Transformation of the Ecuadorian financial system: regulation and response

Author:Luisa Ana Unda, Julie Margret
Position:Department of Accounting, La Trobe University, Melbourne, Australia; Department of Accounting, La Trobe University, Melbourne, Australia
Pages:84-102
SUMMARY

Purpose - The aim of this study is to analyse the transformation of the Ecuadorian financial system using the regulatory dialectic approach (Kane, 1977). This research examines the initial conditions and motivating factors of the reform process, as well as the interplay between government and bankers during the period 2007-2012. Design/methodology/approach... (see full summary)

 
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Transformation of the
Ecuadorian nancial system:
regulation and response
Luisa Ana Unda and Julie Margret
Department of Accounting, La Trobe University, Melbourne, Australia
Abstract
Purpose – The aim of this study is to analyse the transformation of the Ecuadorian nancial system
using the regulatory dialectic approach (Kane, 1977). This research examines the initial conditions and
motivating factors of the reform process, as well as the interplay between government and bankers
during the period 2007-2012.
Design/methodology/approach – Kane’s regulatory dialectic suggests that regulation of nancial
institutions is a series of cyclical interactions between opposing political and economic forces. Three
main stages are identied: thesis (measures and regulatory actions), antithesis (avoidance/lobby
against those reforms) and synthesis (adaptive reregulation resulting from the interaction between
interest groups).
Findings – Since 2007, the government focused on regulating interest rates, developing a liquidity
fund for banking emergencies, increasing taxation and restricting international capital ows. These
government initiatives took place against a background of conicting interests. Private bankers
opposed the majority regarding them as burdensome new rules, rather than enlightened reforms.
Publicly, these reforms as intended by the government were seemingly supported. Finally through the
political process, they were approved. To date, these reforms have strengthened the nancial system,
produced encouraging social policy results and placed the nancial sector to serve the government’s
development strategy.
Originality/value – Using Kane’s notion of regulatory dialectic, we explain the process of nancial
reform in Ecuador as part of a cyclical interaction between opposing forces. Drawing on this framework
enabled insight into the nature of government intervention. Hence, we show how that intervention
affected the growth, development and structure of the banking system.
Keywords Government, Ecuador, Financial reforms, Private banks, Regulatory dialectic
Paper type Research paper
1. Introduction
Since 2007, Ecuador has embarked on a series of nancial reforms and increased
regulation within the nancial industry. Most of the changes were driven by the Correa
government[1] in its endeavour to protect consumers of nancial products; for instance,
placing maximum fees on various nancial transactions. To achieve its aim, the
government focused on regulating interest rates, controlling the Central Bank,
developing a liquidity fund for banking emergencies, increasing taxation of the
nancial sector and restricting international capital ows. In addition to these
reforms, the government formally redened the nancial system to include public
and private banking institutions. Further, they established a solidarity-based sector
that included cooperatives, credit unions and other member organisations, in the
reformed Constitution (CRE, 2008).
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
23,1
84
Journalof Financial Regulation
andCompliance
Vol.23 No. 1, 2015
pp.84-102
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2014-0016
Recently, Weisbrot et al. (2013) explained the purpose and implementation of the
nancial reforms in Ecuador, and highlighted how nancial regulation helped the
government to achieve its intended goals. They argued that the increased regulation
augmented macroeconomic stability, strong economic growth, improved government
revenue, achieved a substantial decline in poverty and unemployment and improved
other economic and social indicators (Weisbrot et al., 2013). The study, however,
analyses the regulatory reforms from the point of view of the government and its
regulators. In doing so, it fails to explain the process under which banks adapted to the
new regulatory framework. This is important because, arguably, there were conicting
interests between the government and private bankers; and these apparently opposing
forces were to shape the development of Ecuador’s nancial reforms.
Drawing on Kane’s (1977) regulatory dialectic approach, this study examines the
transformation of the Ecuadorian nancial system. Kane’s regulatory dialectic suggests
that regulation of nancial institutions is a series of cyclical interactions between
opposing political and economic forces. This approach treats the political process of
creating regulation (government’s view), and economic processes of regulatee avoidance
(private banks’ view) as conicting forces that adapt continually to each other. The
adaptive processes evolve as a series of lagged responses, with regulators and
regulatees seeking to maximise their own objectives, conditional on how they perceive
the opposing party to behave (Kane, 1983). In the regulatory dialectic, three main stages
are identied:
(1) thesis (regulation);
(2) antithesis (regulatory avoidance); and
(3) synthesis (regulatory change).
The recent regulatory reforms in the Ecuadorian banking system provide insights into
the relationships between and interaction of government, regulatory and supervisory
authorities, bankers, nancial analysts and consumers. We examine documented details
of the interplay between these political (government) and economic (private bankers)
entities based on media releases and other publicly available reports. The development
of changes in nancial regulations during the period 2007-2012 is also investigated. This
period covers the major nancial reforms introduced by Correa’s government.
Background
Prior to the election of President Rafael Correa in 2006, Ecuador suffered a severe
nancial crisis. In 1998, two medium-sized banks – Solbanco and Prestamos – collapsed,
triggering contagion that led to deposit runs in the banking system. In response, the
Central Bank provided funds to bail out the troubled banks to avoid further contagion
and a systemic problem. It was evident to many that poor lending practices and weak
corporate governance preempted the demise of the Ecuadorian banks. By 1999, the
banking disaster involved the collapse of several nancial institutions[2] and shattered
public condence in the banking system. Repercussions throughout the country
resulted in economic downturn, hyperination, currency devaluation, unemployment
and high migration of Ecuadorians to foreign countries. Evidently, this nancial crisis
caused hardship for many[3]. The Correa Administration’s nancial and regulatory
reforms sought not only to correct the failures of the past but also to transform the entire
nancial sector to better serve the public interest. A major initiative was to ensure – as
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Ecuadorian
nancial
system

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