectives, but without assuming the risks of administering the bank. They have said the new code could result in officials manipulating private financial institutions in line with the government’s economic policies.

Acosta said the board will have too much power to handle the decisions of private banks, while shareholders will bear the brunt of decisions by officials.

“This leaves the door open for bad decisions that will have to be accepted by bank administrators, even though they won’t make [the decisions],” Acosta said.

Photo cutline: Patricio Rivera