The Banco de Café Scandal: A Cure that Nearly Killed the Patient
The forced liquidation of Banco de Café and the Central Bank decision to limit its rescue package for Bancafé clients took account holders and the country as a whole by surprise
The crisis of confidence these decisions triggered brought the entire banking system perilously close to collapse.
Until late in the afternoon, November 17 seemed like any other day in the imposing new Managua headquarters of the Banco de Café (Bancafé). There was no suggestion that the bank was about to go under, as the tellers continued to issue bank drafts, honor cash withdrawals and accept deposits. One woman was even allowed to deposit her life’s savings despite the fact that behind the scenes the bank’s fate had already been sealed. By the evening news, however, it became general knowledge that Bancafé had been closed down because, in the words of bank superintendent Noel Sacasa, "The bank is in a state of manifest insolvency from which it is impossible to recover." According to Sacasa, this was due to "imprudent actions and irregularities committed by people responsible for running the bank."
The government changes It was not the loss of another banking institution that took the country by surprise, as Bancafé is the fifth to go under since 1996 and the second this year following the Interbank scandal only three months ago. What threw Bancafé’s account holders—and by extension depositors in Nicaragua’s remaining banks—into a panic was that the government suddenly changed the unwritten rules established in the four previous liquidations, in which the Central Bank had covered all of the affected deposits. In this case, it cavalierly announced that it would guarantee only up to 10,000 córdobas (around $770) and only for Bancafé clients with deposits of under 20,000 córdobas (or the dollar equivalent). The balance belonging to these small-scale savers and all of what was in the accounts of those with over 20,000 córdobas worth of local currency or dollars was not covered at all. It would supposedly be reimbursed once the bank’s assets were liquidated, but the fear—which did not lack precedent—was that they would be sold off quickly and on the cheap, almost certainly to fat cats linked to the government, so the money raised would not stretch very far.
the game rules in the fifth inning
According to the Central Bank, the deposits it was prepared to help recover represented 90% of the estimated 45,000 affected account holders, but that was an exaggeration at best since it referred just to savers with current accounts in córdobas; only 79% of those with dollar accounts were included. Furthermore, while not understating the importance of even this support to so many small account holders, the actual money involved represented only 12% and 2.4% of the total córdoba and dollar deposits, respectively.
Over the weekend the picture became even murkier as a controlled yet clearly annoyed Noel Sacasa informed the press that he had taken the decision to liquidate Bancafé, but only after President Alemán had left him no alternative. According to the bank superintendent, Alemán had met with bankers that Friday morning without his presence and decided to support none of the rescue bids apparently still being negotiated and to provide none of the usual guarantees to those affected.
Meanwhile, Central Bank president Noel Ramírez almost triumphantly announced that the government’s decision was a good one because it would clean up Nicaragua’s banking system in the long run. Most bankers initially backed this view, seeing the measure as a bitter but necessary pill to swallow. In the commentaries by analysts that dominated the news over the weekend, there was general agreement that the effort to attract private banks back to Nicaragua starting in 1991 had offered very generous conditions and imposed very lax requirements, resulting in too many banks with too little solidity.
Rumors were rife that the government’s decision had been made under pressure from the international financial institutions, which hold the key to the country’s long-awaited entry into the Highly Indebted Poor Country’s Initiative (HIPC). Although both the government and the institutions subsequently denied these rumors, the impression was reinforced by Francisco Aguirre Sacasa, Nicaragua’s foreign affairs minister and also the government’s alternate delegate to the World Bank and Inter-American Development Bank (IDB). Just after the government’s announcement, Aguirre had attended the 10th Ibero-American Summit. There he met with IDB president Enrique Iglesias, who, Aguirre reported, "was very pleased with the way the government so energetically intervened in the Banco de Café." Aguirre added that "the professional and serene way in which this case was handled has strengthened the possibility of entering the HIPC."
Confidence the loser, panic the winnerBy the end of Monday, Aguirre must have been wishing he had never opened his mouth. What neither the majority of the country’s bankers, the Nicaraguan government nor—if Aguirre read him correctly—the head of at least one multilateral financial institution appeared to have considered was that banking systems rely on confidence. From the hyperinflation of the 1980s to the current run of bank closures culminating with the highly publicized corruption scandal that sank Interbank, Nicaragua’s recent history has been shot through with financial uncertainty. The government’s abandoning of Bancafe’s account holders created instant panic among account holders throughout the country.
Meanwhile, the government’s announcement that it was sending a bill to the National Assembly to protect bank savings in the future was scant comfort to Bancafé’s account holders, who felt they had been sacrificed to the HIPC initiative. Both individuals and nongovernmental organizations with accounts in Bancafé organized to pressure the government. The association of individuals decided to protest outside the Central Bank, fanning the growing flames of public panic by calling on others to withdraw their savings because there is no reason to trust any of the banks.
The result was a massive withdrawal of deposits from all banks, above all the semi-privatized Nicaraguan Bank of Industry and Commerce (BANIC), which paid out US$4.8 million and 10 million córdobas to depositors in just one day. FSLN leader Daniel Ortega fueled this run on BANIC with his calculated remark that if he had money there he would take it out immediately. His generally flagging credibility was enhanced in this case by the shady privatization of half the state bank’s stocks to investors grouped around President Alemán’s party last year. Other banks also felt the pinch, however, and televised news interviews in BANIC parking lots with former account holders revealed that they felt safer burying their money in a jar in the back yard than depositing it in another bank.
What had started out as a tactic to avoid any further reduction in the country’s international reserves and to gain entry into the HIPC—a debt-reduction initiative that the government’s own corruption scandals had set back in the first place—was thus fast becoming a financial nightmare. Under pressure from the association of banks, the government finally made a complete U-turn on Tuesday, November 24, announcing that it would guarantee all savings in Bancafé. The Central Bank ended up having to provide $40 million to cover Bancafé’s arrears portfolio. While this restored some confidence to the battered banking system, it is not yet known just how much money was withdrawn from Nicaraguan banks and either sent abroad by larger investors or buried in their yard by smaller savers. Bancafé’s assets, including the active and supposedly healthy part of its lending and investment portfolios, was bought up for approximately $1.3 billion by Banco de Finanzas, a bank based on Sandinista capital and home to part of the Nicaraguan Army’s pension fund—which some quip makes it the safest bank in the country.
Who broke Bancafé?Bancafé had sold the image of serving small- and medium-scale producers and was one of three banks—all of which have now ended in bankruptcy—that acted as brokers for IDB funds in a project to bolster Nicaraguan micro-businesses. Bancafé had also used World Bank funds to buy up branches of the former state development bank BANADES in poor rural areas and thus attend a sector of the Nicaraguan population otherwise abandoned after BANADES went bankrupt and was closed. Banco de Café was by no means focusing exclusively on these small-scale sectors at the time of its liquidation, however, though it did have a substantial number of such clients. It is thus extremely unlikely that their financial problems, exacerbated by Hurricane Mitch, were what forced the bank to go under, as its directors insisted.
What appears to have done this particular institution in is a traditional, deeply rooted and essentially fraudulent tendency in Nicaraguan banking to grant large loans to high-risk individuals or businesses with personal links to the bank’s directors. Among Bancafé’s most notable loans in this category was an $11 million credit provided to the Centeno Roque brothers, who have now added its name to that of Interbank as banks they have helped break so far this year. Following the Bancafé case many commentators and even Central Bank president Noel Ramírez and World Bank representative in Nicaragua Ulrich Laechler have called for an end to the impunity so far enjoyed by those guilty of such practices. Unless this happens, they argue, such problems will only recur in the future. As Laechler put it in an interview with the political weekly Confidencial, "When bad or illegal things have been done, then the weight of the law should come down on those people; the level of impunity must be reduced."
Interbank was an all-too-perfect example of this impunity level. On October 20, less than a month before the SIB liquidated Bancafé, a Managuan judge closed the Interbank case and dropped the charges against all involved, including the Centeno Roque brothers and a group of the bank’s directors. In that case, everything was resolved through political negotiations between the FSLN, which had considerable interests in the bank, and the ruling PLC, and it is a safe bet that the two parties even sewed up the court resolution in advance. Such events further undermine the country’s rule of law, discourage foreign investment and in general make the country even less governable.
Impunity among those with influence has acquired epidemic proportions in Nicaragua right now, and the banking world is no exception. There is no guarantee that those involved in the Bancafé fraud will be indicted either, and not only because the Centeno brothers are again involved and will no doubt call upon the help of friends in high places, including top FSLN figures and Cardinal Obando y Bravo. When Bancafé president Francisco Mayorga pointed out that the SIB had not charged him with any crime during 11 months of intervention, he did so as proof of his innocence. A more accurate reading is that it highlights the lack of judicial action since it is almost universally accepted that the bank was broken by fraudulent activities. Furthermore, there is no reason to think that what did not happen in the last eleven months will happen in the near future. It is important that the courts use the Banco de Café case to send an urgent and clear message to others involved in such dealings, but there is little expectation that this will happen.
Another worrying aspect to emerge from this and the Interbank scandals is that the SIB’s 11-month intervention of Bancafé only forestalled an eventual bankruptcy, thus raising doubts over this watchdog institution’s effectiveness and/or authority. Meanwhile, the allegations that Arnoldo Alemán made critical banking decisions without even consulting the SIB adds doubts about its autonomy. Perhaps most worrying, if not scandalous, is the SIB’s inability or unwillingness to reveal to the public the true state of the banks it is overseeing. For example, in its June 2000 report—less than two months before Interbank folded and three months after the SIB had become suspicious and began investigating—it mentioned no serious irregularities in the bank operations and classified 96.7% of its loan portfolio as category A: completely risk-free.
Finally, this latest banking failure provides yet another example of governmental misjudgment and even incompetence or capriciousness in financial affairs. This problem goes right to the top, with President Alemán’s apparent eagerness to take direct control producing disastrous results. This is the second time in quick succession that this has happened, the first being Alemán’s failure to resist the temptation to take a political swipe at the FSLN by personally crowing about Interbank’s problems. Seeing how severely that undermined confidence in the banking system, why were no lessons learned? That the government and bankers themselves thought the banking system could withstand the effective message that from now on nobody’s savings in this already impoverished country would be guaranteed beggars belief.
It is not clear who benefited most from the Central Bank’s timely about-face: the savers whose deposits were finally guaranteed, the bankers who were spared more massive and possibly fatal withdrawals, the big borrowers whose bad loans may well end up being written off, or Bancafé’s partners who were freed from judicial demands that could have resulted in the embargoing of all of their assets. At the end of the day, however, it is clear who the big losers were. As in the Interbank case, when Nicaraguan taxpayers were left having to cover the $80 million that the Central Bank used to guarantee Interbank account holders’ money, they are again footing the bill to get the country out of another fine mess.