Ecuador: National Bank Holiday, 1999

In early 1999, an ongoing liquidity crunch and capital flight made it difficult for Ecuador’s institutions to access funding on the interbank market. By February 1999, liquid banks had stopped lending to weaker banks, thus excess liquidity from the former was redirected to one-day central bank securities with interest rates of more than 110%. The central bank was paying high interest rates on its securities in an attempt to maintain the value of the sucre and sterilize the extraordinary monetary expansion that its liquidity support to banks had created (Jácome H. 2004, 18–19; Republic of Ecuador 2000c, 54, 57).

Although the government had established the AGD in 1998 to guarantee deposits and close failing banks, its deposit guarantee lacked credibility because of the depth of the banking sector’s problems and the government’s own weak fiscal situation (Decker 2022; Jácome H. 2004, 19–20). In early 1999, five small banks closed, and the liquidity crisis became acute at Banco del Progreso, one of the largest banks in the country measured by deposits, despite the substantial liquidity assistance the bank had already received from the CBE (IMF n.d., 26; Jácome H. 2004, 19; Republic of Ecuador 2000c, 57).

On March 8, 1999, one hour before banks were supposed to open, Bank Superintendent Jorge Egas declared a bank holiday to “preserve the stability of bank reserves, limit the withdrawals that could [affect] the domestic financial system, and avoid pressure on the currency and the continued rise in prices”(AP 1999). The holiday during which banks were entirely closed began on March 8, and banks reopened on March 15, 1999 (BBC 1999a, 3; IMF 2000a, 10; Republic of Ecuador 2000c, 58). During this time, rumors swirled that the government was also considering a deposit freeze (see Key Design Decision No. 6, Communication) (Catan and Alvaro 1999).

On March 11, 1999, the president and the finance minister announced that the bank holiday would end on the upcoming Monday, March 15, but that it would be replaced with partial withdrawal freezes. All deposits were frozen for one year, except depositors could withdraw up to 50% from all checking accounts and sucre-denominated savings accounts (see Key Design Decision No. 7, Details of Suspension, Gates, or Fees) (Republic of Ecuador 1999, no. 685). In a speech, President Mahuad characterized the partial freeze as necessary to protect the value of the deposits, the currency, and the economy for all: “[The government has] the duty to put order in the withdrawal of the bank accounts. We have to protect our international monetary reserve. That reserve belongs to all Ecuadorians” (see Key Design Decision No. 6, Communication) (BBC 1999a).

On March 12, 1999, the BCE president and board of governors resigned to protest the partial deposit freeze (Alvaro and Tedesco 1999; Republic of Ecuador 2000c, 57). The board of governors had instead asked the president and finance minister to close a number of nonviable banks (see Key Design Decision No. 4, Administration) (Republic of Ecuador 2000c, 57). Scholars characterize the president’s and finance minister’s decision on the holiday and partial freeze as an override of the BCE (Beckerman and Solimano 2002, 61).

According to the IMF, the one-week bank holiday was also partially motivated by authorities’ desire to allow time to find a solution for Banco del Progreso before its failure triggered a run (IMF 2000b, 26; Jácome H. 2004, 19). Jácome similarly says that the government imposed the partial deposit freeze to “[buy] time to clean up the banking system” (Jácome H. 2004, 22).

The partial deposit freeze after the bank holiday was lifted came with a one-year moratorium on repayment of loans by bank debtors (BBC 1999a, 3; Republic of Ecuador 1999, no. 685, art. 3(f), 7). During the deposit freeze, the government also designed a multifaceted bank restructuring strategy with help from the IMF (see Key Design Decision No. 9, Verification of Solvency) (IMF 2000b, 26).

Over the longer crisis period, between late 1998 and early 2000, the government also provided liquidity support to the banking system, closed banks that held more than two-thirds of all deposits, issued a blanket guarantee of deposits and trade financing, revised the tax system, and dollarized the Ecuador sucre (BCE 2000, 41; IMF 2000b, 28; Republic of Ecuador 2000a; Republic of Ecuador 2000c, 2, 56).

Liquidity Support and Recapitalization

Throughout 1998, the BCE granted short-term liquidity to financial institutions through repo operations (Republic of Ecuador 2000c, 52). The BCE was able to provide US dollar liquidity through currency auctions. The BCE conducted at least two currency auctions on March 15, 1999, selling USD 32.5 million at a mid-rate of ECS 9,837 per dollar during the first auction (Dow Jones 1999e, 2).

Throughout the crisis, the BCE also provided liquidity support through bonds, and banks used this support to recapitalize and pay out guaranteed deposits (Beckerman 2006, 9; Republic of Ecuador 2000c, 60). The BCE sterilized 25% of its liquidity support by selling interest-bearing obligations to a small number of banks that had extra resources. The Treasury issued USD 1.4 billion in bonds for bank recapitalization (Beckerman 2006, 9; Beckerman and Solimano 2002, 57; Republic of Ecuador 2000c, 88).

Deposit Insurance Reform and Blanket Guarantee

Before December 1998, the BCE administered a limited deposit insurance scheme for up to approximately USD 8,000 for domestic and foreign currency deposits, depending on the real exchange rate, since coverage was tied to an inflation-indexed unit. However, the existing limited deposit insurance scheme could not sufficiently cover payouts when Banco de Préstamos, the sixth-largest bank in terms of assets, was closed (Jácome H. 2004, 17; Republic of Ecuador 2000c, 54). There followed a flight to quality in the autumn of 1998, as sucre deposits shifted to US dollar deposits (Jácome H. 2004, 17).

On December 1, 1998, the Ecuadorian government created the AGD to restore stability in bank liabilities (El Telégrafo 2014; Jácome H. 2004, 19; Republic of Ecuador 2000c, 15). At the same time, the government announced that it would guarantee all onshore and offshore deposits in addition to external credit lines of the banking system (Republic of Ecuador 2000a). The guarantee applied to most deposits with certain restrictions (Republic of Ecuador 2000c, 55–56).

The guarantee did not cover deposits that were subject to any right of set-off (Republic of Ecuador 2000c, 55). Language in the Law for Economic Transformation explicitly said that the guarantee would not cover deposits in offshore entities (National Congress of Ecuador 1998b, art. 21). However, a bond prospectus dated August 23, 2000, stated that the AGD initially intended to guarantee offshore deposits. The guarantee was unlimited for trade financings of all lenders from December 1998 to March 2000 (Republic of Ecuador 2000c, 54–56).

As of July 31, 2000, the AGD had USD 850 million in outstanding liabilities from guaranteed deposits, and the government had not yet determined how it would finance these obligations. In August, the government disclosed its intention to reduce coverage of deposits in phases, starting in March 2001, at which point the government would be in an extended schedule of unfreezing deposits (see Key Design Decision No. 11, Exit Strategy) (Republic of Ecuador 2000a; 2000c, 56, 93). For details of Ecuador’s blanket guarantee, see (Decker 2022).

Debt Moratorium

On March 12, 1999, President Mahuad announced a debt moratorium in a public address; he said that the moratorium would give debtors of the banking system a “breath of fresh air”(BBC 1999a, 3). To this end, by Executive Decree 685, Mahuad extended by 365 days the maturities of obligations denominated in sucres, foreign currencies, and in unit of constant value (UVC)^FNCreated by the Securities Market Law, UVC was a monetary unit that was periodically readjusted for inflation such that it would not lose value as a currency over time(Giordano 1994, 165). accounts (Republic of Ecuador 1999, no. 685, art. 3(f)).

Per Executive Decree 685, obligations of financial institutions affected by the moratorium accrued annual interest rates of 40% for sucres and 9% for US dollars, readjustable every 90 days in proportion to the variation that occurred in the referential passive rate published by the BCE in sucres, dollars, and UVC—except for liabilities that originated in current and savings account deposits (Republic of Ecuador 1999, no. 685, art. 6). Liabilities that originated in current and savings account deposits accrued an annual interest rates of 50% of other sucre-denominated liabilities and 40% of other US dollar-denominated liabilities (Republic of Ecuador 1999, no. 685, art. 6). UVC accounts would maintain their readjustment mechanism and accrue interest rates of 7% for liability operations and 11.4% for asset operations (Republic of Ecuador 1999, no. 685, art. 5).

Sucre-denominated assets of financial institutions that were affected by the moratorium maintained an annual rate of 52%, readjustable every 90 days in proportion to the variation that occurred in the referential passive rate published by the BCE in sucres, dollars, and UVC. Foreign currency–denominated assets maintained a fixed annual rate of 14% and were to be readjusted every 90 days (Republic of Ecuador 1999, no. 685, art. 7).

Bank Restructuring

In consultation with the IMF, World Bank, Inter-American Development Bank (IDB), and Andean Development Corporation (Corporación Andina de Fomento, CAF), the Ecuadorian government devised a new strategy to restructure the banking system with the following goals:

• Establish a legal basis for bank restructuring;
• Strengthen bank solvency;
• Facilitate bank resolution of failed institutions;
• Strengthen prudential regulation and supervision; and
• Restructure the viable bank debts of households and the corporate sector (IMF 2000a, 26).

For more on bank restructuring, see Key Design Decision No. 9, Verification of Solvency.

Dollarization

On January 9, 2000, Ecuador adopted the US dollar as its official currency (Republic of Ecuador 2000c, 2).^FNThe Ecuadorian Constitution forbade the outright elimination of the sucre, so the sucre remained as a fractional currency (EIU 2004; Republic of Ecuador 2000c, 29). To this end, authorities pegged the sucre at ECS 25,000 to the US dollar, withdrew the sucre from circulation, and replaced sucres with US dollars between April and September 2000. By September 2000, this process was largely complete (EIU 2004). In a bond prospectus dated August 23, 2000, the government stated that it expected dollarization to lower inflation, eliminate exchange rate risk, reverse capital flight, and render the economy more transparent to both Ecuadorians and foreign investors (Republic of Ecuador 2000c, 28).

Dollarization limited the BCE’s ability to provide liquidity support to the banking system (BCE 2000, 41; Beckerman 2006, 20; Republic of Ecuador 2000c, 30). Therefore, the government began to develop a mechanism to recycle liquidity within the banking system: the sale of USD-denominated bonds combined with repo operations, together with a BCE liquidity support facility (Beckerman 2006, 20; Republic of Ecuador 2000a; Republic of Ecuador 2000c, 30). Because the BCE’s capacity to provide liquidity support was limited, the CAF lent USD 70 million to establish a liquidity support fund. Banks had to place 1% of their deposit base with the liquidity support fund, which functioned as a supplemental reserve requirement on top of their conventional 8% reserve requirement for all deposits (Beckerman 2006, 20).

International Support

As early as March 1999, the financial press reported that the IMF had been in negotiations with Ecuador to arrange a standby credit facility (Alvaro 1999b; Alvaro and Tedesco 1999). However, reporters characterized progress as “slow” because of legislative opposition to President Mahuad’s attempts to reduce Ecuador’s fiscal deficit to 3.5% of GDP through tax and cost-cutting measures. The IMF reportedly supported the need for deposit insurance but opposed bailing out bank shareholders, as Ecuador had done in the past (Alvaro and Tedesco 1999).

On April 19, 2000, the IMF approved a one-year standby arrangement with Ecuador for 226.7 million Special Drawing Rights (SDR) (USD 170 million) (IMF 2000a, 5; Republic of Ecuador 2000a; Republic of Ecuador 2000c, 18).^FNAccording to the IMF, USD 1 = SDR 0.75 on April 19, 2000. This allowed Ecuador to receive additional funding from the World Bank, the IDB, and the CAF. Disbursements through June 30, 2000, exceeded USD 193.3 million, and commitments through December 31, 2000, exceeded USD 719 million (Republic of Ecuador 2000c, 18).

Ecuadorian Legal Authority

The Political Constitution of the Republic of Ecuador was passed on August 11, 1998, seven months before the broad-based bank holiday (National Congress of Ecuador 1998a). Ecuador’s constitution specified that the Superintendency of Banks is a technical and autonomous office created to supervise the operations of credit institutions and banks (National Congress of Ecuador 1946, art. 151; 1998a, art. 222). We could not definitively confirm that the constitution was the basis for the bank superintendent’s announcement of the bank holiday, on March 8, 1999, but it appears most likely that it or related regulations were.

Passed in 1979, National Security Law No. 275/79 gave the president the power to declare a state of mobilization “that [allowed] the transformation or transition from peacetime organization and activities to wartime organization and activities or other national emergencies” (National Congress of Ecuador 1979, tit. 2). Articles 54 and 55 specify that the president may mobilize all resources, including economic institutions, in pursuit of national mobilization (National Congress of Ecuador 1979, arts. 54–55). On the basis of this authority, President Mahuad and his administration gained control over the nation’s banks and financial institutions and then issued further decrees that implemented the bank holiday, withdrawal restrictions, moratorium, and related measures (CFN 2007, 5–6).

On March 11, 1999, President Mahuad issued Executive Decree No. 685:

Within Executive Decree No. 685, articles 2 and 3 provided for the deposit freeze, and articles 3(f) and 7 provided for the debt moratorium (Republic of Ecuador 1999, no. 685, arts. 2-3, 7). Additionally, article 8 provided for the issuance of CDRs at the request of depositors (Republic of Ecuador 1999, no. 685, arts. 8).

To fulfill Executive Decree No. 685 by the president, the finance minister issued complementary Regulations No. 014 and 015 in March 1999 (Republic of Ecuador 1999, nos. 014–015). Regulation No. 014 allowed the Superintendency of Banks to appoint auditors to review the financial system (see Key Design Decision No. 9, Verification of Solvency) (Republic of Ecuador 1999, no. 014, art. 1). Additionally, this regulation allowed fund managers and investment trusts to issue CDRs (Republic of Ecuador 1999, no. 014, art. 11).

Through further decrees, the government gradually unfroze deposits in 1999 (see Key Design Decision No. 8, Treatment of Depositors or Investors) (BCE 2000, 37).

In February 2014, the National Congress passed the Banking Crisis Closure Law of 1999, which the president signed into effect (BCE 2014; National Congress of Ecuador 2014). The law purported to “definitively” end the 1998–99 crisis by transferring assets that the BCE acquired during the crisis (via purchase and assumption of banks) to public institutions that could pay remaining public and private liability holders (National Congress of Ecuador 2014, arts. 3, 9). Article 9 authorized a one-time payment of up to USD 75,000 in cash to private depositors (National Congress of Ecuador 2014, art. 9). Once these liabilities were met, article 10 authorized remaining funds to be paid to public liability holders up to the amount of their respective claims (National Congress of Ecuador 2014, art. 10). Payments to private and public liability holders had to occur within one year of the law’s passage (National Congress of Ecuador 2014, arts. 9, 10).

Ecuadorian Constitutionality

The Constitutional Tribunal declared the account freezes unconstitutional in November 1999. In early 2000, the government issued a resolution that scheduled the unfreezing of accounts (CFN 2007, 6; Republic of Ecuador 2000c, 59).

In February 2000, the government extended the unfreezing schedule through a resolution signed by the finance minister, bank superintendent, BCE president of the board of directors, and the AGD general manager. This resolution also allowed the repayment of deposits in both cash and bonds (Republic of Ecuador 2000c, 59). For a schedule of unfrozen deposits, see Key Design Decision No. 8, Treatment of Depositors or Investors.

IMF Article VIII Approval

Per the IMF Articles of Agreement, article VIII, section 2(a), Ecuador had to obtain IMF approval for the 1999 partial deposit freeze, because this action could have affected transfers of balances due related to current international transactions, such as remittance of interest abroad on bank deposits held by nonresidents. The IMF granted approval, because Ecuadorian authorities stated their intention to soon eliminate the exchange restriction. The IMF authorization would last until September 1, 2001, or the conclusion of the next article IV consultation with Ecuador, whichever came first (IMF 2000a, 10, 41).

President Mahuad and his executive officials—the finance minister and the bank superintendent—made decisions without the BCE and seemingly overrode the central bank in the process. The BCE governor and board had preferred a different policy intervention and resigned en masse in protest of the partial freeze (see Summary Evaluation) (Alvaro and Tedesco 1999, 3; Republic of Ecuador 2000c, 57). At the start, the bank superintendent announced the bank holiday on March 8, 1999 (AP 1999; Superintendency of Banks n.d.). News reports say that the president and finance minister extended the holiday multiple times such that banks did not reopen until March 15, 1999 (Catan and Alvaro 1999; Dow Jones 1999c; IMF 2000a). The newly created AGD—which was in charge of deposit insurance and bank resolution—paid out unfrozen deposits as they were liberated over a protracted time period after the initial announcement of the holiday and partial freeze in March 1999 (see Key Design Decision No. 11, Exit Strategy) (Decker 2022; Dow Jones 2000; Republic of Ecuador 2000c, 56).

The Superintendency of Banks was Ecuador’s main regulator responsible for capital adequacy, solvency, and risk asset quality of financial institutions (Republic of Ecuador 2000c, 54; Superintendency of Banks n.d.). As of August 2000, the Superintendency was led by the Banking Board,^FNThe Banking Board is not mentioned in the Political Constitution of 1998, but authorities reference the Banking Board in a bond prospectus dated August 2000; the Banking Board is also referenced in the 1994 Financial Institutions Law (National Congress of Ecuador 1998a; Republic of Ecuador 2000c, 54). which was composed of five members: the bank superintendent, the general manager of the BCE, two members appointed by the Monetary Board, and one member appointed by the other four members of the Banking Board. The Monetary Board could authorize certain loans to help the liquidity of a private bank (Republic of Ecuador 2000c, 54).

The bank superintendent announced the bank holiday, despite objections from the BCE board (but with support of the president) (AP 1999; Dow Jones 1999c, 1; Republic of Ecuador 2000c, 57). In fact, the BCE president and board of directors resigned in protest to these measures (Alvaro and Tedesco 1999; Republic of Ecuador 2000c, 57). The president and finance minister extended the holiday and then imposed withdrawal restrictions on deposits when the banks reopened on March 15, 1999 (BBC 1999a).

The BCE board comprised five members appointed by the president of Ecuador with majority approval from the National Congress (National Congress of Ecuador 1998a, art. 262). Board members served terms of six years with partial renewal every three years (National Congress of Ecuador 1998a, art. 262).

On January 22, 2000, a military coup overthrew President Mahuad and his administration; Mahuad’s vice president, Gustavo Noboa, assumed power as president. Though the bank holiday had ended, the coup occurred during Ecuador’s blanket guarantee and protracted unfreezing of deposits (see Key Design Decision No. 11, Exit Strategy) (Decker 2022, 180–81, 187; Scrutton 2000). Mahuad subsequently fled to the United States (BBC 2014). In May 2014, a court in Ecuador sentenced Mahuad in absentia to 12 years in jail for his involvement in the bank holiday and partial deposit freeze; Interpol issued an arrest warrant. Mahuad said these charges were politically motivated (BBC 2014).

As early as March 4, 1999, the financial press had reported that the BCE “categorically denied market reports that it was considering freezing dollar deposit [sic] to help the sucre” (Newsome 1999). However, on March 8, 1999, Bank Superintendent Jorge Egas declared a surprise bank holiday on broadcast television one hour before banks were supposed to open to “preserve the stability of bank reserves, limit withdrawals that could [affect] the domestic financial system, and avoid pressure on the currency and the continued rise in prices” (AP 1999; Dow Jones 1999c, 1).

On March 10, President Mahuad also declared a state of national emergency for 60 days to address the economic and social turmoil (Dow Jones 1999c, 1).

The president of the private banks’ association, Carlos Larreátegui, spoke to the press and said: “Confidence has been seriously weakened by the closure. The government has lost control of the country” (Newsome and Lapper 1999a).

During the one-week bank holiday, rumors swirled that the government was also considering a continued deposit freeze after the holiday ended (Catan and Alvaro 1999). On March 11, the president and finance minister announced that withdrawal freezes would apply when the holiday was lifted on the following Monday, March 15, 1999 (BBC 1999a).

After the announcement of the partial freeze on March 11, eight private banks asked the government for guarantees before they reopened on the following Monday, according to Dow Jones (Deveney 1999; Dow Jones 1999d).

On March 11, 1999, President Mahuad publicly addressed the nation with his reasoning for the holiday and partial freeze:

In the same speech, President Mahuad further explained the details of the partial deposit freeze and noted that depositors could obtain CDRs, which were negotiable claims on their respective accounts that depositors could use for certain transactions (see Key Design Decision No. 8, Treatment of Depositors or Investors) (BBC 1999a; Beckerman and Solimano 2002, 56; Jácome H. 2004, 22).

On March 30, 1999, Finance Minister Ana Lucía Armijos gave a televised interview and said that “the government [was] heading towards a more relaxed stance on the deposit freeze, but the time [was not] right yet—the relaxation [would be] done in a very detailed fashion and when [it was] deemed ripe to generate credibility” (Dow Jones 1999f).

According to the IMF, the government achieved a temporary resurgence in public confidence in the banking system when it announced the results of systemwide bank solvency verification audits conducted by international firms and next steps on July 30, 1999 (see Key Design Decision No. 9, Verification of Solvency). Confidence fell again in September 1999 when Ecuador defaulted on its Brady bonds. Additional capital flight and further withdrawal of foreign credit renewed liquidity pressure (IMF 2000b, 32).

During the holiday, all banks were entirely closed (IMF 2000a, 10; Republic of Ecuador 2000c, 58). Retail and institutional customers had no access to their funds, and trading in the sucre was suspended (see Key Design Decision No. 11, Exit Strategy) (Dow Jones 1999a).

After the holiday ended, the government froze the following accounts:

• For 365 days: 50% of demand deposits in sucres in public and private financial institutions operating in Ecuador, including branches of foreign financial institutions, if the account contained greater than ECS 2 million as of the date of the decree (deposits up to ECS 2 million were exempted);
• For 365 days, 50% of demand deposits in foreign currency in public and private institutions operating in Ecuador, including branches of foreign financial institutions and offshore branches of Ecuadorian institutions, if the account contained greater than USD 500 as of the date of the decree (deposits up to USD 500 were exempted);
• For 365 days, 50% of savings deposits in sucres and UVC as well as 100% of foreign currency savings deposits in national financial institutions, including their offshore branches, if the account contained more than ECS 5 million or USD 500 as of the date of the decree (deposits up to ECS 5 million and USD 500 respectively were exempted);
• For 365 days, 100% of repo transactions and time deposits in sucres, UVC, or foreign currency in financial institutions operating in Ecuador, including offshore branches of Ecuadorian institutions and the offshore branches of foreign institutions;
• For 366 days, 100% of deposits in sucres, UVC, or foreign currency made by leasing companies, credit card issuers, or administrators as of their original maturity date (Republic of Ecuador 1999, no. 685, art. 3).

New demand deposits and time deposits in sucres, UVC, or foreign currency made as of March 15, 1999, in any financial institution or fund administrator were not subject to the freeze (Republic of Ecuador 1999, no. 685, art. 14).

Local Ecuadorian outlets reported that under the partial freeze, the government froze nearly USD 750 million in checking and savings accounts, including ECS 4 trillion in sucre accounts (roughly USD 400 million at the time) and USD 350 million in US dollar accounts (Quito Voz de los Andes 1999a, 2). According to an Ecuadorian government document dated April 2000, the total amount of frozen term deposits was USD 2.2 billion, including USD 1 billion at banks that were in resolution with the AGD at that time and USD at open banks (Republic of Ecuador 2000a, 28–29).

For the complementary debt moratorium, see Key Design Decision No. 2, Part of a Package.

Certificates of Reprogrammable Deposits

Depositors could request from their banks and investment funds claims on their respective accounts called CDRs (Republic of Ecuador 1999, nos. 685, 014). Depositors could hold CDRs until they expired (in other words, until the government unfroze the underlying deposit); alternatively, depositors could sell their CDRs at a negotiated price, including on the stock exchange, since CDRs were transferrable to another party by endorsement (BBC 1999a; Beckerman and Solimano 2002, 56; Jácome H. 2004, 22; Republic of Ecuador 1999, no. 685, no. 8).

CDRs were issued by the bank or investment fund and, as a result, had different discounts according to market perception about the financial strength of each bank or fund (BBC 1999a; Beckerman and Solimano 2002, 56; Jácome H. 2004, 22). The government decree also permitted CDR holders to use CDRs to service bank loans at par and buy durable consumer goods and real estate (Beckerman and Solimano 2002, 56; Jácome H. 2004, 22).

A government decree in November 1999 forced banks to accept CDRs as payments of credits at face value, up to the amount of credit lines granted to each bank by the National Financial Corporation (CFN), a public development bank (IMF 2000b, 31). Many depositors who needed cash sold their CDRs at a discount to bank borrowers, who then used the CDRs to pay back their debt in full (El Telégrafo 2017). According to the IMF, the November 1999 decree negatively impacted banks’ liquidity and portfolio structure and also led to “the technical bankruptcy of the CFN” (IMF 2000b, 31). Guido Macas of Ecotec University told an Ecuadorian outlet that “CFN became the dumping ground for the CDRs”; since not all CDRs were collectible from the banks that issued them, the CFN’s delinquencies rose and liquidity fell (El Telégrafo 2017).

Unfreezing Schedule

The terms of the partial freeze on deposit withdrawals favored those with small accounts (BBC 1999a, 3), President Mahuad said: “Those who have up to [ECS 2 million] may withdraw all their money. They are the smallest, the neediest” (BBC 1999a, 3).

Merely weeks after announcing the partial freeze, the government began to unfreeze deposits in phases, which alleviated pressure on the banks to meet withdrawal demand (see Figure 2) (BCE 2000, 37; Beckerman 2006, 9–10). The first phase liberalized deposits of specific target groups: insurance entities, the elderly, those affected by medical emergencies, savings and credit cooperatives, international agencies, and diplomatic missions. During the second phase, the government sought to liberalize the most liquid operations to gradually revitalize productive activities and financial intermediation (BCE 2000, 37).

For the extended unfreezing of time deposits and mutual fund shares, see Key Design Decision No. 11, Exit Strategy.

Solvency Verification Reforms Before the Holiday and Partial Freeze

Before the reforms in December 1998, financial institutions had to meet capital requirements within a certain timeframe or face liquidation:

• Financial institutions with capital deficiencies of less than 50% of total assets had to meet requirements within 90 days;
• Financial institutions with capital deficiencies greater than 50% of total assets had to meet requirements within 30 days (Republic of Ecuador 2000c, 56).

With the December 1998 reforms, the Banking Board determined the solvency and viability of each financial institution; the Banking Board transferred insolvent institutions to the AGD. Depending on viability, a financial institution could

• enter restructuring where it remained operational;
• enter a clearing process where closure was possible; or
• face closure.

For closures, the AGD could choose to

• sell or transfer assets and liabilities;
• recapitalize the institution; or
• pay the guaranteed deposits in cash (Republic of Ecuador 2000c, 56).

New Solvency Verification Announced with the Holiday and Partial Freeze

During his announcement of the bank holiday on March 11, 1999, President Mahuad said that the government would hire international firms to audit the banks and determine their true capital adequacy (Beckerman and Solimano 2002, 55; Republic of Ecuador 2000a). To this end, on May 6, 1999, the AGD hired four auditors to conduct independent audits of the entire banking system. These auditors delivered their results to the respective bank boards and to the AGD in June 1999, and the government publicized the auditors’ recommendations (Republic of Ecuador 2000a; Republic of Ecuador 2000c, 57). Based on these results, banks were sorted into three categories: capital compliant (“A”), capital deficient (“B”), and negative net worth (“C”). On July 30, 1999, the government publicly announced the results of this audit and next steps: “A” banks remained under private control; “B” banks remained operational and underwent a restructuring process; the AGD immediately took over and resolved “C” banks (IMF 2000b, 28; Republic of Ecuador 2000c, 56). For financial institutions that closed (for example, “C” banks), the AGD could sell or transfer the institution’s assets and liabilities, recapitalize the institution, or pay the guaranteed deposits in cash (Republic of Ecuador 2000c, 56).

Revised Solvency Verification After the Holiday and Partial Freeze

Starting in March 2000, the Banking Board reviewed financial institutions whose solvency indexes fell below 9%. These financial institutions entered a regularization program set by the Banking Board to recapitalize and reach a 9% solvency index within 60 days. These financial institutions also had to create a trust with all their shares for the benefit of the AGD. If an institution failed to reach its target, the trust was terminated and the AGD thus owned the institution. The Banking Board then became responsible to ensure that deposits were secured by a financial institution’s assets as best as possible (Republic of Ecuador 2000c, 56).

As of April 2000, the AGD had intervened or closed 14 financial institutions (wiping out equity holders), including the two largest banks, comprising 65% of onshore assets in the financial system, and the owners lost their equity in these 14 institutions (Republic of Ecuador 2000a).

Research did not uncover other conditions.

Bank Holiday

The bank holiday began on March 8, and banks reopened on March 15, 1999 (BBC 1999a, 3; IMF 2000a, 10). After the bank holiday, the sucre resumed trading on March 15 at a level that was 34% higher against the US dollar than its close on March 5 (Dow Jones 1999a). By Friday, March 19, 1999, the financial press characterized the sucre as “broadly stable” (see Figure 3) (Reuters 1999b).

In a letter of intent to the IMF in April 2000, Ecuadorian authorities indicated that they were strengthening supervision by the Superintendency of Banks to include:

• Revised organizational structure for better regional and departmental coordination;
• Improved offsite supervision with a plan to identify “at risk” banks to be placed under intensive monitoring;
• Staff training for offsite supervision and risk analysis;
• Review of staffing needs;
• A new sequence of phased and intensified supervisory action for regulatory noncompliance;
• Bilateral agreements with foreign authorities to share supervisory information; and
• Better integration of consolidated supervision, onsite inspection, and Basel core principles. Authorities also said that banks would be required to publish certain financial indicators (consistent with best international practice) on a quarterly basis to be more accountable to creditors. Special purpose public banks would undergo independent audits (Republic of Ecuador 2000a).

Specifically on bank solvency, Ecuadorian authorities said they intended to revise requirements for loan classification, loss provisioning, and interest suspension (see Figure 5) (Republic of Ecuador 2000a).