A nice corruption racket with official deposits in the Venezuelan banking system

August 27, 2005

a public service to the revolution I will explain a corrupt practice in
detail, maybe one of the readers knows someone in power who can explain
it to someone in power or the Comptroller and something may be done
about it.

OK, let’s start at the beginning with the hints that something funny is going on:

#1: In 1998, official deposits, that is deposits from all Government
institutions, in the banking system were about 1% of all monetary
liquidity (all the bolivars in the financial system).

Hint #2: According to the monthly banking report which you can get in Reporte Diario de La Economia from July 22nd.,
official deposits in the banking system are today Bs. 14.54 billions
(in Spanish) or Bs. 14.54 trillion in English, or just so you can see
all the zeroes:

Bs. 14,547,270,000,000 (US$ 6.76 billion)

Or 1.4547 10+13 in scientific notation. We are not talking “millardos”, we are talking “millones de millardos”.

Now, go the Central Bank
pages, go to statistical information, go to monetary aggregates
(weekly), there you find what monetary liquidity is and couple of weeks
ago it was:

Bs. 50.73 trillions (US$ 23.6 billion)

the Government has 28.6% of the monetary liquidity deposited in the
private banking system. Why the increase from 1% to 28.6% since 1998?
Does it make any sense?

there are official deposits that do not appear in the balance sheets of
banks. They occur when a bank “transfers” an investment to a public
institution, with an agreement to buy it back. These are not even taken
into account in our argument and discussions.

#3: Public institutions get their budget every month. Thus, they should
get 8.33% of their budget each month. Therefore they all have, on
average, 3.4 months of “savings” in the bank, rather than spending it
on the “people”, “the revolution”, “social programs” and the like. Why
do public institutions keep that money in the bank? Another thing that
does not amke sense.

Hint #4: Look at the banks’ official deposits. There are 37 commercial banks in Venezuela.
Two are Government owned. Of all banks, 16 have percentages of official
deposits that are above the national average of 28.6% of the monetary
liquidity. Three have double
the national average, with one as high as having 77% of its deposits as
official deposits. None of these are official banks, they are all

#6: How can it make sense for the Government to issue local debt in
Bolivars at a certain interest rate, so that the Government can pay the
monthly budget of its own institutions, which simply turn around and
deposit their money, which I assume has a purpose, in commercial banks
to get a lower interest rate than that paid by the Government?

Let me explain this with a diagram what I am saying:

Government ( Doric building on the left) issues a bond (document above)
that pays let’s say 18% interest per year, the bank (tall modern
building) buys it, gets that 18% and pays a Government institution 10%
interest, (on the right in blue) for having its deposits in it.

see the problem? The Government is paying the banks 18%, so that it can
pay Government instituions 10-12% for depositing tehir money. Weird no?

Sound fishy? You bet it is. Let’s make the explanation very graphical. How does a bank usually work?

The bank lends money (on the left) to someone charging them 18%
interest (this is called a loan), from which it pays the depositor
10-12% on the right (in a CD, for example). The problem is that the
balance is never perfect, banks do not (can not) lend all the money
they have, so they also buy Government or private bonds to pay
depositors with the interest they get. They also keep some cash at hand.

The problem is that because of the lack of investment in Venezuela in the last eight years, credit demand has been very low and banks typically have four to five times more deposits than loans. So, what to do with the excess money?

typically if banks have too much excess money, interest rates go down
and credit demand increases. Or private companies issue more bonds. Or
the Government issues more bonds. In
it has been the Government issuing more bonds in the last few years, so
that it can spend more. But, as explained above it is very inefficient
and that goes to the heart of the matter of this post.

see, it does not make any sense that 28.6 % of banks deposits are
official deposits. That means that the Government pays 2.6 trillion Bs.
(US$ 1.2 billion) to banks so that they can pay the Government
institutions 1.4 trillion (US$ 615 million). Absurd, no? You bet,
somebody pockets the difference.

key is that difference between the two, those 1.2 trillion Bs. or US$
500 million. In the middle are the banks that make part of that money,
Government officials that get paid commissions to deposit their money
in certain banks and some “intermediaries” that get paid to “find”
those deposits for the banks. Nice corruption racket, no?

obviously does not make sense, but it continues and even grows as time
goes by. The “profits” have gone down as the spreads (or difference)
between the rate paid by the bonds and that paid to deposits has
shrunk. But if that spread is today 6-8%, for two or three years from
2001-2004 it was more closer to 10-14%, or around US$ 1 billion per

not all of the official deposits move under commissions, there are
banks that don’t pay them, for example, but a big chunk is corruption
related. Since we are talking about some US$ 4 billion in the last four
years, think about what that means if only one third of the money moves
on the basis of commission. These are some very rich crooks indeed.

Government officials know this, so obviously the money is being spread
around widely to sustain the system. Thus, I was quite pleased to hear
that the Government was going to start a “Banco del Tesoro” or Treasury
Bank that would act as a payment agent for the Government and eliminate
this racket. Well, the idea does not appear to be as pure
as I thought. According to the announcement by Government officials,
the Banco del Tesoro will be a commercial bank that will compete with
the private banking system and act as payment agent for the Government.
But official deposits will still exist and the Banco del Tesoro will
buy Government bonds much like any other bank. So, you have to wonder
if all they are doing is simply centralizing this corruption racket, so
that a few can benefit from it.

all this is actually quite easy: i) Streamline payments to Government
institutions so that you don’t advance to them more than one month of
their budget at a time, ii) Have them have accounts at Government banks
which bear no interest or iii) simply have the Government issue
payments directly. (This is the way it is done in the
US and most of the world, institutions ask the Treasury for payment and you get a check directly from the Government’s Treasury)

Neither of these three appears to be in the works at this time. You be the judge. 


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