‘Run on the bank’ at local cooperative should be warning to depositors, says former Central Bank official

According to a former official of Ecuador’s Banco Central, last week’s run on a large financial cooperative in Cuenca should serve as a cautionary tale for those who deposit money with the country’s financial cooperatives.

Based, apparently, on a rumor that it had declared bankruptcy, thousands of customers crowded the branch offices of Juventud Ecuatoriana Progresista, or JEP as it is commonly known, to withdraw their savings. In Cuenca, streets were closed and police were summonded to perform crowd-control duties, around the main JEP office in the historic district. According to JEP, between $5 million and $6 millon were withdrawn between Tuesday and Thursday.

The rumor started, JEP officials say, when the branch in Machala was closed due to plumbing problems. The rumor spread, according to a spokesman, on social media as well as on talk radio stations in Machala. The spokesman said that efforts are underway to identify the source of the rumor.

Romero Vasquez, an economist and former consultant with Ecuador’s Central Bank in the early 2000s, said it was fortunate that the run occurred at JEP instead of another cooperative. “JEP is one of the stronger cooperatives and is one of the few that is audited by the Central Bank. If this had happened at a coop that is not regulated by the bank, the outcome could have been much worse.”

Vasquez referred to a report issued two weeks ago by the Supintendency of Banks that showed that only eight of the 66 cooperatives in Cuenca and Azuay Province, were regulated by the national banking authority. In addition to JEP, the others that are regulated are CACPE Biblián, Jardín Azuayo, Codesarrollo, Mego, Riobamba, 29 de Octubre and San Pedro de Taboada.

Vasquez says he is particularly concerned for foreigners who invest in cooperatives.

“They are promised rates of return that are 4% higher, or even more, than those offered by the banks. What they are not told is that there is no oversight of the money or operations of most coops and that deposits are not insured by the national banking system.”  

In some cases, says Vasquez, foreign investors are told that cooperatives are equivalent to credit unions in the U.S. and Canada. “This is simply not the case,” he says. “Credit unions in North America operate under the same rules as banks and deposits are insured by the national banking agencies. If a coop in Ecuador says that its deposits are insured, they are referring to some sort of self insurance which means that they would try to settle claims from cash on hand.”

Vasquez adds that depositors should be free to invest in cooperatives if they understand the risks. “My concern is that many foreign investors do not speak Spanish and are not able to conduct the kind of research needed to understand the situation.”

Chief of Ecuador’s banking superindency, Gustavo Munoz, says his office is considering changes that would strengthen requirements for cooperatives. “My office has no control over most cooperatives and I think this presents a danger for the public who are not informed.”

Muñoz points out the only reporting requirement for cooperatives not under control of his office are to the Ministerio de Inclusión Económica y Social, or MIES, which is a social services agency that is unable to perform audits or provide financial oversight.

Muñoz is proposing a Superintendencia de Economía Popular y Solidaria, to establish stricter operating standards of unregulated cooperatives. “At least this would provide a higher level of accountability and would insure that all cooperative operate under similar standards.”

Among other changes being considered is the imposition of a cap on interest rates that cooperatives can charge borrowers, which could mean a reduction in interest rates offered to depositors.

In June, officials of the immigration offices at the Minitry of the Exterior, announced that they would no longer accept deposits in cooperatives as the basis for the 9-II residency visa.

Photo caption: Crowds gather last Wednesday at the JEP office at Mariano Cueva and Vega Muñoz in Cuenca to withdraw their savings. Credit: El Tiempo, Cuenca.