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Crisis in the financial systems: a view from Ecuador
Crisis en los sistemas financieros: una mirada desde el Ecuador
Janice Licenia Ordóñez Parra
*
Ludivia Hernández Aros
**
Laura Constanza Gallego Cossio
***
Gustavo Adolfo Rubio-Rodríguez
****
ABSTRACT
The objective of this article is to analyze the role of the
financial system in Ecuador based on different scientific
theories that support the capitalization of financial
institutions through the internal control evaluation process
and the Basel III regulatory framework. The
methodological approach responds to an exhaustive
literature review and systematization of the main theories
on the financial crisis considering the chronological
sequence of events and processes of change over time
from different events, sectors of society and variables. As
a result, we obtained the contextualization of the financial
system and the elements that affect them, recognizing the
antecedents, contemporaneity, causes and consequences
of the crisis. Concluding that the destabilization of the
financial sector is a product of the impact of financial crises,
*
Magíster en Contabilidad y Finanzas. Profesora de la Carrera de
Contabilidad y Auditoría de la Universidad Católica de Cuenca,
Ecuador. jordonezp@ucacue.edu.ec. https://orcid.org/0000-0002-
5002-2203
**
Magíster en Auditoría Internacional. Docente investigadora de la
Facultad de Contaduría Pública de la Universidad Cooperativa de
Colombia sede Ibagué-Espinal, Ibagué-Colombia.
ludivia.hernandez@campusucc.edu.co. https://orcid.org/0000-0002-
1571-3439
***
Doctora en Administración. Magister en Administración de
Empresas con especialidad en Finanzas. Integrante grupo de
investigación PLANAUDI. Profesora investigadora de la Universidad
Cooperativa de Colombia sede Ibagué/Espinal, Ibagué-Colombia.
laura.gallego@campusucc.edu.co. https://orcid.org/0000-0003-3131-
235X.
****
Doctor of Management with a major in Management and
Administration Project. Doctor en Ciencias Económicas y
Administrativas. Magister en Administración de Empresas. Master MBA
en Dirección Empresarial y Marketing. Profesor Investigador de la
Corporación Universitaria Minuto de Dios. gustavo.rubio-
r@uniminuto.edu.co. https://orcid.org/0000-0002-6582-2481
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recognizing the importance of financial control processes
in aspects of efficiency and profitability to mitigate serious
economic consequences, hence the importance of
considering the principles of the Basel III regulations
promulgated by the Basel Committee on Banking
Supervision to update the internal control processes, its
governing regulations and its impact on the financial entity,
enabling them to develop new strategies of financial
intermediation.
Keywords: Financial Crisis, Financial Institutions, Financial
System, Ecuador
RESUMEN
El objetivo del presente artículo es analizar el rol del sistema financiero en el Ecuador a
partir de diferentes teorías científicas que sustentan la capitalización de las entidades
financieras mediante el proceso de evaluación de control interno y marco regulatorio
de Basilea III. El abordaje metodológico responde a una exhaustiva revisión de la
literatura y sistematización de las principales teorías sobre la crisis financiera
considerando la secuencia cronológica de los sucesos y procesos de cambio en el
transcurso del tiempo a partir de diferentes eventos, sectores de la sociedad y variables.
Obteniendo como resultado la contextualización del sistema financiero y los elementos
que inciden en ellas, reconociendo los antecedes, contemporaneidad, causas y
consecuencias de la crisis. Concluyendo que la desestabilización de sector financiero es
producto del impacto de las crisis financieras, reconociendo la importancia de los
procesos de control financiero en aspectos de eficiencia y rentabilidad para mitigar
graves consecuencias económicas, de ahí, la importancia de considerar los principios de
la normativa de Basilea III promulgados por Comité de Supervisión Bancaria de Basilea
para actualizar los procesos de control interno, su normativa regente y su impacto en la
entidad financiera, posibilitándolas para desarrollar nuevas estrategias de intermediación
financiera.
Palabras clave: Crisis Financiera, Entidades Financieras, Sistema Financiero, Ecuador
INTRODUCTION
Throughout history, various problems and serious consequences can be seen in the
economic sphere that converge in financial crises in several countries worldwide due to
precarious financial control processes. In Mexico the "Tequila Effect" of 1994, in Thailand
"The Dragon Effect" of 1997, in Russia the "Vodka Effect" of 1998, in Brazil the "Samba
Effect" of 1998, in Argentina the "Tango Effect" of 2001 and the "Corrida Bancaria" of
2002 in Uruguay (Acuña, 2011; León-Manríquez, 2015; López, 2006; Sotelo, 2009), are
some examples that denote how fundamental it is to evaluate the impact of the financial
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crisis at the global level in terms of efficiency and profitability in the financial sector
(Erfani & Vasigh, 2018).
By virtue of this, access to other markets facilitated by economic globalization forces
financial institutions to forecast macro and microeconomic behavior of the economy in
order to react to problems that could lead to losses (Martínez, Rivas, Martínez, &
Treviño, 2015) that could cause distrust in the financial sector (Priscila, Guevara, &
Cortez, 2019).
In the Ecuadorian context, in the banking crisis of 1999, a 5-day suspension of the
Ecuadorian financial system was announced, where the President of the Republic of
Ecuador, Jamil Mahuad, by means of Decree No. 685, froze for one year the deposits in
checking accounts with more than 2 million sucres and savings accounts with more than
5 million sucres. 685 freezes for one year the deposits in current accounts with more
than 2 million sucres and savings accounts with more than 5 million sucres and,
announces on January 9, 1999 the dollarization of the Ecuadorian economy anchoring
the price of foreign currency to fluctuations between 25 thousand and 35 thousand
sucres, measures that contributed to precaution the withdrawal of deposits, the
international monetary reserve, the increase in prices and the instability of the exchange
market (Romero, 2017).
However, the problems of fiscal, monetary, financial management and the deficient
management of the Deposit Guarantee Agency make it difficult for customers to recover
the deposited values (Camacho, Ciclio, & Erráez, 2015), being the biggest banking crisis
in Ecuador (1988-1999), which currently still evidences repercussions due to
incongruent credit and investment policies implemented without adequate financial
maturity, which at the time contributed to the loss of $8.6 billion and the closure of
more than 26 financial institutions due to liquidity problems.
In this context, the actions of the Basel Committee on Banking Supervision, which, by
updating internal control processes, seeks solutions to the crisis by promoting the
strengthening of the financial system in terms of risk management, capital requirements,
liquidity regulations, adjustments in the reaction capacity and good supervisory practices
of the control body (Caruana, 2010). Thus, in order to guarantee the financial stability
of the economy, it is necessary an adequate capitalization of the banking entities (Ikapel,
Namusonge, & Sakwa, 2020), vigilant of the fulfillment of objectives of effectiveness,
efficiency, reliable financial information and compliance with laws by all the members of
the institution (Blanco, 2015).
Therefore, the objective of this article is to analyze the role of the financial system in
Ecuador distinguishing its fundamental role in the Ecuadorian economy, considering that
its financial stability in the face of a possible economic crisis will depend on strengthening
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methodologies, internal control regulations and the various operational processes with
efficiency, efficacy and effectiveness in accordance with Basel III regulations in order to
regain confidence in the country's financial sector.
MATERIALS AND METHODS
Crisis in financial systems: a view from Ecuador, is a descriptive review study with a
qualitative approach. It is based on a systematic literature review of articles extracted
from journals indexed in scientific databases recognized by the epistemic community,
with advances in the analysis of the main theories on the financial crisis considering the
chronological sequence of events and processes of change over time based on different
events, sectors of society, concepts or variables.
The search criteria were based on the descriptors of the Ecuadorian financial system
crisis according to its changing behavior resulting from social events and phenomena.
Ninety-five articles and literature reviews were analyzed, 34 have been selected for the
relevance and pertinence of the contents to the subject of study. The relevance of the
literature review aims to take stock of the existing information on the topic and
establishes what others have written on the subject, revealing the scope of the research
on the crisis faced by Ecuador and the impact on its financial system.
RESULTS
Contextualization of the crisis in the Ecuadorian financial system
The banking crisis of 1998 and 1999 exacerbated by the dollarization of the Ecuadorian
economy brought monetary losses and the closure of 26 financial institutions due to
liquidity problems (Romero, 2017), in addition, even today the different strategies and
payment commitments unfulfilled by the control entities have caused nonconformity of
their creditors with a direct affection to their quality of life.
Thus, the management of problems referred by the operational processes of financial
institutions in Ecuador is key, and the Basel Committee on Banking Supervision is the
answer to the control of the financial system (Mínguez, 2011).
Currently in Ecuador there are 63 financial institutions registered, 25 corresponding to
Private Banking, 7 to Public Banking and 31 Savings and Credit Cooperatives of Segment
1 (Superintendencia de Economía Popular y Solidaria, 2019), all of them regulated by
Art. 308 of Title IV Development Regime that determine financial activities as public
services authorized by the state with the purpose of preserving deposits by
intermediating them efficiently to strengthen national productivity, social consumption
being environmentally responsible, observing the financing needs oriented to meet our
development objectives (Constitution of the Republic of Ecuador, 2008).
In addition, with respect to the financial situation of the Central Government, income
between $1,200 and $2,000 million U.S. dollars and outflows of $3.200 million between
2018 and 2019 revealing a deficit in the financial situation (Central Bank of Ecuador,
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2020), recognizing that different events have affected the financial system conformed by
the Banking and Savings and Credit Cooperatives motivating considerable changes in the
economy of Ecuador, it is from the year 2015 with the Organic Monetary and Financial
Code the Financial Institutions (IFIS) must develop new strategies to consolidate the
activities of financial intermediation (National Assembly of Ecuador, 2014).
The Association of Private Banks of Ecuador (2020) maintains that by the end of 2019,
the non-performing loan portfolio of the Private Banking and the Savings and Credit
Cooperative sector in terms of placements maintain a tendency to grow, and the Central
Bank of Ecuador (2020) asserts that the deposits component in Private Banking remains
around $8 million, in time deposits and government bonds between $15,000 and
$19,000 million and due to labor issues and price variation, the savings and credit sector
tends to decline.
On the other hand, the total balance of the gross portfolio decreased by 0.2% monthly,
reaching $28,607 million at the end of August 2020, but grew by 1.2% annually (see
Graph 1). Deposits grew by 1.3% compared to the previous month and by 6.9%
compared to the same month of the previous year, with a closing balance of $34,258
million at the end of August 2020 (see Graph 2).
Graph 1: Gross portfolio at the end of August 2020. Source: (Asociación De Bancos
Del Ecuador, 2020).
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Graph 2: Bank deposits at the end of August 2020. Source: (Asociación De Bancos Del
Ecuador, 2020).
Financial phenomena affecting Ecuador's economic development
The banking crisis resulting from mismanagement and poor execution and control of
financial activities is considered one of the main financial phenomena that generated
serious consequences in the political, economic and social sphere (Cubero, 2009), costs
assumed by the state for the closure of several financial institutions generating greater
losses due to the lack of ethics, efficiency and effectiveness in their administration,
making it impossible for the Ecuadorian people to recover their funds (Corredor, 2015),
efficiency and effectiveness in their administration making it impossible for the
Ecuadorian people to recover their funds (Corredor, 2015), consequently it can be
asserted that the lack of control by regulatory agencies is one of the main factors of the
crisis in financial institutions and creditors.
Supported by a historical review, we can explore what happened in Banco El Progreso,
where the liberal administration of the deposits of the non-financial public sector
triggered an over liquidity concentrated in some banks of the country, considering that
due to the crisis of Banco El Progreso, the financial sector was more profitable and even
speculated with the US currency to obtain short-term exchange gains of 10% to 20%.
Likewise, Filanbanco, considered as the first bank in the country, presented liquidity and
solvency problems, where the government of the day started with the bailout to mitigate
a systematic bankruptcy, the same situation was faced by Banco de Prestamos,
Tungurahua and Finagro, actions by the National Government that lead to increase
financial repression, affecting its financial stability, efficiency and effectiveness, limiting the
development and soundness of the banking sector (Igan et al., 2019; Romero, 2017).
On the other hand, when trying to qualify what was executed by the Deposit Guarantee
Agency, it can be argued that its work was extensive and even overlapped with the
Central Bank and the Superintendency of Banks, exceeding the regulations of the
General Law of Financial System Institutions.
However, banking crises weaken the internal control processes (Laeven & Valencia,
2018) carried out by the boards of directors of the entities minimizing the achievement
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of objectives framed in the effectiveness and efficiency of operations, reliability of
financial information and compliance with legal regulations (Blanco, 2015).
DISCUSSION
Internal control seeks to ensure the assets of the organization by maintaining reliable
records with an effective administration (Estupiñan, 2015), in effect, the internal control
processes of the financial sector are related to management activities and operations
that seek to meet the objectives set out in the internal and governmental policies with
efficiency, effectiveness, effectiveness in order to improve the quality of service of the
financial system, which is why the need to anticipate and ensure security against events
such as banking crises weaken the control processes of the regulatory bodies is
demonstrated.
Therefore, it is key to identify and manage the financial institution's operational
problems. In response to the global financial crisis, the Basel Committee on Banking
Supervision, based on the principles of the Basel III regulatory framework, requires
financial institutions to integrate operational risk control into their activities in order to
achieve a resilient banking system, hence, the Committee of sponsoring organizations
or COSO report applies a systemic approach to identify, measure and monitor risks to
define actions to be executed oriented to mitigate the risks of financial institutions, such
internal control methodologies are considered non-traditional by having as a basis good
business risk practices and active monitoring (Mantilla, 2018).
CONCLUSIONS
From evaluating the impact of the financial crisis that managed to destabilize the financial
sector, the importance of the control processes that the financial system deserves in
terms of efficiency and profitability in order to mitigate the serious economic
consequences that could develop in the country becomes evident. In the case of
Ecuador, the banking crisis and non-compliance with regulations resulted in monetary
losses and 26 financial institutions closed due to liquidity problems.
Hence the importance of considering the principles of the Basel III regulations
promulgated by the Basel Committee on Banking Supervision to integrate in its activities
the risk measurement of segments such as systems, processes, human resources, internal
and external fraud, policies and regulations. Specifically, the Basel III regulatory
framework makes it possible to update internal control processes that are currently
insufficient, their governing regulations and their impact on the financial institution,
enabling them to develop new financial intermediation strategies.
Therefore, it is necessary for financial institutions to work under ethical and moral
principles, concerned about the optimal functioning of their activities and the control of
their management oriented to be efficient and effective, complying with international
regulations and those of the country's governing bodies in order to avoid corruption in
the Ecuadorian financial system.
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