The deposit guarantee turns 25, a bad memory, but now it covers 99% of the bank’s customers

Although most Ecuadorians today do not remember the Deposit Guarantee Agency (AGD), for those who had a bank account in 1998, it is impossible to forget what that organization meant, which was a symbol of one of the worst crises. that the country experienced: the collapse of the financial system.

That “will not happen again” because there are now two key elements that make the difference: dollarization and the banking power that now exists, says the Association of Private Banks of Ecuador (Assobanca).

AGD was created 25 years ago when 43% of the current population had not been born and only 28% were of legal age. On December 1, 1998, the Law on Economic Reorganization in the Tax-Financial Area entered into force, which established AGD. “The deposit insurance mechanism already existed around the world since the 1990s, therefore the creation of AGD in Ecuador was crucial because the aforementioned institution took over the payment of 100% of the deposits of bank clients, whose “institutions were in the process of being cleaned up,” indicates the executive president of Asobanco , Marco Rodríguez.

This law was passed in a complex political and economic scenario, and it drags on problems that started years before: the war with Peru (1995-1998), political instability that ended with the dismissal of President Abdalla Bucaram (1997), the economic crisis that worsened the phenomenon of El Niño (1998) and the drop in the price of oil (1998) -a barrel reached $7-.

The then president Jamil Mahuad assures that the World Bank proposed the creation of the AGD, and he asked that organization for advice on banking legislation reforms. “While the bill was being debated, rumors spread that Filanbanco – the largest bank in Ecuador at the time – was going through serious financial problems. This unfortunate circumstance contaminated the legal process. The collapse of a bank of that size, which could create a tsunami in the country’s financial system, turned the legal debate into the center of the wildest conspiracy theories, to the extent that there were those who said that the law was intended to save bankers, when in reality it punished the bankers who did so. deserved and protected depositors.”

This law allowed the Government to act quickly in the conditions of the Filanbanca crisis, the new entity immediately took over the management of the bank, reduced the shareholders’ capital to zero and asked them for additional personal guarantees. This is how Mahuad describes it in his book This is how we dollarize Ecuadorsince the financial crisis was one of the crises that came together when there was a change in the national currency, which was the sucre.

The project states that the deposit guarantee will have limitations. It was finally approved to be unlimited.

The original idea was a legal framework to intervene in insolvent banks without bailing out the owners: legal instruments so that the state could take control, intervene, close and restructure banks in trouble, protect depositors, but once the bank owners lose ownership of the banks, says Augusto de la Torre, who was part of the discussions that Ecuador had with the International Monetary Fund (IMF) and the World Bank on how to deal with the general crisis that the country was experiencing.

The Filanbanco case: a 23-year history marked by political decisions and legal disputes in local and international courts

“Although Congress introduced important changes that weakened the AGD Act, its approval was initially seen as favorable, as a late step toward restructuring the banking system. The application of the law did not enable the stabilization of the financial markets. The authorities could no longer delay the intervention or closure of these banks. Eventually they did… Filanbanco was placed under a special administrator appointed by the AGD in early December 1998, and remained open with the aim of recapitalization and eventual reprivatization. A series of destabilizing closures of small and medium-sized financial intermediaries immediately followed: five banks, two finance companies and a credit union were closed by the AGD between December 1998 and early March 1999. However, these actions were so clumsily implemented that they did not help stop the erosion of trust.” This is in a fragment of the article The great Ecuadorian crisis of the late nineties by Augusto de La Torre and Yira Mascaró published in December 2011.

For Nicolás Brito, who headed the Banco del Progreso’s Client Committee, “AGD was an institution created for the benefit of large debtors; most of its managers used it to accept overvalued payment dates. Also, the managers paid cash or undervalued assets to investors who bought reprogrammed Certificates of Deposit (CDRs) at discounts of up to 50%. While the original depositors were waiting for us. Many of AGD’s assets were utilized, but their production was not coming, and when that became apparent, they let those assets be destroyed. One of of our struggles was to make a difference between CDR owners and depositors, we achieved that and we who protested in the streets were paid very quickly.”

El Progreso was closed on March 22, 1999. Filanbanco merged with La Previsora ​​went bankrupt in July 2001. 16 banks failed in a row.

At that time there were 40 private banks in Ecuador. Today there are 24 “that overcame the crisis with prudent management according to the best international standards. The strength they had has allowed the banks to successfully face the economic cycles of the last 23 years,” says Rodríguez.

There are still unresolved issues after 20 years since the creation of AGD

AGD was closed in December 2009; He transferred the assets of the closed bank that were still owned by him to other state entities. The deposit guarantee is still in place and covers 99% of customers in the event that the entities experience difficulties, that is, 14.9 million people who have up to $32,000 deposited in savings, checking and term accounts, and 1% are 151,000 customers with deposits over 32,000 dollars.

This is through the Deposit Insurance Corporation (Cosede) – created by the Act on the Creation of the Financial Safety Net, 31 December 2008 – which is fed by the exclusive contribution of private banks. This insurance reaches a net value of 2.629 million dollars as of September 2023, which covers 99% of clients, Asobanc details.

Can this kind of crisis happen again?

The executive president of Asobance, Marco Rodríguez, points out two key elements that distinguish the current scenario from 1999: dollarization and banking, which “has been strengthened and transformed in recent years and has become a pillar of support for dollarization.”

He comments that after 1999, banks are still managed in a technical and professional manner, applying best practices and international standards, and that this solidity has enabled them to successfully deal with economic cycles in these 23 years. For example, “a pandemic-induced crisis would have caused an unprecedented economic collapse, but banking and dollarization conveniently mitigated the 2020 crisis, not exacerbated it.”

Despite the economic situation and facing a possible deterioration of the portfolio, the bank maintained adequate liquidity and coverage indicators. The increase in bookings from October 2023 compared to the same month in 2022 was $377 million, which is 15% more than the previous year. As of October 2023, the coverage is 201%, which means that provisions are 2 times higher than non-performing portfolio levels, “and demonstrates the responsible management that banking practices in this environment.”

So could the same thing happen as in 1999? Not. If the monetary scheme and banking power that exists now is maintained. Therefore, the more we promote technical and prudent management of dollarization and banking, away from political agendas, the further we will remain from 1999, Rodríguez maintains.