ABV alerts regarding illiquidity in banks and requests the BCV to review the legal reserve

The Venezuelan Banking Association (ABV) alerted the Central Bank of Venezuela (BCV) about the difficult liquidity situation facing the banking system and requested the revision of the legal reserve rate of 93% and other measures that alleviate the pressure expressed at rates above 1,500% in the overnight interbank loan market or «Overnight».

“Throughout 2020, an increase in operations and in the interest rates negotiated in the interbank market became evident. On average, the rates were 161.53%, registering in the months of April and August, interests that reached the levels of 329.8% and 323.8%, respectively, with daily maximums of 980.6% “, describes the ABV document.

What the bankers’ communication reveals is that the weight of an excessively restrictive liquidity policy places the system in a serious situation of illiquidity, which has now reached a serious level, similar to the marks of April and September last year. as published by the Banca y Negocios media.

What does the Banking Association of Venezuela request?

– The revision of the percentage of legal reserve that remains at 93% of public deposits.

– Urgently approve a system that regularly increases legal reserve deductions, since the most recent, which amounted to 30 trillion bolivars, approved on September 17, has already lost all effect, since it is only equivalent to 7 , 1% of current requirements. According to the union’s calculations, an additional reduction of 88.3 billion bolivars is required “to reach a situation equivalent to September 2020.”

– The revision of the method for calculating the financial costs -very onerous for the system- derived from the deficits of legal reserve, «which currently takes as a reference the variation of the Investment Index (IDI), given that in the periods in which the exchange rate shows volatility, this can make banking institutions incur costs with substantial impacts on their financial statements, affecting in a real way their stability and continuity ”.

It should be remembered that the IDI is a value index that is indexed to the variation of the exchange rate and, therefore, implies an indirect dollarization.

January has become an especially critical period for bank liquidity. In the ABV statement, it is revealed that the costs for reserve requirements rose to maximum of 1,967% and 1,742% on January 5 and 6, respectively.

A “situation that can hardly be managed by banking institutions and that are the product of structural elements of the economy, since the coverage of the legal reserve can be met with a stable growth in the flow of funds, but it is difficult when there is volatility as occurs currently due to the change in seasonality ”.

The social impact of this situation is the contraction of bank credit, an indispensable tool to support an eventual recovery of the economy.

G. Febres

With information from the ABV and Banca y Negocios