A 660 million dollar withdrawal in deposits (12% of the total) in two months increases the chances of Nicaragua’s Central Bank (BCN) finding itself forced to take drastic measures to tackle this problem. One of these measures involves limiting how many dollars citizens can withdraw from banks. Will assets be frozen in Nicaragua?
Even though 12% represents a worrying level of withdrawals for any systems analyst, economist Jose Luis Medal doesn’t believe that the BCN will implement such a controversial measure in the near future which would only relieve banking problems for a short while but end up creating panic which could be even more detrimental to the economy.
Who decides to introduce a freeze on bank accounts: the BCN or every individual bank?
It would be the Central Bank’s decision. It isn’t any individual commercial bank’s decision to make.
How low do deposit levels have to fall in order to put a freeze on assets?
There isn’t an exact number, but it isn’t a very high percentage. I mean to say, it couldn’t be 30% of deposits, to give you an example. The reason is simple: banks don’t have all of the deposits locked up in their vaults. Most of their deposits are in credits which are loaned out to clients. Some deposits are kept at the Central Bank as a legal reserve, and other deposits are kept in cash in bank vaults.
A freeze on assets isn’t the only monetary and exchange action that the Central Bank can take. It could devalue the Cordoba as an alternative, place regulations on currency exchanges or even a combination of these two measures. The only certain thing here is that a 12% drop in deposits between April 18th and June 18th is an alarming figure.
I really think the Central Bank will adopt a drastic policy with very serious consequences if depositors withdraw an additional 12% in the next two months. Not a freeze on assets necessarily: it could be a devaluation, or an exchange control, which would have the same effect as a freeze on assets.
A high percentage of deposits are in dollars. What effect will this have in this situation?
A highly dollarized financial system, like Nicaragua’s, is very fragile when deposits are withdrawn in dollars. This wouldn’t be the case if the economy wasn’t dollarized. If all of our deposits were in Cordoba’s and there was a financial panic, the Central Bank would simply just print more Cordoba’s to finance any banks’ liquidity problems.
This is the main role of the Central Bank: to be a banker of banks, their moneylender in times of crisis, as a last resort. Because the Nicaraguan financial system is highly dollarized, it is extremely fragile when depositors withdraw dollars.
As well as a loss of confidence in the national bank, which is already bad enough, what other consequences might this have for our economy in general?
The consequences would be dire. I mean we’d be speculating right now if we wanted to assess the effects right now. These consequences would be short-term. I don’t share the same opinion as an economist who said that the national economy has last another twelve months of our current situation. If dollars continue to be withdrawn from banks (which is already a financial panic in itself somewhat), the situation can get a lot worse very quickly.
In this case, how long would it take for the economy to recover?
I prefer not to speculate. But, in the case of Argentina’s freeze on assets, it took them years to recover.