Central Banks: The Paraguayan Warning

The spectacular collapse of Paraguay’s Ueno bank shows the price of a double connivance: between political power and the central bank on one side, between the supervisor and the commercial banks on the other. The ousted president and the governor he appointed are now in custody. A direct warning to Europe.

For thirty years, it has been good form to demand that central banks be independent of governments. Far less often are they asked to be independent of the banks. Paraguay has just shown – in four days – what the two dependencies cost when they come together.

Until recently, the country’s main stadium bore the name of a bank: Ueno. The bank sponsored the national soccer team and claimed 2.9 million customers, six out of every ten adults in the country.

On Tuesday, November 3, the central bank seized Ueno; its app, its cards and its transfers all went dead at once. That same day, the central bank’s governor, Carlos Carvallo, resigned, before the country’s president, Santiago Peña, in turn tendered his own resignation on Thursday – which Congress refused. Had he left office by resigning, he would, like every former president, have become a senator for life – except that within the hour the Chamber of Deputies had impeached him.

On Friday, in his absence, the Senate removed him from office unanimously. That same evening, prosecutors, who suspect both men of breach of trust among other offenses, ordered their detention. The former governor turned himself in to the police; the former president spent the rest of the night at the barracks of the Presidential Escort Regiment, since his safety could no longer be guaranteed at home in the face of protesters.

Four days were enough to go from the palace to the barracks.

One Line on a Résumé

Yet there is nothing mysterious about the collapse: Ueno lent to its owners’ companies, far beyond the legal limits and without adequate collateral. Once the books were corrected, its capital ratio fell to 5.56 percent, against a regulatory minimum of 12 percent. The mystery lies elsewhere: how could Ueno lend on such a scale for a whole year?

Until August 2023, Carlos Carvallo chaired the finance company from which Ueno grew, before taking the helm of the central bank, appointed by Mr. Peña – himself a shareholder in Ueno’s holding company until the spring of 2025. The central bank may insist that its governor recused himself from his former employer’s files; the loans, for their part, kept flowing.

Public money eventually followed: Ueno held more than $800 million in public funds, roughly one-eighth of the country’s annual tax revenue. More than $350 million of it came from the state pension and health fund, whose investment rules had been loosened twice, in 2023 and again in 2024. According to the complaint now being investigated by prosecutors, that fund’s deposits at Ueno grew more than twenty-fivefold. In October 2024, Mr. Peña defended these deposits – while he was still a shareholder in the bank.

Europe Has No Reason to Smile

On Friday, before the Senate and citing Credit Suisse, one of the president’s lawyers argued that “banks fail everywhere.” He is not wrong. Yet everywhere, too, public bodies look the wrong way. In 2019, Germany’s financial supervisor filed a criminal complaint against two Financial Times journalists who were exposing Wirecard… which went bankrupt the following year, with €1.9 billion missing. The résumés tell no better story: from 2002 to 2019, Germany’s IWH institute tracked 185 heads of banking supervision in ten large European countries. Its verdict? Nearly four in ten came from the banking world. Paraguay, then, combined both dependencies: a governor straight from the house, appointed by a president who owned a stake in it.

The markets looked no harder. In March, J.P. Morgan and Bank of America placed $350 million of five-year bonds for Ueno, with a 6.7 percent coupon. S&P had rated them BB a week earlier, and they were slated for listing in Luxembourg. Demand reached one and a half times the amount on offer. The bank even had a European shareholder: OTP, Hungary’s largest bank, owned 9.99 percent of its parent company. Eight months later, Ueno was shut down and Fitch had cut it to default. The banks that placed the bonds and the agencies that rated them were paid to look. None of them sounded the alarm. All of them, at bottom, relied on the supervisor. That is precisely why the supervisor cannot come from the house.

Five Years, Both Ways

Safeguards exist, but they are flimsy. The ECB’s code of conduct provides for a waiting period of up to one year for its senior officials – and a public reprimand as the harshest sanction. In 2020, the executive director of the European Banking Authority left to run the European lobby of the big banks. The European Ombudsman later ruled that the move should never have been allowed. Too late.

The rule that matters fits in one line: a five-year wait, in both directions. No one supervises the house he has just left; no one joins the house he has just supervised. I will be told that the expertise lies in the banks. Yes – and it will still be there after five years. Paraguay dictates a second rule: not one cent of public money in a bank in which whoever governs has an interest.

I grew up in Lebanon; I witnessed, and endured, what becomes of a nation’s savings when the central bank governor, the bankers and the ministers belong to the same small circle – when they are not one and the same. It took nearly five years to arrest the former central bank governor there. In Paraguay, four days. The country failed to prevent the disaster; it did not wait to demand accountability. Europe, for its part, still lacks the rule that would keep it from coming to this.

A stadium changes its name overnight. A central bank takes years to win back its credit.