Fitch: Venezuelan Banks Under Review After Regulatory Mandate

Fitch Ratings is conducting a review process of the possible financial impact of some recent regulatory measures mandated by the Finance Ministry and The Banking Superintendence related to the investment portfolio of Venezuelan banks. On May 19 2008, the Finance Ministry in Venezuela required all commercial and universal banks (among other financial intermediaries) to cease the negotiation of local currency securities issued by foreign intermediaries (banks, brokerage house, and any financial or non financial institution), including structured notes issued in local currency backed by assets denominated in foreign currency. Also, it was required that all local financial intermediaries to unwind their current holdings of such securities in no more than 90 days since the release of such mandate (to end on Aug. 19, 2008). This legal resolution was followed by a notification of the local Banking Superintendence required all financial intermediaries to provide then all the relevant information about those positions and the effects of the unwinding process. It is currently difficult to define the final effect of this measure on the system and on individual banks. Lack of clarity in the definition of potentially affected securities, as well as limits on transparency of reported financial statements, make accurate analysis difficult. In addition, the market risks inherent in a forced sale could result in potentially significant losses for large holders of such securities. The potential for forced sales of affected securities raise the prospect of significant pricing pressures in such a sale; the volatility of Venezuela's effective exchange rates also may put pressure on individual institutions, depending on the effective exchange rate at which individual securities were originally booked. Also, individual clauses on each kind of security could result in some rigidity to unwind the current positions, while early cancellation charges can not be ruled out. Venezuelan banks show significant dispersion in terms of the size of such exposures in their balance sheets, being that there is still some debate about the kind of securities affected by this regulatory requirement. Last, but not least important, lower profits and tight capital levels (also disperse along different financial intermediaries) hinders the financial flexibility for some institutions in order to cope with significant and unexpected realized losses in case those positions must be sold below its book value.