Venezuela: Reserve Requirements, GFC

The BCV did not state any purpose for cutting the marginal reserve requirements on December 30, 2008. Two years later, after the BCV again cut the requirement, the Venezuelan press reported that the BCV’s motivation was to increase bank liquidity and combat the economic recession (Business News Americas 2010a; Business News Americas 2010b).

A February 2009 news article explained the December 2008 cut by noting that the Venezuelan banking sector faced withdrawals by the government due to election spending and Christmas bonuses. In all, deposits in public-sector banks fell 10.2% between September and November 2008, and small banks registered withdrawals as high as 55%. Interbank lending more than doubled in fall 2008, forcing the interbank rate up from 9% to 33% between October 2008 and January 2009 (Economist Intelligence Unit 2009).

The country faced an economic slide in 2009 and 2010, with real GDP contracting by 1.5%, the only Latin American economy to shrink in 2010. Flagging oil production and associated revenue strained the finances of PDVSA and the government. The government established a bond-trading system administered by the BCV in which participants could exchange bonds issued by PDVSA or the government at a rate of 1 US dollar to 5.3 bolívars. Issuance of government and PDVSA bonds thus became critical to financial markets, since the only alternative source for dollars was the black market, which sold dollars at a rate of 9 bolívars (The Economist 2010).

Following the first cut of marginal reserve requirements in December 2008, the BCV also provided liquidity and capital to banks in need by accepting government bonds and notes from banks in exchange for cash, beginning in February 2009 (Dow Jones 2007b; Economist Intelligence Unit 2009). A month later, the BCV cut the marginal reserve requirement to 25%.

In May 2008, the government forced banks to sell USD 5 billion of foreign-issued, USD-linked notes and buy bolívars. Venezuelan banks had purchased these notes to skirt a regulation limiting banks’ holdings of foreign currency assets to 30% of assets; the forced sale of these notes saddled banks with large losses and raised concerns about their solvency (Reuters 2008; Romero 2008). In June 2008, the government eliminated a tax on bank withdrawals (Leonard 2012). In July 2008, global oil prices fell dramatically, hurting Venezuela’s dominant industry, already weak from lingering effects of labor strikes that began in 2003 (Millard et al. 2019). Later that month, following a year of efforts to nationalize more firms in the country, the Chávez administration announced the government would take over Banco de Venezuela, the country’s third-largest bank, which was owned by Santander, a large Spanish bank (Romero 2008).

Resolutions published in the official gazette cited articles 21(2), 51, 52, 53, and 55 of the Law of the BCV (Central Bank Law 2002). Collectively, these articles allowed the BCV Board of Directors to set reserve requirements and compelled banks to maintain the set amount. Article 52 protected reserves from use by declaring them unseizable (inembargables). The resolutions also drew from a law that regulated banks.^FNThe law was called el Decreto con Rango, Valor y Fuerza de Ley de Reforma Pacial de la Ley General de Bancos y Otras Instituciones Financieras (Gaceta Oficial 2007).

The BCV administered changes to reserve requirements. The Law of the BCV permitted the BCV to accept sight (demand) and term deposits, noting that demand deposits and reserve requirements formed the basis of Venezuela’s clearinghouse system (Central Bank Law 2002). According to the Law of the BCV, the central bank could remunerate reserves for monetary policy purposes under terms and conditions established by the BCV’s Board of Directors. The BCV established the calculation of the reserve requirement ratio, as well as the interest rate paid by banks and other financial institutions.

The Board published a resolution in the official gazette whenever it changed the reserve requirements, which replaced the previous policy at a specified later date.

The Board of Directors consisted of the president of the BCV and six directors. Five of these directors were appointed for seven-year terms, while the sixth was a current economic minister other than the minister of finance (Central Bank Law 2002, sec. 15). The president of Venezuela appointed the BCV president and four directors, while the National Assembly appointed the remaining two (Central Bank Law 2002, sec. 16).

News articles demonstrate that officials held conferences when announcing their decisions, though research found no transcripts of those events (Reuters News 2010).

Only bolívars held at the BCV satisfied the reserve requirement (Gaceta Oficial 2007, sec. 6).

The BCV did not differentiate deposit obligations by the type of account. The minimum requirement was 17% of the Net Obligations Reserve Base, a requirement which remained steady between 2008 and 2010 (BCV 1998). The Net Obligations Reserve Base included all obligations as of July 14, 2006, except those held in trust or due to (Gaceta Oficial 2007, sec. 1):

• the BCV (Gaceta Oficial 2007, sec. 16)
• the Venezuelan government
• export finance companies
• public housing funds (such as el Fondo de Ahorro Obligatorio para la Vivienda; Gaceta Oficial 2007, sec. 4). 

A resolution set forth in December 2021 indicated that the BCV used average end-of-day balances of banks in its accounts over a business week to calculate reserve holdings (Planchart 2022). However, it is unclear whether this averaging practice existed before the December 2021 Resolution and during or before the GFC.

The legal act creating and amending reserve requirements specified that all the following were required to hold reserves:

• Commercial banks
• Universal banks
• Investment banks
• Mortgage banks
• Financial leasing companies
• Savings and loan institutions
• Money-market funds (Gaceta Oficial 2007, secs. 2, 16).

Starting in July 2009, the BCV assigned a 12% RRR to development banks, including those engaged in microfinance activity, in which 70% of assets were microfinance loans (Gaceta Oficial 2009a, sec. 16).

Between fall 2009 and spring 2010, the government closed at least 12 banks (Cancel and Pons 2010). Figure 4 in the Appendix shows how these closures coincided with closures in the investment-bank and money-market-fund subsectors. These closures were putatively related to insufficient reserves or capital (nine banks had capital adequacy ratios less than 8% as of October 2008). As shown in Figure 2, banks did face shortages of reserves in late 2009 and early 2010. But international media reports also point to mismanagement by bankers: In addition to undercapitalization, “others were apparently lending top executives large sums of money, and at least one financier couldn’t prove where he got the money to buy his banks in the first place” (Smith 2009).

In July 2006, the BCV added the marginal reserve requirement for banks, which applied to deposits above 90 billion bolívars, in an effort to aid smaller banks with total deposits (Dow Jones 2007a). Once the crisis started in 2008, changes came, first following bank failures and liquidity shortages, and then around problems in the real economy and government bond issues. The BCV tried to provide liquidity directly to ailing banks before it lowered reserve requirements (Economist Intelligence Unit 2009). The second round of changes was explicitly targeted at a USD 3 billion PDVSA bond issue (Reuters News 2010). PDVSA bonds featured prominently in the Venezuelan foreign exchange system, and the oil producer needed cash acutely in 2010 as recessions abroad reduced oil revenue (The Economist 2010).

On December 30, 2008, the central bank cut the marginal reserve requirement from 30% to 27%, effective January 5, 2009 (Leonard 2012).

Between 2008 and 2010, the BCV cut the RRR from 30% to 17% (see Figure 3).

The Law of the BCV (Central Bank Law 2002, sec. 54) granted the Board of Directors the authority to remunerate reserves to further its monetary policy. Documents surveyed do not indicate a rate that the BCV paid, and the resolutions setting reserve requirements do not mention remuneration.

No documents suggest other conditions of lowered reserve requirements.

Changes to reserve requirements were not met with any countervailing policies. The BCV’s other policies were also aimed at increasing banking system liquidity. The BCV lowered reserve requirements to provide liquidity to the banking sector ahead of the PDVSA bond issuance, which would remove liquidity from the system (Business News Americas 2010b).

The BCV gave no indication that reserve requirement changes would be temporary. On the contrary, in April 2009, a month after the BCV lowered the marginal requirement to 25%, the Planning and Development minister said that the cash reserve requirement “was already quite high, not just the reserve requirement but also a second complimentary [sic] level” (BBC News 2009). Reserve requirements remained at 17% until October 2013, when the minimum requirement was raised to 19% and the marginal requirement raised to 22% (BCV 1998).