Nationalization of Banco de Venezuela will create poorer standards, greater inefficiency and declining profitability

Venezuelan President Hugo Chavez [recently] announced plans to nationalize Banco de Venezuela, the South American country's third-largest bank in terms of deposits and a unit of Spain's Banco Santander, in order to increase state control of the financial services industry. Do you think Santander and the Chavez government will come to an agreement soon? What does the government's move mean for Venezuela's banking sector? Franklin Santarelli:, Senior Director for Latin American Financial Institutions at Fitch Ratings: The final outcome of these negotiations is, like all negotiations, uncertain in nature and depends on the agreement of a reasonable price. Initial signs indicate that an agreement could be reached between the parties. President Chavez has announced on several occasions in the past his intention to acquire an efficient and large bank in order to provide services for his social agenda. The incorporation of state-owned banks so far has not yielded the desired results, with private banks being relied upon to deliver most of the services he has requested. If the government finally acquires Banco de Venezuela, its main challenge would be to integrate an efficient, previously privately owned bank into the current network of publicly owned entities without losing its efficiency while leveraging its expanded network. For the rest of the banking system, it would be a challenge to compete with a large government-owned bank. The nationwide outreach of Banco de Venezuela could help the government to provide several services directly to the population, without leveraging the private-sector banks. If the government manages to merge most of its financial entities into one large bank, this would result in by far the largest bank in the country with a significant influence over the market, and even more importantly, it would have the government as its largest individual depositor.