Banco Fassil branch

A drop in foreign reserves and fears over devaluation are threatening the Latin American country’s economy, as its third-largest bank faces liquidation. Barbara Pianese reports.

At the end of April, the Bolivian Financial System Supervisory Authority (ASFI) took control of Banco Fassil, the third-largest bank in the country, after a breach of its customer obligations. The police arrested several executives for alleged mismanagement at the same time.

The regulator intervened after receiving multiple complaints that the bank was not turning over deposits to its clients. In several cities, clients were queueing at bank branches to demand their savings. Client deposits total $2.7bn, according to data from Bolivia’s Ministry of Economy.

Banco Fassil had been reporting liquidity problems since the beginning of the year, but the situation took a drastic turn in April when it said that debit, credit and prepaid card services were “temporarily disabled for national and international operations”.

In April, the executive director of the ASFI, Reynaldo Yujra, told reporters in the city of Santa Cruz that “mismanagement and unhealthy practices have caused a crisis”. The regulator has also commented, confirming that users’ savings are not at risk, the deposits will be guaranteed and there is no threat of a systemic risk.

Growing concerns

The bank was already a concern to the government back in 2019, Bolivia’s president Luis Arce told reporters in May. 

Juan Antonio Morales, former president of Banco Central de Bolivia (BCB), told The Banker: “Banco Fassil was in a so-called ‘gambling for survival mode’ with regards to deposit growth, as they offered high rates and other incentives to attract depositors while other banks have been more cautious.”

Deposits and loan portfolios have grown quickly, with the latter growing at a faster rate than nominal gross domestic product (GDP). “When this happens, there are always risks looming,” adds Mr Morales.

Bolivian law includes a process for transferring a failing bank’s assets and liabilities to other financial entities responsible for returning deposits and collecting credits. In early May, the ASFI disclosed that nine banks were awarded Banco Fassil’s deposit portfolio.

This crisis seems to be isolated in the financial system. “We don’t believe that the Banco Fassil crisis is related to any weaknesses around the banking system,” explains Camilo Perez, credit analyst at S&P Global Ratings. “Therefore, we don’t believe there will be any immediate impact or risk of contagion.”

Dollar shortage

The Banco Fassil problems aside, the Latin American country is currently facing a currency crisis. In the past few months, Bolivians have been withdrawing their dollar deposits and rushing to buy more of the US currency.

Bolivia’s net foreign reserves have fallen from a peak above $15bn in 2014 to less than $4bn today. The scarcity of the dollar, which some attribute to the BCB running out of hard currency reserves and which the government blames on speculation, means that a parallel dollar market has emerged for the first time since 2011.

this is [likely] due to the limitations of free circulation that the government and the central bank have imposed

Abraham Martinez

Devaluation is a real fear for the population. However, according to independent economist Miguel Clares, the country is facing transitory liquidity issues rather than a solvency crisis.

Banks have been feeling the dollar shortage since February. “At the beginning, the BCB blamed banks for the foreign exchange (FX) shortage,” says Jaime Dunn De Avila, chairman of financial consultancy iBolsa Sociedad de Titularización.

The central bank was only able to offer very few physical dollars to banks, who continue to make FX transfers but need to convert them into local currency. Although customers are officially allowed to withdraw funds in the fully convertible currency, there is a limit on how many dollars can be taken per person at each institution over a given period.

National lenders have increased the fees on dollar withdrawals or transfers to compensate for their increased cost of acquiring dollars. “Banks in Bolivia cannot sell currency outside of the official exchange rate. As banks need to buy dollars, they might need to do so at an unofficial exchange rate and mask the difference as cost transaction fees,” explains Mr Dunn De Avila.

Moreover, not all of the dollars generated through exports are reaching Bolivia — some of the funds are held outside Bolivia in other countries. “It is likely this is due to the limitations of free circulation that the government and the central bank have imposed,” says Abraham Martinez, director at Fitch Ratings.

Boosting reserves with gold

At the beginning of May, Bolivia’s senate approved the so-called ‘gold law’ aimed at strengthening the country’s foreign currency reserves. This will allow the central bank to buy raw gold from the country’s mining co-operatives and convert it into gold currency or bars to trade on international markets.

However, this law does not represent a solution to the long-term trend of Bolivia’s reserves deterioration, and might not be enough to solve the bigger structural problems that exist in the country.

for banks it is more convenient to lend to the central bank rather than consumers

Jaime Dunn De Avila

The central bank is already tightening monetary policy to reduce dollar demand and increasing interest rates to control inflation.

Since February, the central bank has increased short-term interest rates (callable bills at 274 days) from 0.30% to 5.74%, while interest rates on one-year bills shot up to 6.5%. “As credit to the productive and social housing sector is capped at 6%, for banks it is more convenient to lend to the central bank rather than consumers. This generates a lot of pressure in the financial market,” says Mr Dunn De Avila.

“Given the size of the informal economy, there is currently $7bn outside the financial system,” he says. “The unofficial devaluation in the black market has been relatively small – at around 8% – despite the difficult circumstances. This makes me think that the great quantity of dollars in the informal economy is supporting the exchange rate.”

A robust system

There is more trust among Bolivians in the financial system than the local currency. Despite the recent liquidity issues, the financial system remains robust. In the past few months, the currency crisis has caused some banks to lose liquidity, while others have improved their positions.

“On the whole, between December and February there has been a 9.5% decrease in liquidity in the system. Despite this, an increase in liquidity can be observed within some banks, such as Banco Nacional de Bolivia, Banco Bisa and BancoSol,” says Mr Dunn De Avila.

This suggests part of the population simply moved their funds from one bank to another. However, the fact that the situation could have been a lot worse testifies to the system’s strength. Some banks also increased their credit portfolios, which might also be the result of the reallocation of Banco Fassil’s portfolio.

The financial system has shown its dynamism, with deposits increasing 8% in February and credit growing 4% compared to last year, says Mr Clares.

Reported non-performing loans are around 2.2% of total loans. These are fully covered by conservative provisioning policies and the high share of collateralised loans, according to S&P Global Ratings.

“The banking system is healthy and solvent with a capital adequacy ratio above the threshold established by regulations,” says Marcelo Escobar, CEO of BancoSol. “As of February 2023, it stood at 11.9% in the case of the ‘multiple banks’ and 11.4% in the case of banks focused on small and medium-sized enterprises.” In Bolivia, multiple banks are similar to traditional commercial banks in other parts of the world.

The banking system is healthy and solvent with a capital adequacy ratio above the threshold established by regulations

Marcelo Escobar

Despite issues with the dollar, the boliviano is relatively stable in terms of funding and liquidity because banks are mostly funded with local currency deposits. “Loans are relatively short term in Bolivia and FX loans are mostly used for trade purposes,” says Mr Martinez.

Risks in the financial sector have increased due to higher macroeconomic risks, in particular due to increasing external vulnerabilities. With respect to the rise in global interest rates and the crisis registered in some regional banks in the US, Bolivian banks are cautiously looking out for any effect that could have on the system, according to Mr Escobar.

“The country is not well integrated into world markets; therefore, any effect would be indirect. However, we have the necessary strength to face any issues,” Mr Escobar adds.

The banking system has, over the years, lowered its exposure to foreign currency-denominated loans and deposits, but the deterioration in the country’s external profile is a risk for the stability of the national financial industry.

The slowing economic growth could take a toll on the banks’ asset quality during the next few years, according to a S&P Global Rating report. The Bolivian government’s ability to support domestic banks is uncertain, considering its lack of capacity to provide sufficient liquidity to the system, the report notes.

State intervention

One of the most important laws for the economy and the financial sector was enacted in 2013. The ‘New Financial Services Law’ encouraged a high degree of state intervention in the management of financial institutions.

The state is expected to be a regulatory authority and an active participant in financial intermediation, and government representatives should attend banks’ board meetings and shareholder meetings.

The government can instruct financial institutions to offer credit to specific sectors which the state considers appropriate. In addition, it fixes the maximum interest rates that banks can charge, determines loan repayment grace periods and the type of collateral that can be used against a loan. The intention was to ensure the banking sector performs a social function.

Over the past decade, credit as a share of GDP has increased from 35% to 43%, while the number of borrowers as a share of the adult population has doubled. “Before 2005, banking branches and other types of locations where citizens can perform financial operations covered less than 50% of the whole country; now they cover between 80% and 90%,” says Mr Clares.

Rapid growth of credit over the past decade has boosted the banking sector’s assets, which now exceed 100% of GDP.

The national banking system developed two main strengths. First, the funding base is mostly composed of deposits, which have proved very stable even in the midst of the recent political turmoil. Second, the system has good provisions and capitalisation levels to mitigate challenging scenarios.

However, the rules established by the New Financial Services Law also ended up creating inefficiencies in the financial system. “Return on equity (ROE) went from 25% 10 years ago to 10% now. Taking out the effects of the pandemic, ROE stands at probably around 13%,” adds Mr Perez.

Banks ended up preferring loans to riskier sectors or consumer credit, which are not subject to the interest rate cap, Mr Dunn De Avila notes.

There is much concentration in the banks’ lending portfolio, as the banks are obliged to lend to specific sectors of economic activity. This has put pressure on profitability and asset quality.

At the same time, the banking system is quite isolated, which is positive to a certain extent as lenders are not directly exposed abroad. “Local banks do not issue international bonds and have corresponding banking relationships mostly for trade finance purposes,” explains Mr Martinez.

“In the past 15 or even 20 years Bolivian banks have been limiting their capacity to pay dividends, as they have been forced to give credit and loans to specific economic sectors,” adds Sergio Garibian, senior director at S&P Global Ratings. “The willingness of foreign shareholders to enter Bolivia is lower than the willingness of some foreign shareholders to leave the country.”

Banks also depend on deposits from national pension funds — of which there are only two in the country. This generates potential stability problems for both the banks and the pension funds, according to Mr Martinez.

“Having a certain dependency on the wholesale funds pensions is reasonable. We saw that in many countries, and it makes sense given the depth and breadth of the capital market in Bolivia,” adds Mr Garibian.

Still, the question has always been how does the monetary transmission work if banks’ interest rates are capped? “The answer is quite simple – it doesn’t,” says Mr Morales. 


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