As reported in The Wall Street Journal, Venezuelan President Hugo Chávez’s decision to take over a unit of Spanish giant Banco Santander SA carries a new set of risks, touching on local confidence in the banking system  As the article notes:

“…Banking affects Venezuelans more personally and immediately than oil, telecommunications and other strategic industries in which Mr. Chávez has intervened. The move could backfire if depositors lose faith in the government’s ability to protect their savings, and yank their money.

…One key question will be whether Mr. Chávez will use the nation’s vast oil wealth to acquire more banks. Big international lenders, including Citigroup Inc. and Spain’s Banco Bilbao Vizcaya Argentaria SA, also have units in Venezuela. Any further acquisitions might not be received well, observers said.

While in the U.S. the government is seen as a guarantor of bank stability, nationalizations are viewed with deep skepticism in many Latin American nations, where official corruption and incompetence are pressing issues. Many Venezuelans already blame government mismanagement for a host of problems ranging from food shortages to the declining productivity of the oil industry.

“Chávez said the bank’s deposits will now be in the government’s hands, but the problem is there may be people who think that’s not such a good thing,” said Alejandro Grisanti, a senior Latin America economist who follows Venezuela at Barclays Capital Inc.

Mr. Chávez announced last week that the government would buy Banco de Venezuela, the nation’s third-largest bank in terms of deposits, back from Santander at a “fair” price. The bank was privatized in the 1990s. Santander had been in talks to sell it to a local banking group. After learning of the talks, Mr. Chávez decided Venezuela would buy it, he said.

Santander confirmed that it had been in talks with a private group but was now negotiating a sale to the government.

The Spanish government said Friday that it wouldn’t get involved.

The specter of nationalization has loomed over the banking sector, and Banco de Venezuela, in particular, for a long time. Banco de Venezuela has a big network of branches that may be used to more efficiently distribute welfare payments and subsidies. Buying it fits with Mr. Chávez’s strategy of getting more control over government bank accounts.

While Mr. Chávez is taking pains to present the nationalization as a legal purchase of a bank that was already for sale, Venezuela’s history of banking crises will make buttressing confidence over the long term a trickier task. The recent experience that Venezuelans have with banking collapses has conditioned them to act faster to pull their deposits when they sense danger.

…Santander is selling at a key moment for the banking system. The government is set to publish a long-awaited revision of bank regulations expected to increase government controls.

Venezuelan banks have been highly profitable under Mr. Chávez, but the operating environment has changed in the past year. The industry was squeezed, for instance, by the government’s decision to move deposits from private banks to government banks. Today, 65% of government deposits are in private banks, compared with 80% a year ago.

Meantime, bank executives have privately questioned the quality of some loans that banks hold. Banks are required to dedicate nearly 47% of their loans to politically sensitive areas such as agriculture. What’s more, credit-card and commercial lending may have overheated as Venezuelans took on debt as a hedge against 30% inflation rates.”