Financial institutions of the world and venezuela

1. Introduction

As the world has evolved, people have sought the best way to take care of their money, to make it produce, to have it in a safe place where it can be seen. In view of these needs, different financial institutions began to come out that, in addition to offering the service of taking care of your money, this institution offers different options such as: credits, options for the purchase of premises, purchase of securities, trust, etc.

As these institutions were growing and the economy in the country presents many variations, institutions were founded to fulfill the task of guaranteeing the money that the client gives to the bank. These types of institutions are the ones that will be referred to in this work, trying to explain them in a very simple way, these institutions are:

1. Superintendency of Banks.

2. Deposit Guarantee and Bank Protection Fund (Fogade).

3. International Monetary Fund.

4. World Bank.

2. Superintendency of banks

Structure: The Superintendency of Banks is a body endowed with legal personality and its own assets independent of the national treasury and is attached to the Ministry of Finance for the sole purpose of administrative debt.

Likewise, the Superintendency is under the direction and responsibility of an official named Superintendent of Banks, whose appointment and removal is under the responsibility of the President of the Republic. However, its appointment must be confirmed with the authorization of two thirds of the vote of the Senate of the Republic.

Functions: The current General Law of Banks… in addition to providing greater autonomy to the Superintendency of Banks to the point of turning it into an autonomous body, has given it the most varied powers in its article 161, the authority to promulgate norms for:

1. Procedures in applications for promotion and operation of banks and financial institutions.

2. Rules on control, participation and linkage.

3. Rules for opening offices, branches and agencies.

4. Rules for merger and transformation procedures.

5. Rules regarding:

to. Classification of investments and credits.

b. Content of the prospects for the issuance of mortgage securities.

c. Restructuring and rescheduling of credits.

d. Valuation of investments and other assets.

and. Exposure and coverage of large risks and concentration of credits.

F. Off-balance sheet risks and ways to hedge it.

g. International transactions.

h. Equity adequacy.

i. Money tables.

j. Liquidity, interest and foreign exchange risks.

k. Adequacy of guarantees.

l. Credit penalty.

m. Accrual of interest.

n. Internal controls.

ñ) Disclosure of advertisements.

3. Deposit guarantee and protection fund

Structure:

Internal Assembly: This is integrated according to article N ° 204 by:

1. The Ministry of Finance, who will preside it.

2. The president of the Central Bank of Venezuela.

3. The Superintendent of Bank and Other Financial Institutions.

Administration: According to Article N ° 208, the board of directors of administration is made up of:

A President and six Principal Directors with their respective alternates. The president and four of the principal directors and their respective alternates will be appointed by the president of the republic. The other two Principal Directors and their respective alternates will have the character of Labor Directors and will be appointed in accordance with the provisions of Title X of the Organic Labor Law.

Functions: According to article 203 of the General Law of Banks and other Financial Institutions, Fogade has the following functions:

1. Guarantee public deposits made in banks and financial institutions governed by the General Banking Law…

2. Provide financial assistance to restore the liquidity and solvency of banks and other financial institutions.

3. To exercise the function of liquidator in the cases of liquidations of banks and financial institutions governed by the General Law of Banks and Other Financial Institutions.

Origin: During the great depression of the years 1929-39, in the United States, a large number of banks, especially the smaller ones, went bankrupt due to the insolvency of their borrowers, small farmers who could not cope with the drop in agricultural prices.

To increase the effects of this crisis, the Franklin Delano Roosevelt administration created the Federal Deposit Insurance Corporation, an entity in charge of administering the insurance of bank deposits. Between 1934 and 1977, that federal agency had to assume the closure of 541 banks (BAEZA, Sergio A. Cristóbal Valdés: Bank deposit insurance. Felaban Magazine N ° 49). In 238 cases this body had to acquire the banks and then resell them; while in the remaining cases it liquidated the banks, compensating their depositors.

Origin in Venezuela: The bank deposit insurance is a guarantee for the depositor of a bank, in the sense that although a bank to some other credit institution has had losses derived from its active operations, depositors will be able to recover their funds.

The idea of a guarantee towards depositors is not absolutely new in the country. The legal reserve established by the General Law of Banks and Other Credit Institutions is a guarantee for the depositor.

On the other hand, there were securities issued by mortgage banks and financial companies such as Cédulas Hipotecarias and Mortgage Bonds that were guaranteed with mortgages.

The establishment of the Deposit Guarantee and Bank Protection Fund arises as a consequence of a series of interventions and later settlements that take place with banking institutes, such as the National Discount Bank, (whose liquidation undertaken several years ago has not yet been completed), the Banco de Comercio, and the costly rescue of the Banco de los Trabajadores de Venezuela and the payment of deposits to its customers, was made with funds from the National Public Treasury, which had no obligation to do so.

For these reasons, the Guarantee and Protection Fund for Bank Deposits was established in 1985, by Decree No. 540 of March 20, 1985 (which was modified by Decree No. 651), containing its Organic Statute. Later, in 1993, the General Law of Banks and Other Financial Institutions incorporated a Title III which refers to the Guarantee and Protection Fund… (Fogade) and, incidentally, the deposit insurance was increased.

4. International monetary fund

Structure: The Board of Governors, made up of the monetary authorities of each of the member countries, is the governing body of the IMF. Day-to-day operations are carried out by an executive board made up of 22 members representing a group of countries or a country. The managing director chairs the executive board. The headquarters of the Fund is located in the US city of Washington.

Functions: Agency of the United Nations Organization (UN) founded together with the International Bank for Reconstruction and Development (IBRD) during the Bretton Woods Conference (New Hampshire, United States) held in 1944. The IMF began its activities in 1947. Its objective is to promote international monetary cooperation and facilitate the balanced growth of world trade by creating a system of multilateral payments for current transactions and the elimination of restrictions on international trade. The IMF is a permanent forum for reflection on aspects related to international payments; its members have to abide by exchange rate discipline and avoid restrictive trade practices. It also advises on the economic policy to be followed,promotes the coordination of international policy and advises central banks and governments on accounting, taxes and other financial matters. Any country can belong to the IMF, which currently consists of 182 member states.

The members undertake to inform the IMF about their economic and financial policies that affect the exchange rate of their national monetary unit so that the rest of the members can make the appropriate decisions. Each partner is assigned a share of special drawing rights (SDRs), the Fund's unit of account since 1969; its value depends on the weighted average of the value of five currencies (in March 1994 one SDR was equal to 1.41 US dollars). This system replaces the previous one, which forced countries to deposit 75% of their quota in national currency and the remaining 25% in gold. Total quotas at the end of 1994 were 144.8 billion SDRs. Each member's share corresponds to their relative position in the world economy. The main economy, the United States, has the largest share, around 19.000 million SDRs; the smallest amounts to about 2 million SDRs. The amount of the fee establishes the voting power of each member at IMF meetings, how much foreign exchange they can get from the Fund, and how many SDRs they will receive. Thus, the European Union holds 25% of the vote and the United States around 20%.

Members with temporary imbalances in their balance of payments can go to the Fund to obtain foreign exchange from their reserve, created with the contributions - based on the quota - of all members. The IMF can also borrow money from other official institutions; With the General Loan Agreement of 1962, the Fund was authorized to use the financing of the so-called Paris Club, which granted a loan of up to 6,500 million dollars (later the credit was increased to 17,000 million). Any member country of the IMF can use this financing with a time limit (five years) to resolve its imbalances; then it must return the foreign exchange to the IMF. The borrower pays a reduced interest rate to use the institution's funds; the lender country receives most of this interest,the rest is received by the IMF to cover its current expenses. The IMF is not a bank, but sells a country's SDRs for foreign exchange.

The IMF also helps countries to promote their economic development, for example, the states that joined the Warsaw Pact (dissolved in 1991) to reform their economies and turn them into market economies. To this end, in 1993 a special transitory item was created to help these countries balance their balance of payments and mitigate the effects of the abandonment of the price control system. The IMF's structural adjustment instruments allow the least developed countries to undertake economic reforms: at the end of March 1994, 4.3 billion SDRs had been granted to 44 countries. These IMF loans often include clauses relating to the national economic policy of the aid recipient country, which have generated tensions between the IMF and the most indebted countries.

Origin: After its creation in 1946, the IMF made a major reform in 1962, when the General Loan Agreement was signed. Initially, the Fund intended to limit fluctuations in the exchange rates of the currencies of the member countries to 1% above or below a central value established against the US dollar, which in turn had a fixed value with respect to the standard. gold; 25% of member contributions had to be made in gold as well. The first reform allowed the creation of the General Loan Agreement, signed in 1962 when it became clear that the Fund's resources had to be increased. In 1967, the IMF meeting in Rio de Janeiro created special drawing rights as an international unit of account.

In 1971, the IMF exchange system was reformed, devaluing the dollar by 10% and increasing the variation margin of exchange rates to 2.25%. The sharp rise in oil prices in 1973 had a negative influence on the balance of payments of the member countries and broke the system of fixed exchange rates created at Bretton Woods. The modification of the statutes in 1976 ended with the role of gold as the axis of the IMF exchange system, forcing the abandonment of the gold standard that already in 1978 had been replaced by the US dollar.

Beginning in 1982, the IMF devoted most of its resources to solving the external debt crisis generated by the excessive indebtedness of the least industrialized countries. It helped the indebted to design structural adjustment programs, backing this aid with new financing. At the same time, he encouraged commercial banks to increase their lines of credit. As member country problems became apparent due to structural mismatches, the IMF created new financial instruments and used funds from better-off countries to provide long-term liquidity to those willing to reform their economies..

The IMF has had new powers since the late 1980s, due to the collapse of communism in Europe and the demand from ex-communist countries to convert their economies into capitalist economies. In order to help these countries, new funds were created to reform the planned economies of the Central and Eastern European countries.

The IMF has largely lost its original structure and objectives; exchange rates are now determined based on market forces. Current exchange control systems, such as the exchange rate mechanism of the European Monetary System (EMS), are linked to convergence programs designed to be able to create an international currency, but the crisis of the EMS in 1992 demonstrated the relative impotence of the Fund to deal with exchange rate problems in today's developed economies. Mexico's financial crisis in 1995 made it clear once again that IMF funds are insufficient to control private capital flows in the world economy. However,it continues to play an important role for the economic development of the least developed countries by facilitating the transition to an integrated world economy.

5. World Bank

Structure: Currently, the World Bank is made up of several institutions: the International Bank for Reconstruction and Development (IBRD), the International Association for Development (AID), the International Finance Corporation (IFC) and the Multilateral Guarantee Agency. of Investments (AMGI). By extension, and due to being the main body of this group of organizations, the World Bank is generally referred to as the IBRD.

Functions: The World Bank grants long-term loans for profitable projects only to governments or private companies with a government guarantee, and does not admit moratorium on payments. The interest rates applied by the World Bank in its operations depend on the rate that it must in turn pay in the international capital markets, in 1976 a year of high rates in the international financial markets, the World Bank charged on average for its disbursements 9.5%

According to its founding agreement, the World Bank must make safe investments that allow it to pay the current interest rates and obtain the necessary foreign exchange for its repayment. Loans should be granted for productive purposes, and only in very special cases should they meet the foreign exchange needs of the projects. Neither can the World Bank grant tied loans, meaning that the country's purchases can be made in any other member country. Loans are only granted if there is an assurance that the borrower cannot obtain the loan on reasonable terms from other sources. With the appearance of the External Debt crisis in 1980, the Bank began to participate in loans for structural adjustments not tied to a specific project.

origin: international economic organization founded together with the International Monetary Fund (IMF) after the Bretton Woods Conference in 1944, with the function of granting credits on a global scale, but especially to developing states.

6. Further reading

Born in the context of the international monetary and economic system devised at Bretton Woods in 1944, the IMF has since become one of the main international organizations in this area. Michel Lelart outlines in the following text the main points of its organization and operation.

Fragment of The International Monetary System.

By Michel Lelart.

Chapter II, 3.

As the Bretton Woods agreements organized the convertibility and stability of currencies, an institution was needed to guarantee respect for the rules, which had, as we have seen, a certain number of exceptions. But the role of the Monetary Fund was also to give member countries the means to intervene in the market to sustain their currency and not force them to establish or maintain restrictions. This is the role of the financial institution that we are going to examine.

Membership of member countries

As soon as you are a member of the Fund, each country is assigned a quota that corresponds to its subscription of capital and determines at the same time the help that it will be able to obtain and the right to vote that it will be able to exercise. Before the conference, it had been decided that the United States would have a quota twice that of the United Kingdom, and that the Soviet Union and China would have third and fourth places, respectively. The formula to arrive at this result was 2% of national income in 1940, plus 5% of gold and dollar reserves on July 1, 1943, plus 10% of the strongest variation in exports between 1934 and 1938, plus 10% of the annual average of imports during the same period. Out of a total of 8,800 million dollars, the United States had a quota of 2,740 million (that is, 31.3%); the United Kingdom, 1.3 billion;The Soviet Union, 1,200; China, 550; France, 450; Belgium, 225; Poland and Czechoslovakia, 125, Norway and Cuba, 50; Iran and Peru, 25; Haiti and Ecuador, 5…, and Liberia and Panama, 0.5 million. As the Soviet Union did not ratify the agreements, the total quotas were lowered to $ 7.6 billion, which meant that the United States' quota was 36.2% and the United Kingdom's 17.1%.

Article III provided that each Member State had to pay its quota in full. 25% had to be paid in gold, without the amount being able to pass 10% of the country's net reserves in gold and in dollars. Thus, France, which had few reserves, only paid 15% of its initial fee. The rest had to be paid by each country in its national currency. In fact, each central bank credited this amount to the Fund's account. The latter therefore had a current account in all the central banks of all the member countries and kept a certain amount of all national currencies.

Quotas determined voting rights, but in a way that was not exactly proportional: each country had one vote for every $ 100,000 of quota, plus 250 votes. This calculation benefited small countries, since their quota was weaker. The United States, which had 36.2% of the quota, only had 31.9% of the voting rights; Iran with 0.3% of the quotas, had about 0.6% of the voting rights; Liberia, with 0.006% of the quotas, had 0.3% of the voting rights.

These voting rights were exercised within the Council of Governors, in which each country was represented. The Council meets once a year in a General Assembly, which takes place two years in a row in Washington and the next in a member country. In this way the General Assembly met in Manila in 1976, Belgrade in 1979, Toronto in 1982, Seoul in 1985, Berlin in 1988 and Bangkok in 1991. The Board of Governors votes the budget, decides the admission of new members or the revision of the quotas, it elects administrators from among its members. The five countries with the largest quotas (the United States, the United Kingdom, Germany, France and Japan) each appoint a manager. The other sixteen are elected for two years by groups of countries with geographic, political and cultural affinity.There are currently 24 administrators. Of these, one is chosen by Saudi Arabia, which acquired the right to be one of the two main creditors of the Fund; another is elected by China since this country replaced Taiwan in 1980, and another by Russia since this country joined the Fund. The administrators are not independent experts, as the English wanted: they represent their country and have a strongly political role. They reside in Washington and meet in Council whenever necessary, often several times a week. They are the ones who decide the Fund's policy, especially when it comes to granting loans to member countries and about consultations on Article VIII. They control the administration and elect the CEO every five years,who is the head of the Fund's services and ensures the day-to-day management of the institution. Although it is not written in the statutes, it is always a non-American. In return, the president of the World Bank is. The CEO has always been European. Since 1963 he has been assisted by an American deputy general manager.

The emissions

Issues are the most common operations of the Fund. But this expression is not mentioned in the statutes, which always speak of purchases. These operations have particular characteristics that combine both exchange and credit.

- It is an exchange operation whereby the country in difficulty gives the Fund its own currency -which is a weak currency- and receives in exchange the currency of another member country in surplus and, therefore, with a strong currency. The Fund's foreign exchange reserves are continually changing and it owns fewer and fewer currencies from surplus countries and more from currencies running balance-of-payments deficits. It does not run exchange risk, as the country must guarantee the gold value of the Fund's reserves in its currency. Every time it is devalued, or if it depreciates strongly in the market, the country must pay an additional amount. If not, the country reimburses it by reducing the Fund's reserves in its central bank account.

- It is a credit operation for two reasons. On the one hand, the country that buys the currency of another country from the Fund must return it within a certain time. The Fund speaks of redeeming its own currency, which must be done by a country at the end of its fiscal year for an amount that takes into account the variation of its reserves and that gives rise to very complex calculations. In addition, the issuing country must pay a fixed commission of 0.5% that is added to the price of the currency it buys. They must, above all, pay a commission every quarter - we must talk about interest - on the amount issued that has not yet been redeemed. The rates initially set ranged from 0.5% to 4%, depending on the volume and duration of the issue in progress.These commissions had to be paid in gold or partially in the national currency when the country did not have enough gold. These provisions have been modified on several occasions.

You can see the originality of these issues, or, as the Fund says, of these purchases. It is an exchange operation, something like if a tourist who buys foreign currency before going on a trip is forced to pay interest until, in six months or three years, he repays it to his bank. Here the tourist is a country that, by giving its currency to the Fund, loses nothing, since it creates its own currency. The foreign exchange obtained in return represents a net increase in its reserves. In this sense, it gets help from the Fund. But in what quantity? In accordance with article V, a country can buy from the market up to 25% of its quota each year and until the Fund's reserves in its currency reach 200% of its quota. As each country initially paid 75% of its quota in its currency, only up to 125% could be issued,in five annual installments of 25% each. But you have to distinguish:

- The first tranche, called "tranche-gold", has a special nature, since it corresponds to 25% of its quota, which the country, in turn, paid in gold. A credit is granted on the Fund, and in the issuance of this first tranche it mobilizes its credit. While the Fund's reserves in your currency are less than your quota, you have a reserve position: you are a creditor of the Fund.

- The following sections are different. The country obtains hard currency as consideration for a previous payment made in gold: in this case it is truly a credit that the Fund grants it. As soon as the country begins to use "the credit tranches", it becomes a debtor of the Fund. The Fund's reserves in your currency are greater than your quota, and the difference measures your "recourse to Fund credit."

The creditor or debtor situation of a country therefore depends on the level of reserves of the Fund in its currency in relation to its quota. But each time a country makes an issue, or a purchase, the Fund's reserves in its currency vary the same as the reserves in the currency it supplies or receives. The position of two countries is affected each time in reverse. Although there is a global trade-off between debtor and credit positions. But, depending on the issues, the Fund keeps the currencies increasingly weak and less and less strong. You do not run any currency risk, as we have seen, but you may face a liquidity problem. For this reason chapter VII, devoted to scarce coins, allows you to:

- Recover the total of its reserves in a currency by giving gold to the country involved, which cannot be denied. This is what was called replenishment and it was used in the first years.

- Encourage a country to issue in its own currency or that of another country if it consents. This formula was and is used today, especially for large quantities.

The evolution of the Fund's operations

The Fund did not last long as it was conceived at Bretton Woods. In the years following the conference, Poland, Czechoslovakia, and Cuba withdrew. On the contrary, new candidates have been examined by the General Assembly, a process that still continues more or less every year. Later, Germany, Japan and their allies joined, the African countries that requested their incorporation after their independence; later, the islands of the Atlantic or the Pacific with a few thousand inhabitants that became microstates, and finally, the countries of the East. In each new accession, the Bretton Woods formula was used, the most complicated being the allocation of quotas, which are re-examined every five years. The first times they were not modified, but then they were systematically taken up since 1960, by 25%,33% or 50% depending on the case. The increases were more or less proportional, or more or less selective. This allowed the Fund's resources to be accumulated, albeit in a limited way, since the currencies of the countries in difficulty were not usable to finance the issues and these countries, having a higher quota, saw the possibility of issuing open. For these reasons, the Fund has often been forced to use loans.For these reasons, the Fund has often been forced to use loans.For these reasons, the Fund has often been forced to use loans.

The modalities of these operations were also frequently modified. We will limit ourselves to the most important reforms decided by the administrators. An obligation to repay the issue in several staggered payments was added to the amortizations provided for by the statutes, whatever the situation of the country and its level of reserves. These contractual repayments have become the rule, the statutory amortization was replaced by an early purchase obligation for when the situation in the country improved. The commission scale was replaced by a rate set annually so that the results of each year are gradually balanced. Hereafter, remuneration will be paid to the country with a credit position in accordance with its initial gold ratio,since the Fund cedes its currency in issues made by other countries. These currencies are chosen by means of a procedure that the Fund had to invent: these are the famous "operating budgets". In the end, the exemption that the Fund could agree on both in terms of the emission limit and in their staging over a period of four successive years was used very frequently. The escalation limit was lifted in 1978 and repeated new issues have made this limit expired.The exemption that the Fund could agree to both in the limit of emissions and in their staggering over a period of four successive years was very frequently used. The escalation limit was lifted in 1978 and repeated new issues have made this limit expired.The exemption that the Fund could agree to both in the limit of emissions and in their staggering over a period of four successive years was very frequently used. The escalation limit was lifted in 1978 and repeated new issues have made this limit expired.

Numerous decisions have been made by the administrators by virtue of their power to interpret the statutes. They have, as the jurists say, jurisdiction over powers, they are both judge and party, which constitutes an exception in an essential legal principle. They have used this power repeatedly, for example when deciding on a "fundamental imbalance" to adjust parities or a balance of payments deficit "on a current account" basis, the only one that allows a country to obtain aid. From the bottom. They have also interpreted provisions relating to the transitional period, the parity system, the price of gold… and the conditions under which a country can use the Fund's resources.

This issue was not settled at Bretton Woods. The statutes only provided that the country wishing to buy a currency should declare "that this currency is currently necessary to make payments compatible with the provisions of this agreement" (art. V, section 3a). The problem quickly arises in questioning whether the Fund should accept this statement. The administrators decided that the Fund would benefit the country that wished to use its tranche of reserves "with an eminently favorable presumption". But for issues in credit tranches, the Fund could verify said statement by examining whether the country has resolved the difficulties of a temporary nature and whether the policy it intends to adopt will be sufficient to overcome such difficulties during that period. In order to facilitate emissions,the Fund suggested that countries discuss with him not at the time of issuance, but beforehand, to ensure that they can proceed at the necessary time. This is where the emissions assurance policy comes from or, as it is said today, the confirmation agreement. It is an exchange of letters between the country and the Fund that provide for the staggering of emissions, the measures that the country agrees to take to achieve certain results and the timing of its consultations with the Fund. These different clauses, which do not entail any formal obligation for the country, constitute the elements of the conditionality principle officially recognized in the first amendment of 1969. This procedure was first applied to the industrialized countries that negotiated a stabilization program with the Fund,before being used in developing countries negotiating an adjustment program. In fact, the essential role of the Fund depends more and with increasing evidence on the nature of these conditions than on the total emissions that member countries may request.