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Venezuela - Banking
More about the Economy of Venezuela.
Venezuela's extensive financial infrastructure, distinguished by the specialized nature of its institutions, displayed rapid growth from the 1950s through the 1980s. In 1989 the financial services sector consisted of forty-one commercial banks, twentythree government development finance institutions, twenty-nine finance companies, sixteen mortgage banks, twenty savings and loan associations, and scores of other related entities, such as insurance companies, liquid asset funds, pension funds, brokerage houses, foreign exchange traders, and a stock exchange. The huge oil profits of the 1970s prompted the rapid expansion of financial institutions. During the less-prosperous 1980s, however, several institutions went bankrupt. These insolvencies greatly disrupted the financial system and led the government to intervene to resuscitate some companies and to force others to close down. The most celebrated of these interventions was the 1982 takeover of the Workers' Bank, which until that year was the country's fastest-growing financial institution.
The Central Bank of Venezuela (Banco Central de Venezuela-- BCV) and the Central Office of Coordination and Planning (Oficina Central de Coordinación y Planificación--Cordiplan), with assistance from the World Bank, sought to modernize, liberalize, and consolidate the private financial system in the early 1990s. One of the main aims of restructuring was to improve the weak supervisory authority of government regulatory bodies such as the Superintendency of Banks, the Superintendency of Insurance, the Deposit Insurance Corporation, and the National Securities Commission. The same policies sought to redefine and eliminate overlapping responsibilities. Financial authorities also attempted to liberalize the BCV's interest rate policies and strict credit allocation provisions, which restricted financial markets. In addition, policy makers contemplated increased participation from foreign banks, which had been limited to a 20 percent equity share since 1970, in order to make local financial institutions more competitive with international counterparts. Financial restructuring also aspired to create new government mechanisms for dealing with ailing financial institutions.
The country's forty-one commercial banks and their hundreds of branch offices represented the core of the private financial system. Commercial banks held about 70 percent of the total assets of the financial system in 1989. Bank lending policies were generally very conservative, favoring high liquidity ratios and emphasizing personal relationships. Banks financed mostly the short-term credit needs of the economy, reserving long-term financing for government development finance institutions. The banking industry was highly concentrated; six major banks, all affiliates of the six leading financial groups, dominated the industry with ownership of 63 percent of total bank deposits and 57 percent of total financial system assets. Banco Provincial, Banco de Venezuela, Banco Mercantil, and Banco Latino were the largest commercial banks in 1989. Fifteen medium-sized banks controlled 29 percent of bank deposits, whereas twenty small banks held only 8 percent of such deposits. Of the forty-one banks present in 1989, thirty were locally owned, private banks; two were privately owned with some foreign interests; and nine were government-owned banks. Many local banks balked at the prospect of outside competition from larger and better capitalized foreign banks.
The nine public-sector banks that operated as commercial entities were the Industrial Bank of Venezuela (Banco Industrial de Venezuela--BIV), the Agricultural and Livestock Development Bank (Banco de Desarrollo Agropecuario--Bandagro), four regional development banks associated with the BIV, and three subsidiaries of the BCV (Banco República, Banco Italo-Venezolano, and Banco Occidental de Descuento). The BIV, the oldest state-owned bank, served as the major lender to the public sector and to industry. Like its four affiliated regional development banks, the BIV held a great many nonperforming loans. Without continued capitalization from the central government, these five banks likely faced insolvency. Bandagro, also dependent on renewed government capital, faced large debts in 1990 despite several attempts to restructure the institution during the 1980s. Nevertheless, Bandagro remained a key lender for medium-sized agricultural enterprises. The BCV's three banking subsidiaries, also carrying weak loan portfolios, were slated for privatization in the early 1990s.
In addition to public-sector banks, the state also operated twenty-three development finance institutions. Development finance institutions typically funded large, long-term development projects in both the private and public sectors, generally projects that were unable to secure commercial bank loans. Successive governments also had established specialized institutions to propel the development of agriculture, industry, urban areas, tourism, and exports. The names and functions of these financial institutions, most of which were founded after the 1973 oil boom, often changed as successive administrations pursued different development objectives.
Finance companies, a common institution throughout Latin America, met the society's diverse credit needs, ranging from consumer finance to short- and medium-term loans for local industry and commerce. Some twenty-nine finance companies with almost 100 offices in 1989 held about 20 percent of the national assets, ranking them as the second largest type of financial institution in the private sector. In Venezuela these companies tended to be rather specialized, lending primarily to agriculture, industry, and commercial activities. Given the local banking industry's conservative reputation, finance companies often lent where banks did not. At the same time, many of the country's finance companies belonged to larger financial groups affiliated with commercial banks. In addition to finance companies, the major international credit cards did business in Venezuela, thereby supplying another source of consumer credit.
Sixteen mortgage banks served the country's longer-term credit needs with more than 100 offices nationwide. Mortgage banks, which lent for new construction, home improvements, and residential and commercial real estate, contained about 7 percent of the total financial system's assets. Like the commercial banks, mortgage banks faced a serious imbalance of liabilities over assets by the late 1980s, principally as the result of inconsistent interest rate policies on the part of the BCV. The mortgage bank industry was thrown into further disarray in 1989, when the Venezuelan Congress passed a politically motivated Protection Law for Mortgage Owners. As interest rates were liberalized and rose after early 1989, the Protection Law for Mortgage Owners established ceilings on the proportion of monthly salary that mortgage holders could pay, usually no more than 25 percent. This measure aided home owners in the short run, but threatened to squeeze mortgage bank credit for future housing.
Savings and loan associations held about 5 percent of the country's total financial assets in 1989 and were the key to mobilizing the nation's savings. Twenty savings and loans provided short- and long-term lending through nearly 300 branch offices. The weak portfolios of these institutions in the 1980s required substantial government intervention. The National Savings and Loan Bank (Banco Nacional de Ahorro y Préstamo-- Banap) intervened in the savings and loan industry on behalf of the government. Banap became the regulator, provider of capital, and guarantor of the industry. By 1990 some institutions owed as much as 40 percent of their overall liabilities to Banap, which itself faced growing financial constraints.
Capital markets constituted the other major component of the private financial system. Unlike other financial establishments, capital markets were slow to develop and remained quite weak in 1990. Among the explanations for the slow growth in capital markets was the traditional, family nature of businesses in Venezuela and the lopsided distribution of income, which limited the savings or capital accumulation of the lower classes. Furthermore, with subsidized interest rates, firms usually preferred debt financing or family borrowing over the mobilization of capital through the sale of equity shares. Investors were also skeptical of inadequate government regulation of publicly traded stocks and the state's history of intervention in industry.
The Caracas stock exchange, founded in the late 1940s, was the country's major capital market. The exchange operated under the nation's 1973 capital markets law, but regulatory changes expected in 1990 would allow foreigners to purchase shares on the Caracas exchange. In 1987, 110 companies were listed on the exchange.
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