QUITO, Ecuador—Ecuador’s National Assembly began reviewing Thursday a proposal from the government for a new monetary and financial code that some economists have said could hurt the profits of private-sector banks.
Critics of the proposal have said they are particularly concerned about a proposal to create a regulatory body with broad powers to determine how private financial institutions should handle their liquidity.
“It is important to reinforce controls in the financial system, but it is not healthy to have a super-authority to make decisions for private banks,” said Alberto Acosta, an economist with Guayaquil-based private consulting firm Grupo Spurrier.
The proposed bill, which contains 516 articles, was sent to the National Assembly on Wednesday as “economic urgent,” which means that the legislature must vote on it within 30 days.
The assembly will likely approve the bill as President Rafael Correa’s ruling Alianza Pais party holds 100 of the 137 seats.
The bill would create a so-called Board of Monetary and Financial Regulation, which would be made up of government ministers. The board would establish minimum liquidity requirements, as well as the size of loans and the amount of credit that should be sent to each sector. It would also regulate external borrowing limits and establish conditions and limits on the holdings of foreign assets by banks.
Critics have said officials will be able to manage private bank liquidity to meet government objectives, but without assuming the risks of administering the bank. They have said the new code could result in officials manipulating private financial institutions in line with the government’s economic policies.
Mr. Acosta, the economist, said the board will have too much power to handle the decisions of private banks, while shareholders will bear the brunt of decisions by officials.
“This leaves the door open for bad decisions that will have to be accepted by bank administrators, even though they won’t make [the decisions],” Mr. Acosta said.
Banking representatives weren’t available for comments.
The minister for economic policies, Patricio Rivera, said the new regulations are necessary to create jobs and support economic growth. Mr. Rivera said during a presentation Thursday to the National Assembly’s economic committee that there would be severe sanctions for breaking the new code.
During the same meeting, Central Bank President Diego Martinez denied that the state would decide who should be awarded loans.
Banks in Ecuador have faced increasingly tougher regulations since President Correa took office in 2007.
After a 2011 referendum, legal representatives, board members and shareholders of financial institutions were prohibited from doing business outside the financial sector. They were forced to divest or liquidate their stakes in insurance and brokerage companies, pension companies and any activity not directly related with financing activity.
The government has also made changes to mortgages and car loans by limiting a borrower’s liability in case of failure to repay a loan. It also strengthened requirements forcing private banks to keep their assets and investments in Ecuador.
According to economists, the changes have had an effect on the banking sector’s profits. The net profit of all private banks operating in Ecuador totaled $268 million in 2013, a 15% decrease from the previous year, according to official data.
Data from the Private Banking Association of Ecuador shows that banks had return on equity of 10.15% in 2013, compared with 12.79% in 2012, and 18.91% in 2011.
