APPENDIX I Key Milestones in the Reform of the Financial Sector (2001-2006)22
Credit Institutions Law and Financial Groups Law. Aimed at channeling a greater proportion of national savings through the financial system; fostering long-term savings; strengthening banking regulation and supervision; promoting transparency and competitiveness; fostering new financial products and services; and strengthening the credit institutions’ corporate governance; and broadening the range of services offered.
Amendments to the Rules of Capitalization Requirements for Multiple Banking Institutions and Development Banks. Aimed at advancing the convergence between banking regulation and international standards.
Amendments to the Miscellany on Credit Collateral. Aimed at promoting bank lending by reducing transaction costs; widening the options to secure credit transactions; granting greater judicial certainty to creditors and borrowers; and promoting an orderly and sustainable recovery of defaulted bank loans.
Credit Information Institutions Law. Aimed at regulating the establishment and operation of credit information societies; and ensuring a proper access to credit information, while respecting valid privacy concerns.
Credit Institutions Law. Established a prompt corrective regime consistent with international best practices.
Law of Transparency and Ordering of Financial Services. Regulates commission fees, interbanking fees and other aspects related with the provision of financial services; prohibits discriminatory practices between credit institutions and between users; establishes transparency requirements in contracts and check account balances, credit and debit cards; foresees transparency mechanisms to allow clients of credit institutions to know the carried out transactions and their fees; and establishes sanctions for breaches of the law.
Organic Law of the Federal Mortgage Society. Aimed at increasing the housing supply for wage earners and other workers; promoting the construction and acquisition of housing, preferably low-income; and fostering mortgage securitization and increasing credit supply for housing construction and acquisition.
Popular Savings and Credit Law and Organic Law of the Bank of National Savings and Financial Services. Strengthened the institutional and regulatory framework of popular savings and credit activities, increasing access of low-income sectors and small enterprises to the formal financial sector; established the conditions to foster the development of a popular savings and credit system; created the Bank of National Savings and Financial Services, which offers training and consulting services to popular savings and credit entities, and promotes cost reduction through centralized provision of services subject to economies of scale.
Organic Law of the Financiera Rural. Aimed at supporting the development of agriculture, forestry, fishing and other rural activities. The New Financiera Rural replaced the former Rural Credit Bank (BANRURAL). Financiera Rural does not take deposits from or issue debt to the public, it is financed by the government through the budget with all appropriations, allocations, financing and guarantees properly and explicitly accounted for in the budget and approved by congress.
Amendments to the Securities Market Law (2001). Aimed at promoting the development of the securities market by making it more transparent, efficient and accessible. The 2001 amendments enhanced information, disclosure, minority stockholders rights; improved corporate governance practices; introduced a new versatile instrument (certificado bursatil), a security note that can be issued by private and public debtors; incorporated the central counterparty (lender and borrower rights and obligations in securities transactions) to the market structure, reducing systemic risk in the securities market; introduced a consolidated regime applicable to public companies; redefined the functions and responsibilities within the corporate structure; introduced audit and corporate governance committees with independent Board members; included clear mandates and fiduciary duties for Board members, managers and external auditors, and further improved minority shareholder rights. It also it promoted access to abroad securities market to small- and medium-size firms through new corporate vehicles.
Mutual Fund Law. Aimed at facilitating access to the stock and debt market by a wider range of investors. It improved mutual funds corporate governance practices; allowed for a mutual fund to change from one mutual fund operator to another, to promote competition and to reduce investment manipulations not associated to maximizing the investors’ returns; allowed for a more flexible investment regime; and prohibited banks and investment banks to act as mutual fund operators but allowed them to carry out this function by establishing a subsidiary.
Amendments to the Law of Mutual Insurance Institutions and Associations and the Federal Sureties Institutions Law. Aimed at strengthening the institutional and regulatory framework for the activities of insurance institutions; increasing the efficiency of insurance institutions’ operations; consolidating the insurance sector’s legal framework with that in place for the financial sector; and developing best corporate practices among intermediaries. Recently, a new amendment introduced the Mortgage Credit Insurance (Seguros de Crédito a la Vivienda) and Financial Warranty Insurance (Seguros de Garantía Financiera).
Modernization of the legal framework that applies for Sofoles, leasing and factoring companies. Aimed at enhancing competition in the credit market, reducing administrative costs, and fostering the legal framework that applies to financial leasing, factoring and credit. This reform included the deregulation of leasing and factoring activities.
Amendments to the Income Tax Law. Established a fiscal regime that allows for the development of two investment vehicles, the FIBRAS (Fideicomiso de Infraestructura y Bienes Raíces), a vehicle similar to the Real Estate Investment Trusts in the U.S., and private equity vehicles.
Amendments and Additions to the Retirement Savings System Law. Opened the possibility for more workers to access the benefits of the New Pension System, including workers not registered in the social security institute (workers affiliated with the social security system for public sector employees, state and municipal governments, and public universities or working independently); allowed complementary contributions for retirement for all workers; and allowed investing, up to a limit of 20 percent, in foreign securities.
Payment System Reforms. Revamped the legal framework by enacting a Payment Systems Law, in order to ensure payment finality and improve the execution of collateral and the oversight powers of the BOM; eliminated remaining credit risks in the large value payment systems, in line with the BIS CPSIPS; improved the quality of collateral associated with BOM’s credit; and consolidated the intraday credit into one payment system (from the previous three systems).
New Securities Market Law (2005). Established a regulatory framework in line with international standards covering several aspects of the market, such as disclosure of information to investors, minority rights and sound corporate governance. This framework supports the access of mid-sized corporations into the securities market, consolidates the rules applicable to issuers, in order to improve their organization and operations, through modern corporate structures and revamped liabilities. The new law updates the legal framework applicable to securities firms and those financial entities that participate in this sector, such as securities depository entities and central counterparties, among others. The law also seeks to update the regime of criminal offences and redefine the powers of financial authorities in order to make their functioning more efficient. The CNBV is enabled to inform to the general public the existence of inquiries and sanctions imposed.
APPENDIX II Detailed FSAP Update Recommendations
APPENDIX III Stress Analysis for Commercial Banks, the Insurance Sector, and the Derivatives Exchange
APPENDIX IV Payments and Securities Settlement Issues
127. An update of progress in meeting the standards of the CPSS Core Principles for Systemically Important Payment Systems (CPSIPS) was conducted as part of the 2006 FSAP Update mission. The Mexican authorities provided the FSAP team with a note in which they explained how they have followed up on the recommendations of the 2001 FSAP and the way the risks in the payment infrastructure, as indicated by the FSAP team, were addressed. The update of 2006 focused on the assessment of the measures taken and no new assessments were carried out.
Excluding repo operations the commercial bank exposure to the public sector is lower (around 30 percent).
It is important to note that since 2000 there has been a substitution of external financing by domestic commercial financing and a significant expansion of consumer financing. In fact, domestic financing to the private sector has increased by almost 4 percent of GDP since 2000.
Issues of peso-denominated securities by nonfinancial private corporates have increased significantly over the past five years. These issues have increased from about US$700 million in 2000 to about US$2.5 billion in 2005. However, only large high quality corporates can tap the bond market and equity issuance has remained small.
Middle-income households in Mexico can now obtain peso-denominated 15-year mortgage loans at a fixed nominal interest rate of about 9 percent.
For instance, serious deficiencies were found in a mortgage pool where the SHF was asked to provide mortgage insurance. Thirty percent of the loans suffered from documentation problems. The auditor had reviewed only a small sample of loans. The rating agency did not review any loan files, nor did the institutions that were offering credit enhancements. No firm was called upon to play a specialized diligence role.
The federal government contributes to INFONAVIT’s capital as stipulated in its charter (Ley del INFONAVIT).
FOVISSSTE’s operational improvements, though not trivial, are much less significant than INFONAVIT’s.
The only exception is BANCOMEXT, which continues to make losses on account of its export promotion activities.
Financiera Rural was created after the liquidation of Banrural.
Unless a trust is established in connection to the transaction (caución bursátil or prenda de garantía), the transfer of collateral in case of a counterparty default is taxed. Establishing a trust, however, increases transaction costs for contracts written onshore and tilts investors toward the offshore market.
Despite the lack of formal regulations, in recent years the CNBV has made efforts to increase oversight over outsourcing activities.
AFOREs are allowed to buy and sell both OTC and exchange-traded derivatives, while insurance companies have access to exchange-traded derivatives only.
The CNBV has signed MOUs with the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the New York State Banking Department, the Office of the Superintendent of Financial Institutions of Canada, the UK’s Financial Services Authority and the Bank of Spain, among others. The effectiveness of these agreements is demonstrated on a daily basis by cross-border inspection visits as well as requests of specific information.
The CNBV has already utilized its expanded investigative powers to bring a greater number of enforcement actions. At the conclusion of an enforcement action, after payment of the fine or expiration of any legal challenges, the CNBV publishes on its website the name of the sanctioned person or company, the amount of the fine or penalty, and the provision of the law that was violated.
Only banks have access to the BOM’s credit lines. The eligible collateral for these credit lines are cash deposits (Depósitos de Regulación Monetaria) that banks have posted with the BOM.
PCAs begin at an early stage, once a bank falls below the 10 percent capital ratio, somewhat before it reaches the required minimum of 8 percent.
When a bank fails to comply with a corrective plan, IPAB would write down shareholders’ shares against identified losses, become the owner of the bank and, choose the best bank resolution option under the least-cost criterion.
These complementary reforms are necessary to, in particular, enable partial deposit transfers under P&As. Under the recently introduced bank resolution framework, P&As can only involve the whole amount of deposits and, hence, partial transfers are nor permitted.
In addition to the powers enjoyed by SROs, the CNBV maintains oversight of those sectors.
Sources: “Institution Building in the Financial Sector,” G20, 2005; and FSAP Update team discussions with the Mexican authorities.
It would also be useful to combine the analysis of the hypothetical run on deposits with a shock on interest rates, given that liquidity stress scenarios are often associated with increases in interest rates. The analysis of liquidity risk under stress scenario could also be strengthened by introducing a less favorable assumption on withdrawals of time deposits.
In case the participant was not able to redeem the uncollateralized overdraft three days in a row, the BOM could reclaim some of the losses from the surviving participants in proportion to the bilateral credit lines granted to the defaulted participant. However, the loss sharing in SPEUA did not foresee multiple defaults. In that case the risk had to be borne solely by the BOM.