The Chilean Road to Socialism


Banks, Bankers, and Banking

By mid-1971 the Popular Unity government had achieved an important foothold in the banking sector, long a primary seat of oligarchic power in Chile. In the main, this was accomplished by the simple expedient of making it convenient for stockholders to sell their shares in private banks to the government Development Corporation.

These articles describe the background to the government's intervention in the banking system. They show both the purposiveness and the cautious diplomacy with which the government has so far pursued the completion of the Popular Unity's program. This program gave prime importance to the total socialization of banking.

First published as an advertisement in the New York Times, January 25, 1971.


Banking Concentration

The Chilean economy presents strong concentration, particularly visible in several areas. In particular, the banking sector presents more concentration than the others and this has been an additional cause of the stagnation of the Chilean economy.

Among the private national banks, as of June 30, 1970, three represented 44.5 per cent of the deposits, obtained 55.1 per cent of the profits and participated in 44.3 per cent of the loans. Furthermore, one bank by itself realized more than one third of the profits and represented more than one fourth of the loans and deposits.

With available precedents duly considered, it is possible to state that the concentration in the banking sector is increasing, and that some of the restrictive policies and rules for the quantitative controls of bank credit have contributed to making the situation worse.

The main problems that have derived from this situation of increasing banking concentration are:

1. Credit concentration. This bad habit has lasted a long time within the banking system. In fact, its meaning is that a group of monopolistic enterprises with strong ties in the banking system obtain the largest percentage of the credit, while a large number of medium-size and small-size enterprises have no access to this source of financing.

In addition, the conditions under which credit is given are discriminatory, as the interest is lower for the dominating monopolistic groups, which have an additional certainty of opportunity. Over the course of many years, bank credit in the Chilean economy bore a negative real cost, which has meant a subsidy from the rest of the economy to the credit users. On the other hand, the small enterprises suffer due to extended procedures, and are charged higher interest than the legal rate—through various devices, such as commissions for other services that banks render—and do not receive credit when it is convenient to them.

In December 1969, 66 debtors representing a mere 0.4 per cent of the total receiving bank loans were enjoying 28.6 per cent of the credit; and 1.3 per cent enjoyed 45.6 per cent of it, which means that 208 firms were receiving almost 50 per cent of the credit available. The other extreme was made up by 62.0 per cent of the debtors enjoying only 8.2 per cent of the credit. These figures concern those who have access to bank credit; a large number of persons who do not operate within the banking system is missing.

The monopolistic supply enterprises, for instance, grant credit to the users of their products. Such is the case for paper, concrete and steel; and in general they exact from the medium-size and small-size firm truly usurious interest, which reaches real rates of 20 per cent in some cases.

This circumstance also affects the consumers, who in theory pay a nominal rate of 5 per cent monthly, which translates into a real cost of 15 per cent, 20 per cent and more per year. In this way the distributor, who in the majority of cases is a monopolist, has had access to bank credit at an actually negative cost and has obtained 15 per cent or more in real rate of return; and this gives him a very high margin of speculative profit and leads him into larger debts with the banks.

2. The phenomenon of concentration can also be observed in the regional distribution of financial resources. A tendency toward the concentration of credit in the province of Santiago can be observed. This concentration is relatively stronger than the economic activity, employment and production. For instance at the end of 1965, 62.5 per cent of the credit was granted in the metropolitan section of Santiago in relation to the rest of the nation and this percentage increase to 66.8 per cent in June 1969.

3. If the emphasis of the banking policy is on the quantitative control, the destiny of bank credit is left to the discretion of the dominating groups, and it does not go to the sectors having priority for the development of the economy.

When a policy of selectivity was started for credit, no results came forth. Special credits amounted to 43.6 per cent of the loans at the end of September 1970. There are some lines where the selectivity is fairly strict. The total of special loans came up to Escudos 3,175.0-million in September 1970, and loans totalled Escudos 7,227.2-million. With a strict selectivity rule, it can be said that only 3.7 per cent of the credit is governed by rules clear enough to be considered really selective.

Bank Reform

The precedents we have been examining give some indications that banking activity in Chile is characterized by monopolistic practices and has been aimed at favoring the monopolistic industry's interest in the nation. The controls that monetary authorities have sought to utilize have proved inadequate to correct this situation and the faults that it produces. All this had led the Government to the conclusion that it is necessary to establish State control over the banks.

Government control of the banking system will lead to the reorientation of the credit granted by the above mentioned system toward those productive activities which have priority for the development of the economy, within the Government's plan.

Considering that credit resources are limited, they must be utilized with social criteria which are in agreement with the requirements of economic development. And this puts on us the obligation to parcel out these resources in an extremely equitable way among a larger number of users, allowing them to reach full integration with the national productive system, thereby causing considerable benefit to the entire economy.

It is also necessary to distribute the financial resources among various regions, in relation to the needs of each section and the activities that can be developed there in conformity with National Planning.

As a third consideration, with a state banking system, it is possible to operate with very rapid mechanisms for the allotment of financial resources; and it is possible to obtain a correlation between general economic policy and financial policy, so that the latter may efficiently serve the requirements of the fields of endeavor that are to be promoted and augmented.

Finally, it is possible to relate the various sources of non-bank financing with the monetary and credit institutions, working out an overall coordinated plan, which takes into consideration all the sources of financial resources and the application of a common policy with respect to credit.

An unsigned article from the opposition magazine ¿Qué Pasa? I, Nº. 14, July 27, 1971.

The Banking War

On December 30, Allende announced that he would put before Congress by January 7, 1971, a bill to nationalize private banking. In the meantime, in order to accelerate matters and not to prejudice the smaller stockholders, Allende added, CORFO [1] would purchase any shares offered by these stockholders during a limited period of time (January 11 to 31) at a price that would be in excess of the market values fixed by the nationalization law. This purchasing price, offered as an incentive, would be based on the average quoted on the stock market during the first six months of 1970.

Months have gone by and the project has yet to be sent to Congress. The delay can be attributed to the fact that many shareholders, tempted by an apparently attractive offer—prices are actually 21.9 per cent to 92.4 per cent lower than the book value of these shares—or "persuaded" by the state's propaganda, have sold their shares, causing many banks to fold. Of the larger private banks, only one—the Español-Chile—has been officially nationalized. Several others have been "intervened" by the state, namely the Edwards Bank, the Sudamericano, and the Crédito e Inversiones. These have not, however, been nationalized. The largest concern of them all, the Banco de Chile, remains neither intervened nor nationalized.

The Decisive Battle: The Banco de Chile

After many skirmishes between those concerned, the decisive battle for the Banco de Chile is about to commence. The following statistics show the importance of this bank:

—Before CORFO began purchasing shares, the Banco de Chile had over thirteen thousand shareholders from all classes, including Mrs. Graciela Letelier, widow of the late President General Ibáñez, the Bank of Bilbao, and, although holding very few shares, prominent politicians of the present government. . . .

—The holdings lodged with this bank in Chilean escudos represent 21.4 per cent of the total held by private entities. This percentage is larger than the total held by all the banks controlled by the state. Banco de Chile holdings are more than double those of the Banco Español-Chile.

—Holdings of foreign currency by the Banco de Chile represent 29.6 per cent of the total lodged with private banks and are more than five times the Banco Español's holdings.

—Profits gained by the Banco de Chile represent almost one third of the profits in private banking in Chile.

From the above information one can only reach the conclusion that, while the Banco de Chile continues as a private entity, there is no socialization of private banking.

Kid Glove Treatment?

The Banco de Chile, like the rest of the banks, has suffered from the financial restrictions imposed by the government in its softening-up campaign, such as the decrease in the rates of interest and the loss of the "brokers' market" in foreign exchange. This last measure has been a severe blow to the bank. These recent measures have resulted in extremely poor balance sheets for all banks for the first six months of the year. The Banco de Chile balance sheet for the first six months has not as yet been published, due to the fact that the bank superintendency has not approved the balance. It is supposed, however, that the results will be poor. Nevertheless the bank should, in view of its power, be able to withstand these financial blows.

In the meantime, CORFO continues to purchase shares of the Banco de Chile and now holds between 30 per cent and 35 per cent of the total shares [2] ; thus the state controls between 40 per cent and 45 per cent of the votes at any shareholders' meeting, because only 80 per cent of the shareholders attend. The majority shareholders are being severely pressured to sell their holdings. One is the Banco Hipotecario de Chile, which holds almost two million shares and has had financial difficulties, making it more susceptible to pressure. Another is the enigmatic Rafael Giacamán, who alone holds over 1,800,-000 shares. Moreover, CORFO is at present pressing minor shareholders who have not yet sold their stocks to do so. . . .

At the coming meeting of the Board of Directors, whose mandate lasts until January 1973, CORFO, with its present holdings, could take the opportunity of censuring the Board and so bring about a re-election.

It does not seem likely at present that CORFO is moving along these lines, and the government, moreover, has not brought into play one of its more formidable weapons, that of state intervention, which it has applied against other banks. The lack of sufficient reasons to intervene the bank does not explain the government's attitude, because such reasons were not important in justifying other interventions, such as that of the Banco Sudamericano.

Why, then, the apparent "kid glove" treatment toward the Banco de Chile, when this is the most appetizing pick of the private banks?

The Root of the Matter

What has in fact protected the Banco de Chile so far is that it provides a channel into Chile for numerous private external credits. These private credits are of great importance for our foreign trade, especially now, when our foreign reserves are low. The most important foreign credit to Chile channeled through the Banco de Chile to date has been an agreement with the Chase Manhattan Bank of New York. All these fines of credit would be lost in the case of intervention or nationalization, as has been the case with credit withdrawn from those banks already in the hands of CORFO, even though the amounts are not great. It has been due only to this foreign credit that the ax has not yet fallen on the Banco de Chile.

Another reason for the delay in the nationalization of the bank has been the attitude of its employees. For them, a government-owned concern would mean a threat to their Social Security. The employees fear that if the bank is nationalized, their Social Security would be merged with a state-owned system that would be more bureaucratic and poorly financed and that would, in turn, result in lower benefits for them. The employees also fear that their salaries would be frozen and leveled with those paid to employees of the state-owned banks.

Employees' positions within the bank would most likely be governed by political tendencies. Carlos Ortega, President of the Banco de Chile's union, warned that "there exists a danger that promotion within the bank would depend on whether the employee is a government supporter —of whatever government is in power at the time—and that this will affect us the same way as it has the fiscal employees who have their careers cut off with each change of government."

A Compromise Under Way; The "Tough" and the "Soff "

For these reasons, a quiet compromise may be possible between the bank and the state. On both sides there will be tough and soft attitudes. Within the bank, "tough" Vice-President Alfonso Campos has taken over the negotiations from "soft" Alfonso Vinagre. Vinagre, ex-manager and now president of the bank, was counseled by another "soft," a colleague and intimate friend of President Allende and ex-Minister of President Ibáñez, Luis Correa Prieto. Correa was named director of the bank last October, when Fernando Larraín resigned.

On the governmental side, there are also divided opinions. The president of the Central Bank, Alfonso Inostroza, of the Socialist Party, favors the compromise, while his vice-president, Hugo Fazio, a Communist, opposes the initiative. Fazio insists on nationalizing the Banco de Chile at all costs, disregarding the consequences this may have on the Chilean economy. He has tried, so far with no positive results, to stir up the unions against the bank. Friction between Fazio and Inostroza is not new. Inostroza attempted to give the Banco Edwards an "honorable" settlement over the question of its credits in dollars to a foreign firm. Fazio, however, opposed Inostroza, who resisted, and forced the intervention of the Banco Edwards.

A peaceful compromise has a new supporter now in the person of President Allende. On July 12, he cordially invited Messrs. Vinagre, Inostroza, Fazio, the Minister of the Exchequer, and Americo Zorrilla, of the Communist Party, to dine at his residence. Several formulas of agreement were studied without a definite settlement being reached. The two formulas with greater chance of succeeding, and that also have the approval of the employees, could be either a "mixed corporation" with five directors from the private circles, five fiscal directors, and Vinagre as president of the Board, or four CORFO directors who would have executive powers in the key areas such as foreign exchange. In this second possibility, Vinagre would remain as president of the Board, since he has the confidence of the present government and also because he is a career man in the Banco de Chile who has risen to his present position through his own merits. He also has the backing and confidence of the unions and shareholders whom he represents before the Board.

Notwithstanding all that has been said on this matter, there are still skeptics who do not trust the outcome of the conversations that have been held and believe that, under the counter, the state has been steadily increasing its share holdings with the intention of launching a surprise announcement the minute they control over 50 per cent of the shares. For those who enjoy a good fight there will be no pleasure from this one. The battle for the Banco de Chile could terminate in a peace treaty, but no one knows for sure whether this will be a truce, an impasse, or an unconditional surrender.


1. CORFO is the state Development Corporation.

2. As fax as is known, no U.S. credits were given to any Chilean bank after August 1971.

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