Venezuelan Government Takes over Eighth Largest Bank

Venezuela’s Superintendent of Banks (Sudeban) announced on Monday that it will temporarily close and investigate the privately owned bank Banco Federal for failing to comply with minimum liquid asset provisions and productive sector investment quotas established in the banking law.  


Mérida, June 16th 2010 ( – Venezuela’s Superintendent of Banks (Sudeban) announced on Monday that it will temporarily close and investigate the privately owned bank Banco Federal for failing to comply with minimum liquid asset provisions and productive sector investment quotas established in the banking law.

“Banco Federal’s operations are suspended and its offices are closed until further notice,” said Sudeban director Edgar Hernandez. An investigative commission will have 60 days to present a report on the bank, and determine whether it will be liquidated or rehabilitated.

According to Sudeban, during the second half of 2009 and the first quarter of 2010, Banco Federal failed to comply with the minimum amount of capital that is to be made available for the national productive sector and the minimum balance of liquid assets stipulated by the General Law on Banking and Financial Institutions.

With total deposits worth $3.5 billion bolivars, the bank had allowed its liquid assets to drop to 920 million bolivars as of May 21st of this year, Sudeban charged.

The bank, which is Venezuela’s eighth largest, is also suspected of having invested heavily in the illegal dollar market, which the government identifies as a factor behind the country’s high inflation rate.

Both the National Banking Council and the Banking Association of Venezuela publicly condoned the government’s measures.

“We feel relaxed and we are willing to continue working with the national executive,” said National Banking Council President Victor Vargas on Monday. “The authorities were sufficiently clear and they explained the causes for which they arrived at the decision to intervene in Banco Federal… we believe the executive has taken an opportune measure that had to be taken,” he said.

The president of the Banking Association of Venezuela, Juan Carlos Escotet, urged investors not to worry and said the national banking system is solid and “managed by responsible people.”

“The authorities made efforts to avoid having to intervene, they gave [Banco Federal] several opportunities for rehabilitation,” said Escotet. “We shouldn’t confuse this particular event with the health of the rest of the system,” he added.

The Bank Deposit Protection and Guarantee Fund (Fogade) announced that in the case of the bank’s liquidation, 270,000 of Banco Federal’s account holders – 96% of all the bank’s depositors – will be insured because their deposits fall within the 30,000 bolivar deposit insurance cap.

Fogade has a deposit insurance reserve of 7.1 billion bolivars, according to Fogade President David Alastre. This is enough to insure most of the deposits in Banco Federal as well as the banks that were taken over in late 2009 and early 2010, he said.

“What we want is to transmit tranquility to savings to the account holding public. We have sufficient liquidity,” said Alastre on Tuesday.

To prevent the flight of bankers who are potentially implicated in the investigations, the Attorney General’s Office issued travel prohibitions on Tuesday for the president of Banco Federal, Nelson Mezerhane, as well as 20 other former directors of the banking group Grupo Federal, of which Banco Federal is a member.

However, Mezerhane pre-empted the travel prohibition by leaving the country soon after the government announced the take over of the bank, according to the head of the Foreign, Migration, and Identification Service (SAIME).

“According to the investigations we have carried out, unfortunately, this person, before the prohibition against leaving the country was established, was already outside the country,” said Rivas.

Mezerhane had not been charged with any crimes. He is, however, a shareholder in the opposition-aligned television news station Globovision, and a political ally of Globovision President Guillermo Zuloaga, who fled the country on Tuesday after the government brought charges against him for hoarding vehicles.

Opposition politicians and journalists have used Mezerhane’s links to Zuloaga as the basis for accusations that the government’s intervention in Banco Federal constitutes an attack aimed at weakening Globovision and limiting free expression.

State owned media responded to the accusations by interviewing the former finance minister of Venezuela, Rodrigo Cabezas, and the economist and advisor to the Central Bank and the United Socialist Party of Venezuela (PSUV), Jesus Farías. Both men said the intervention was part of the government’s broader effort to construct “21st Century Socialism” democratically and in accordance with the rule of law.

Cabezas said that “the path to the construction of socialism” includes “the fight against monopolistic private property, which produces distortions in the allocation of food and of prices.” The government does not seek to outlaw all private property, only to create the conditions in which “social property, the property that emphasizes attending to necessities, can and should be hegemonic,” he said.

Faría focused on the goal of eradicating Venezuela’s powerful elite. “This is a group of economic tycoons with a lot of money and a media outlet that they use to repeatedly bombard a democratic system, and they participated openly in a coup d’état,” he said, referring to Globovision and the two-day coup against President Hugo Chavez in April 2002.

“This government has declared war on speculation, on large estate owners, and against anyone who attempts to harm the economic and political stability of the country. It is a just war,” said Faría.

As the government’s efforts to lower inflation and promote domestic production have intensified in recent years, so have its efforts to combat fraud and financial speculation in the banking sector, of which it now controls an estimated 25%.

The government nationalized the country’s third largest bank, Bank of Venezuela, in 2008. It took custody of the Industrial Bank of Venezuela, of which it was already the majority stakeholder, in March 2009. In the final two months of 2009, the government intervened in eight banks, liquidating four and merging the other four into the new, state-owned Bicentenary Bank. The interventions continued in early 2010, with the seizure of three banks and sanctioning of ten others with fines in January and February.

Also, over the past month, the Central Bank took control of foreign currency bond brokerage and imposed a new regulatory structure.