When we talk about opening up the financial system to international competition – a natural addition to a dollarized economy – many say there are no restrictions on foreign banks operating in the country. But this ignores the reality that many prohibitions on the free flow of capital, goods and services today occur in a more subtle way than an outright and outright ban. Although there is no ban on the entry of foreign banks, we have a regulatory and tax framework that drives away capital.

Some argue that foreign banks do not come to Ecuador because we are a small market. But several major financial centers, such as Panama or Singapore, are characterized by nations with small populations: both have between a third (Singapore) and a quarter (Panama) of Ecuador’s population. International financial centers, in order not to depend on national savings, try to capture foreign savings. For example, Panama’s deposit portfolio is US$100,926 million or the equivalent of 158.6% of GDP, and its loan portfolio is US$85,251 million or 134% of GDP. The comparative figures for Ecuador are as follows: a deposit portfolio of USD 44,490 million (41% of GDP) and a credit portfolio of USD 41,374 million (38.9% of GDP). These indicators show that the internationalization of the financial system increases the supply of loans, which puts pressure on interest rates.

What are the common characteristics of star financial centers? They have free movement of capital, lenient banking regulation and a territorial tax regime with low taxes. In the case of Panama, although it does not have a central bank that plays the role of lender of last resort, when there is a lack of liquidity in the economy, the free movement of capital allows private financial institutions (domestic or foreign) based in Panama to connect to a large ocean of global liquidity.

(…) we have a regulatory and tax framework that drives capital.

During the administration of Lenín Moreno, the Ecuadorian Institute of Political Economy presented a bill that considered changing the institutional design of the bank supervisory and regulatory body and the Central Bank of Ecuador (BCE). The reform includes the removal of domestic liquidity requirements, various resolutions concentrating bank reserves above the legal reserve at the ECB and interest rate controls.

This project considers banking licenses based on the Panamanian regime: general, international and representative. In addition, it levels the playing field for all financial institutions, eliminating discrimination against those coming from jurisdictions that the state considers tax havens. Finally, it proposes the complete abolition of foreign exchange output tax (ISD), the transition to a territorial tax system and the reduction of tax pressure.

Becoming a star financial center will take time and will probably require other reforms, such as that of the labor contract regime. But this would be a good first step in the right direction and seems politically viable. (OR)