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American Banker

Tax Plan Offered To Reverse Deposit Drain In Puerto Rico


September 29, 2003
Copyright © 2003 Thomson Media Inc. All rights reserved. 

WASHINGTON -- Loan demand, particularly for mortgages, is robust in Puerto Rico, but deposit growth is not, so all but one of the island s 11 banks are relying heavily on brokered deposits.

Arturo Carrion, the executive vice president of the Puerto Rican Bankers Association, said he knows of a way to attract more core deposits: the creation of several tax incentives, for which he lobbied in Washington this month.

One of them would give U.S. businesses with Puerto Rican operations an exemption on 90% of their Puerto Rican income that is invested into any U.S. business or property. The proposal would also give these businesses incentives for investing the income in Puerto Rico.

Mr. Carrion said this would create jobs and deposits by attracting a number of manufacturing firms to the island.

Puerto Rican banks can continue to contribute to the economy, as long as the Puerto Rican economy helps us do that, he said in an interview Wednesday. So we need this injection to help maintain the strength of the manufacturing sector, which has been the backbone of the economy.

The incentive would be similar to one that was created in 1976. It gave U.S. companies a full tax exemption on income earned in Puerto Rico while also requiring them to keep their funds in Puerto Rican banks.

In 1996 Congress eliminated the deposit requirement and started phasing out the exemption, which is scheduled to be revoked completely by 2005.

Since the phaseout began, Puerto Rico has lost 18%, or about 27,000, of its manufacturing jobs, and banks there have lost more than 90%, or about $7.4 billion, of their deposits from U.S. manufacturers.

Most of the banks have turned to brokered deposits, which now account for close to one-fourth of their total deposits, compared to 4% in 1996, according to the Federal Deposit Insurance Corp. Brokered deposits make up about 5% of the deposit total for all U.S. banks.

Though brokered deposits which typically come in the form of certificates of deposit are a quick way to acquire funds, regulators view them as risky, because they are much more volatile than money deposited by retail customers. Rapid transfers by investors looking for a better rate could cause a liquidity crisis, regulators contend.

Tom Monaco, an analyst for Keefe, Bruyette Woods Inc. in New York, said that Puerto Rican banks have few options, especially since the $36 billion-asset Popular Inc. controls such a large share of the island s retail deposits. (Unlike the 10 other banks based there, Banco Popular gets only about 5% of its deposits from brokers.) They need the funding, and it s cheaper to go out into the wholesale market than to raise deposits locally, Mr. Monaco said.

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