Prepared by Juan Pablo Cordoba (WHD) and Laura Papi (ICM).
Following the banking crisis of 1994-95, the government implemented various bank restructuring and debtor support programs that helped reestablish the solvency of the banking system and avoided losses to depositors. The Mexican banking system is currently considered to be well-capitalized and profitability has resumed.
The FSAP for Mexico found that the banking system does not pose systemic risks and currently all banks except one comply with the 2003 risk-weighted capital requirements.
Restructured loans absorb fresh bank funds because in some of these programs the government issued zero-coupon bonds which accrue income to the banks but do not provide liquid funds and, in other programs, banks have to write-off a portion of the asset on an annual basis as part of the loss-sharing agreements with the government.
It has also been reported that when two banks merge the lines of credit to borrowers by the new institution are not necessarily equivalent to the individual lines that each bank had with that borrower which may result in a credit squeeze.
Nonrestructured bank loans to the private sector are a better indicator of banking sector credit activity because it excludes all credits associated to restructuring programs. The latter include restructurings via UDIs trust funds (trust funds in which debts were restructured and redenominated in inflation indexed instruments), discounts on payments absorbed by both the government and banks, or exchanged for bonds issued by the bank deposit insurance agency (Institute para la Protection al Ahorro Bancario, IPAB) or its predecessor, FOBAPROA.
SOFOLES are nondeposit taking financial instutions that fund themselves via loans provided by commercial banks, the Federal Housing Institution (Sociedad Hipotecaria Federal, SHF) and commercial paper placements.
In addition, some private companies have their own pension funds: however, data on these are not available.
The development of a market for long-term fixed-rate securities has been promoted by the federal government: the government now issues fixed-rate securities on a regular basis (3-and 5-year bonds since 2000, 10-year bonds since 2001 and a 7-year bonds that was introduced in 2002). Institutional investor participation in this market has been strong and the existing government benchmark issues have facilitated the recent emergence of corporate issuers.
Although these figures refer to stocks, they can provide an indication of the importance of reinvested earnings in overall firms’ financing.
It should be noted that the BOM survey reports the percentage of firms who use a specific source of credit but the answers are not weighted by the amount of the credit provided. Therefore, the results should not be understood as indicating that a given source of credit is more important on the basis of the amount of the financing provided to the firms but only in terms of the number firms that have access to that form of credit.
However, this rapid increase in “other” financing needs to be interpreted with caution because the sample of AAA companies is very small (under 30 companies). Large swings in this category can be due to just one or two additional firms issuing in the local bond market.
Publicly available information provides the composition of credit to the private sector by sectors of economic activity but not by size of companies. The BOM is currently working with the CNBV and the banks to improve the survey of credit data provided by banks.
The BOM survey contains also data on firms that provide financing to other enterprises. Over three quarters of firms report that they provide some form of credit to other firms. The share of credit to their clients amount to almost 80 percent, and to their suppliers and enterprises of the same group about 10 percent each.
Consumer credit here excludes credit to households provided by non-financial institutions such as wholesale stores which at end-2001 was equivalent to 1.2 percent of GDP. This source of financing has grown nine-fold in real terms since 1994.
In addition to SOFOLES and bank loans, there are consumer loans granted directly by commercial establishments and retail stares. The total amount of registered consumer loans though these providers of credit was about 0.3 percent of GDP at end-2001.
FOVISSSTE and INFONAVIT are specialized public agencies which administer an earmarked contribution from public and private sector workers, and whose purpose is to provide credit for low income housing. Commercial banks borrow from these agencies at competitive rates and in turn provide housing lending to workers affiliated to them. If the credit is in good standing throughout the life of the loan, FOVISSSTE and INFONAVIT provide a discount of up to 20 percent of the value of the loan.
This is because SIEFORES’ funds have grown significantly and hence the previous limit would have entailed a very large amount of paper of an individual issuer.
Pension funds are restricted to having a maximum of 10 percent of their portfolio in foreign currency securities, which must be issued by Mexican entities. While previously, only UMS dollar bonds were allowed, recently the choice has been extended to issues of any Mexican issuer with investment grade rating on the global scale either in U.S. dollars, euros, or yen.
The changes to this law would allow SIEFORES to invest up to 20 percent of their portfolio in securities issued by non-resident entities, while at present they cannot invest in these assets. This limit would be introduced gradually and it would be 10 percent the first year.
The CONSAR together with the BOM have also recently introduced a regulation that allows pension funds to use simple derivatives to mitigate their risks.
The government anticipates that the trust funds will be used not only for commercial loans but also for housing loans and thus provide a boost to this market as well. Nonetheless, demand for this mechanism for housing loans may not be as high as the authorities anticipate because it does not provide the same level of legal protection that homeowners are used to under traditional mortgage-backed loans.