The banking crisis was a brutal wake up call to Dominican regulators, the central bank and commercial banks. As is often the case with such crises, it also paved the way for new opportunities, such as weeding out poorly managed banks, strengthening regulation and enforcement and creating new openings for non-Dominican financial institutions to enter a potentially lucrative market.
The alarm bells started ringing in May 2003, when the central bank announced on national television that Banco Internacional (Baninter), at the time the country’s third largest bank and second largest private bank, had shortfalls of $2.2bn. The central bank governor revealed that for 14 years Baninter had been keeping a double set of books. The revelation caused panic among depositors and investors.
Bailed out
Earlier that year, Banco Del Progreso, one of the country’s other major players, had announced it intended to acquire Baninter but had backed out of the merger by April. The regime of then president Hipólito Mejía had originally condemned allegations of fraud at Baninter but soon found itself bailing out the bank for the full $2.2bn in a bid to stem or limit the volume of capital taking flight.
On May 15, 2003, a half-a-dozen government officials and bank staff were arrested in connection with the Baninter collapse. The bank’s president, Ramon Báez Figueroa, along with vice-presidents Marcos Báez Cocco and Vivian Lubrano de Castillo, would be charged with asset laundering, falsification of public records, presenting bad cheques and abuse of trust.
Mr Figueroa was a flamboyant and high profile figure with close links throughout the business and political establishment, and a penchant for high spending. “If it moved, Mr Figueroa would sponsor it,” one banker claimed.
Opera fans might have appreciated the tycoon inviting Luciano Pavarotti to the Dominican Republic; others were worried by the visible extravagance of a man responsible for so many of the nation’s deposit accounts.
In addition to banking interests, Mr Figueroa owned more than 70 media outlets, including the nation’s daily newspaper, Listín Diario, and several television stations.
However, the allegations did not stop at Baninter. Fraud allegations were levelled at Banco Mercantil and Banco Nacional de Credito (Bancredito). Executives faced similar charges to those faced by Mr Figueroa and again the government stepped in to bail out depositors.
Regulatory failure
It was not just the banks that faced the uncomfortable glare of public and media scrutiny. The main regulatory authorities, the central bank and the Superintendency of Banks, had failed to prevent the fraud-induced collapse of three of the country’s largest banks, and with them, the economy, despite previous warnings that the banks were in trouble. As the IMF attempted to help resolve the crisis, assurance of a new regulatory framework became a prerequisite for its assistance.
One of the IMF’s many recommendations was that the presence of a major foreign player in the Dominican Republic could have a beneficial effect on the industry. Compared with the English-speaking Caribbean countries, where non-domestic banks either dominate or play a major part in the banking market, it is the local banks that run the show in the republic.
“There are some straightforward reasons for that,” says Nicole Reich de Polignac, head of Scotiabank in the Dominican Republic. First, she says, is the language issue: a Spanish-speaking country is not first on the list for anglophone banks. Second, the big Spanish players that might present obvious candidates are less interested in small markets such as the Dominican Republic.
The crisis did create handholds in which foreign players were able to establish or consolidate their standing. As another condition of IMF assistance, Baninter was dissolved and Scotiabank acquired some of the assets that were not liquidated. Banco Mercantil was bought by the Trinidadian Republic Bank, which completed rebranding last June, and marks the bank’s first foray into the Spanish-speaking world. Citibank, which has had a presence in the Dominican Republic since 1962, also took the opportunity to consolidate its position.
Local strengths
Ms Reich de Polignac joined Scotiabank from Citibank. She says that Scotia has a different focus from her former employer: it provides a service to a wider cross-section of potential customers. It is a competitive market: regardless of what the IMF says about local banks, they offer top of the range retail services, internet and telephone banking and competitively priced loans, she says. Scotiabank may pick up some kudos by being international but Ms Reich de Polignac is aware that local players are also up to speed on international standards.
Following the collapse of three of the country’s largest banks, the market is dominated by one publicly-owned commercial bank – Banco Reservas – and private banks, including Banco BHD, Banco Progreso and Banco Popular. There is also a group of smaller private banks and development finance institutions.
Post-crisis surge
The outlook for the Dominican Republic is good – markedly so in contrast to 2003, when depositors were uncertain which banks were next in line to fall, and queued for their cash accordingly. Most are enjoying a surge in post-crisis business as Dominicans are pushed to embrace new products, such as home loans, consumer loans and savings products as the economy rebounds. But there are constraints on growth.
Banco León, a recently launched mid-ranking player in this new market, was created after the industrial group León Jiménes bought out the stricken Bancredito in June 2004, replacing its management and restructuring the whole institution. Bank president Carlos León told The Banker that in two key areas, market size and regulation, he and his competitors face considerable challenges: “The market is not big enough to allow banks to focus on one sector or product. All banks have to do a bit of everything. The main focus is on consumer banking – here, we anticipate strong growth.”
However, this growth comes at a price. Mr León suggests that, in their haste to be seen to be doing the right thing and to keep international institutions sweet, the banking authorities have imposed a regulatory burden that is too expensive to comply with. “For example, the regulation on loan-loss requirements means that for an entity with an A-credit rating, we must reserve 1% of the size of the loan,” he says. “For a B-rated entity the figure is 3%. For C it starts at a minimum of 20%. For a D-rated entity it is 80%. If the loan is guaranteed it can be mitigated but it is still extremely costly.”
New consumer protection regulations hike up the price of compliance, he says. Banks must now keep records of all transactions for a minimum of four years, and banking regulators must approve all contracts between financial institutions and customers.
If any one factor tips the market towards fewer, larger players, Mr León says it will be the cost of compliance. “Some of the smaller banks just will not be able to afford to do business. Even among some of the principle banks there could be a degree of consolidation.”
Small but focused
There is room for the boutiques though. José Rodríguez Copello, president of Banco López de Haro, told The Banker that since its establishment in 1968, its small size and commercial focus enabled the bank to be competitive in the kinds of interest rates it offered. Originally a finance company specialising in stores and warehouse finance, it has since become a more general commercial lender.
The key to its success is careful husbandry of a quality portfolio, he suggests. “We do not do a great deal of commercial lending, although we might start selling more mortgages. We are a niche bank with middle and upper-class customers. Our delinquency rates are extremely low, we are not in the game of opening hundreds of branches and we do not spend a penny on advertising,” says Mr Rodríguez Copello.
Like its competitors, Banco López de Haro was not immune to the effects of the crisis. Mr Rodríguez Copello says: “Our loan portfolio deteriorated and we took a hit on profitability.” But, by keeping a high level of cash on board and waiting for the hurricane to pass, the bank was able to bounce back in step with the economy. “We are careful lenders,” he says. “We deal with the country’s largest 200-300 companies and we only lend in pesos [to reduce currency risk]. After the crisis, there was little appetite for debt but now we are seeing a definite change. Investment is picking up, people are borrowing again and our loan portfolio is expanding.”
He says he is supportive of the new regulations: “It was important for the authorities to set new lending parameters and reserve requirements. It is good for everyone.”
Averting disaster
Mr Rodríguez Copello is equally supportive of some of the other, more visible measures taken after the crisis: a number of banks had large cross-holdings, with funds from one part of a group often being used to patch holes elsewhere. “Banks should be banks. It was absolutely right that they were forced to divest non-financial services operations,” he says.
All the country’s banks want to concentrate on growing their businesses but there are still visible reminders of the crisis. Recently, a new scandal broke when allegations surfaced that the former president of Banco del Progreso, Pedro Castillo, had channelled nearly $300m of bank funds through US real estate funds. Mr Castillo is being sued by directors, who have had to give the bank a $400m cash injection to keep it afloat.
Standing trial
The prosecutions of several executives remain outstanding from the original crisis, despite alleged pressure on prosecutors to drop or reduce charges. As and when it happens, a media circus is bound to be in attendance, and it is probable that several high-profile figures will be mentioned honourably or otherwise in courtroom dispatches. Mr Figueroa’s defence team has produced a list of more than 110 witnesses, whom it intends to call to testify in his trial for embezzlement, including former president Hipólito Mejía, the current central bank governor, leading figures from the media and executives from many domestic and foreign banks.
Although no implication of complicity is attached to being included in Mr Figueroa’s witness list, drama in the high court and a drawn out trial is assured. Yet what the banking industry wants is for the fuss to die down so that it can move on.
