Mexico
Financial Sector Assessment Program Update: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision and Transparency of Banking Supervision

This paper presents a Detailed Assessment of Mexico’s compliance with the Basel Core Principles for Effective Banking Supervision and Transparency of Banking Supervision. Fiscal consolidation reduced the gross public debt-to-GDP ratio to below 50 percent, providing the foundations for a monetary policy able to bring inflation down to less than 4 percent, in the context of a floating exchange rate. These improvements have contributed to Mexico’s achievement of investment-grade rating, uninterrupted access to capital at low cost, and resilience to shocks, such as the Russian crisis.

Abstract

This paper presents a Detailed Assessment of Mexico’s compliance with the Basel Core Principles for Effective Banking Supervision and Transparency of Banking Supervision. Fiscal consolidation reduced the gross public debt-to-GDP ratio to below 50 percent, providing the foundations for a monetary policy able to bring inflation down to less than 4 percent, in the context of a floating exchange rate. These improvements have contributed to Mexico’s achievement of investment-grade rating, uninterrupted access to capital at low cost, and resilience to shocks, such as the Russian crisis.

I. Basel Core Principles

A. General

1. This report assesses the compliance by the National Banking and Securities Commission (CNBV), as the main authority responsible for banking supervision in Mexico, with the Basel Core Principles for Effective Banking Supervision as of February 2006. This assessment was conducted as part of the joint World Bank/IMF FSAP Update mission, which visited Mexico City on February 22–March 7, 2006. The assessor was Mr. Rudolph Zepeda, Jr. (Directing Bank Examiner, Federal Reserve Bank of Atlanta).

2. The assessment is based on an examination of key documents and discussions with senior officials of the CNBV, the Bank of Mexico (BOM), and the Secretariat of Finance and Public Credit (SHCP). In addition, discussions were held with bankers and other financial sector participants. Through these interviews, and the review of documents, it has been possible to form an opinion on the supervisory tools available to the Mexican authorities, to identify shortcomings, and to recommend changes where necessary. The assessor enjoyed the full cooperation of his counterparts and received all the necessary information.

B. Institutional and Macroprudential Setting, Market Structure—Overview

3. Economic reforms over the last decade have strengthened economic fundamentals and contributed to a more stable economy, but growth has not risen to a sustainable higher path. Fiscal consolidation reduced the gross public debt to GDP ratio to below 50 percent, providing the foundations for a monetary policy able to bring inflation down to less than 4 percent, in the context of a floating exchange rate. These improvements have contributed to Mexico’s achievement of investment–grade rating, uninterrupted access to capital at low cost, and resilience to shocks, such as the Russian crisis. However, Mexico has not achieved strong and sustained rates of economic growth, partly due to an incomplete reform agenda. After a recession in 2002–2003, real GDP rose to 4.4 percent in 2004, declined to 3 percent in 2005, and the consensus forecast sees growth close to 4 percent for 2006.

4. The main risk factors for the Mexican financial system are linked to global and domestic developments. A slowdown of the U.S. industrial production would have an adverse effect on domestic economic activity and, in turn, on the demand for credit and the quality of loan portfolios. Also, the economy, and particularly the fiscal accounts, have become more reliant on oil and adverse developments in this sector (oil production and prices) could result in increasing borrowing requirements by the public sector with crowding–out effects. Although progress was made in extending the maturity and duration of government domestic debt, they remain relatively short and vulnerable to a tightening of global liquidity and sharp increases in interest rates which could lead to increased volatility in the financial system. Finally, notwithstanding significant progress in financial system reform, some gaps in regulation and supervision remain, particularly regarding consolidated supervision and the autonomy of the supervisory agencies (C omisiones).

5. The financial system is diverse—it includes commercial banks, insurance companies, pension funds, securities firms, investment banks, development banks, and nondeposit–taking credit institutions (Sofoles)—but with a dominant presence of large foreign–owned financial conglomerates. Commercial banks account for 49 percent of financial system assets. The banking sector exhibits a high degree of concentration (the three largest institutions account for close to 60 percent of the banking sector’s assets) and a high degree of foreign ownership (representing close to 80 percent of all banking assets as of September 2005). Development banks, privately managed pension funds (AFOREs), and mutual funds account for 13, 13, and 11 percent, respectively, of financial system assets. Insurance, Sofoles, and other financial institutions are making important strides and account for the other 14 percent. Sofoles do not take deposits, and are licensed by the SHCP to grant credit to specific segments of the economy. The bulk of the financing of mortgage Sofoles comes from the Federal Mortgage Society (SHF), a development bank, although some institutions have started to tap the private market and, in the last two years, several of the large mortgage Sofoles have been acquired by private banks. Large, multinational financial groups that are involved in virtually all the salient lines of financial business (banking, insurance, asset and fund management, brokerage, and pension fund administration) dominate the Mexican financial landscape, with the exception of insurance.

C. General Preconditions for Effective Banking Supervision

6. Mexico has made significant strides in increasing transparency and market discipline and in strengthening the institutional framework for financial oversight. Overall transparency, including accounting and disclosure standards in the financial system, has vastly improved. This, together with the limitation of the previously unlimited guarantee on bank liabilities, has significantly boosted market discipline. At the same time, the regulatory and supervisory framework has registered remarkable improvements in quality and effectiveness, although some issues remain regarding the distribution of regulatory functions, coordination, and regulatory and supervisory gaps.

7. The financial system is overseen by multiple regulators. The SHCP sets regulatory policy for the financial system, particularly license granting and removal for banks, as well as capital requirements. The CNBV is the supervisor and regulator for banks, other credit institutions, and securities markets. The BOM has regulatory responsibilities, including money, foreign exchange, and derivatives markets; payment systems; and financial operations and product characteristics. The Pension Fund Commission (CONSAR) oversees AFOREs and the National Insurance and Sureties Commission (CNSF) oversees insurance companies. The institutional framework also includes the Mexican Association of Securities Intermediaries (AMIB), which administers qualification exams for employees of brokers, mutual funds, and banks engaged in the sale of securities, the Stock Exchange (Bolsa), and MexDer (Mexico’s derivatives market). The Institute for the Protection of Banking Savings (IPAB), the bank resolution and deposit insurance agency, is also charged with disposing of the distressed assets inherited from the 1994 Tequila crisis. The professionalism of these agencies is well recognized in the markets.

8. The 2001 FSAP noted that the CNBV resorted on a regular basis to forbearance during the 1994–95 banking crisis and, as a consequence, its standing and credibility in the perception of market participants was undermined. Its autonomy needed to be strengthened as political interference in decision–making and politically imposed budgetary constraints were attendant problems that undermined its operational independence. There was a fragmentation of supervisory powers which weakened accountability and the enforcement of rules and regulations. A legal limitation was preventing foreign supervisors from gaining access to relevant information, but legislative amendments approved in April 2001 addressed this issue. Further actions were necessary to achieve consistency in the treatment of information, decision making, and enforcement within the CNBV. Greater contribution from the Boards of Directors and external auditors needed to be fostered and coupled with appropriate accountability. The legal reforms approved by Congress in April 2001 (including the minimum requirement of 25 percent of independent Board members in the banks’ Boards of Directors) were expected to significantly correct existing deficiencies. The definition of capital in effect at the time did not reflect the actual bank’s economic capitalization to cover losses.

9. Since the 2001 FSAP, legislation was passed mandating the critical systems for sound banking practices within the banking community. Reform legislation was passed on December 2, 2005, including improvements in the risk management system with a risk manager to control the financial institution’s risks. This supplemented the mandated internal control systems introduced in late 2001. The mandated Basel I’s capital standards and the introduction of the new Basel II’s standards required significant changes in the way banks account for credit activities in their accounting. The revamping of the credit rating and provisioning regulations in August 2004 ensured that banks could apply internal credit rating methodologies for all types of loans (consumer, mortgage, and commercial); while also applying specific credit rating methodologies for loans to states and municipalities. It also made use of credit risk mitigation techniques on loans, guarantees, and collateral. It allowed the CNBV to have more accurate classifications of loans and provisioning for adequate loan–loss reserves, and established a requirement of additional provisions for foreclosed assets. Credit ratings for municipalities were required for the granting of credit with substantial loan–loss reserves required for unrated municipalities. The new legislation also addresses credit diversification, underwriting, and accountability assigned to bank officers.

10. Regulations have been issued to ensure transparency in financial disclosure by financial institutions and a standardized format for regulatory reporting. The CNBV issued a regulatory accounting standard in accordance with international accounting standards for all banks to include all subsidiaries within a group supervised by the CNBV. Regulations aimed at enhancing the disclosure of information by banking institutions and financial groups were also issued by the CNBV. Regulations related to external auditors were issued in 1994 and 2000 and further strengthened in April 2005. The definition of “independence” of external auditors was updated and revised. Specific guidelines regarding requirements for independence of external auditors were established. They limit the contracting of additional services from the same firm such as bookkeeping or other services related to accounting records; services for the design and implementation of financial information systems; appraisal or valuation services; internal audit services; and some legal services.

11. Capital standards were strengthened in accordance with Basel I and preparations are underway for the implementation of the Basel II capital requirements. The SHCP introduced modifications in the capital adequacy regulation in accordance with the initial Basel Capital Accord, particularly concerning market risk and further reducing the participation of deferred assets in Tier 1 capital. However, it is worth mentioning that since 1997, the capital adequacy regulation considered a specific requirement for market risk that included the trading book as well as the banking book. The authorities are now preparing a new capital adequacy regulation to comply with Basel II. Also, the CNBV rates (in five categories) the capital levels (in relation to risk–weighted assets) of banks and provides this information on its website.

12. In November 2004 the CNBV established a framework with minimum capital triggers under which prompt corrective action (PCA) is undertaken allowing for the resolution of problem banks in concert with the IPAB. New legislation has also established an early warning system.

13. A significant internal functional and operational reorganization was implemented at the CNBV in 2001. Most significant in this regard was the establishment of a quality control structure to ensure standardization with a uniform exam methodology and procedures for examination of bank and nonbank entities. The lack of exit meetings immediately following examinations made it necessary for banks to wait for the examination report prior to correcting deficiencies. The new electronic work papers that mandate minutes of exit meetings with management are included to ensure that all findings of the examination are discussed prior to the issuance of the formal examination report.

D. Main Findings

14. Mexico has significantly improved its compliance with the 25 Basel Core Principles. In 2001 Mexico was noncompliant or materially noncompliant with 6 Core Principles and fully compliant with 12 principles. In 2005 Mexico was noncompliant with 1 principle and fully compliant with 19 principles. This improvement is due to the overall coordinated effort of all the regulatory authorities in formulating and pushing through for enactment a series of laws and regulations to improve banking supervision and regulation. The major issue (Principle 1) is the lack of an autonomous supervisory agency that has the power to control all the activities from the inception through the demise of a financial institution including all its nonbank subsidiaries. This hinders comprehensive consolidated supervision especially when many of the financial institutions can outsource many of their activities to jurisdictions outside of Mexico without the approval or supervision of the CNBV.

15. Significant improvements have resulted from the internal restructuring within the CNBV since 2001. Of particular significance is the ongoing contact with supervised entities with the perception that management of the CNBV is characterized as “attentive and approachable.” The most significant reform was the implementation of a quality control structure to ensure standardization in the way examinations are conducted. A standardized On/Offsite Examination Manual utilizing both internationally–recognized best practices and locally–developed best practices set forth a uniform examination methodology and procedures for examination of bank and nonbank entities. Another improvement is the introduction of electronic work papers to automate the rating system, and mandatory exit meetings with banks’ management receiving all findings of the examination prior to the issuance of the formal examination report. With the standard for examinations in written format and available on its website, the CNBV began the formation of specialized examiners for information technology, credit review, and anti–money laundering and terrorist financing. The CNBV has sought to attract, train, and retain newly qualified examiners in order to ensure a professional workforce. These new examiners are required to follow the internal CNBV Code of Ethics in the performance of their duties.

16. The main findings of the detailed assessment of the compliance with the Basel Core Principles for Effective Banking Supervision are grouped in seven main categories as follows:

  • Objectives, Autonomy, Powers, and Resources (CP 1): The CNBV lacks autonomy and authority to solely control a banking institution from its inception to its demise. The current legislation spreads out the accountability for many of these functions among three regulatory agencies: the SHCP, the BOM, and the CNBV. There is an agreement among authorities regarding the need of a reallocation of powers between financial authorities. The SCHP has started to transfer some of its powers to the CNBV. This process is being carried out gradually and on a sector–by–sector basis. In particular, the new Securities Market Law (December 2005) transfers the licensing process for securities intermediaries from the SHCP to the CNBV. The authorities envisage amendments to the Law of Credit Institutions (LIC) which will carry out the same type of transfer in the case of banks. In practice, the CNBV shares information with other regulatory bodies and performs simultaneous inspections with these agencies. Procedures for the sharing of specific information and the conduct of joint examinations have not been formalized although in practice they exist, but are loosely followed. Despite the lack of formalization for joint examinations, the cooperation between agencies has been highly effective.

  • Licensing and Structure (CPs 2–5): In Mexico banks are classified as those institutions that receive deposits. However, due to the broad definition other institutions and nonbanks have captured funds by not calling these funds a “deposit.” The recent legislation that was passed into Law on Popular Savings and Credit broadens the scope of the CNBV’s supervision to cover previously unregulated activities, yet some loopholes continue to exist. The licensing authority rests with the SHCP as explained in Principle 1. However, the CNBV with the new Securities Market Law of December 2005 licenses intermediaries in the securities area and is awaiting a revision of the LIC to transfer the licensing process for banks to the CNBV in the near future. Should this reform pass it would mandate that all license applications be reviewed by the CNBV’s Board of Directors. Changes in ownership or controlling interests in existing banks must be approved by the SHCP. The CNBV does not have formal authority regarding changes in ownership or controlling interests for banks, however its opinion is given to the SHCP for any changes. In practice the SHCP votes in accordance with the opinion given by the CNBV. The CNBV is requesting amendments to the LIC that would grant the CNBV the authority to control changes in the ownership process in the near future. The CNBV is also working on the reform of the LIC to have a formal authority in the process of approving investments by the banking institutions. In practice the CNBV has a definitive voice by delivering its opinion to the SHCP on each individual applicant. The SHCP has historically followed the opinion of the CNBV in these matters.

  • Prudential Regulations and Requirements (CPs 6–15):

    • The CNBV supervises the minimum capital requirements and has pushed to significantly increase them to provide a comfortable cushion in the event of a crisis. By strengthening the capital requirements Mexican banks are in accordance with the initial Basel Capital Accord, and positioned to comply with Basel II requirements in the areas of credit and operational risk. All institutions will have the possibility to apply for authorization to use internal models for regulatory purposes. Multinational banks, with the aid of their home offices, are expected to have systems in place to comply with the advanced models for Basel II on schedule.

    • In August 2005, a new banking circular (Circular única de Bancos) set up requirements for prudential regulations governing the credit process by updating the previous regulation for banking institutions. A new corporate structure was established redefining each bank’s credit policies. The functions and responsibilities for officers and business areas involved in the credit process were delineated. The credit approval process was modified to ensure that the responsibility stays with the banks’ Board of Directors, which is not allowed to delegate it to other bodies within the bank. The credit process was redefined establishing different treatments for the assessment of different types of credit. The CNBV at each examination reviews the type of credit and its underwriting methodology, and follows up on deficiencies. The CNBV is empowered to demand the creation of preventive loan–loss provisions for those credits posing irregularities and may decree the suspension of new credits. New provisioning rules have been issued in line with international best practices. The new rules issued in 2004 modified existing ones from 1997 and 2000, which had several flaws. In particular, they were too general, demanding the same set of documentation for all loans, while being inadequate for grasping the details of all kinds of operations. The revamping of the credit rating and provisioning regulations in August 2004 assured that banks could apply internal credit rating methodologies for all types of loans (consumer, mortgage, and commercial); as well as specific credit rating methodologies for loans to states and municipalities, for the estimation of provisions. It also makes use of credit risk mitigation techniques on loans, guarantees, and collateral. It allows the CNBV to have a more accurate classification of loans and provisioning for adequate loan–loss reserves, as well as a requirement of additional provisions for foreclosed assets. Credit to unrated municipalities is penalized through substantially higher loan–loss provisioning requirements, than for rated municipalities.

    • In 1988 the CNBV was provided with the faculty to rule on risk concentrations within the banking system and established limits to asset and liability concentration, according to their net capital or as a percentage of the total capital of the bank. This legislation was modified in 2005 and limits were established on the concentration of credit risk (12 percent) to either individuals or groups of individuals, as a share of basic capital (Tier 1). The new framework codified both, groups and corporate holding companies, into the concept of “common risk” to ensure these two types of ownership structures are included within the 12 percent limit. It also excluded those corporate entities not exposed to both credit and market risks from the concept of “common risk.” It allows banks to lend more than 12 percent to a particular group provided it has higher capital levels. The sum of all financing granted to the top three borrowers cannot exceed 100 percent of Tier 1 capital. It also replaced the diversification requirement for liabilities by obligating the reporting of this diversification whenever operations exceed the regulatory limits.

    • The general framework for connected lending has been significantly revised. In its monthly reporting to the CNBV, banks must provide an indicator on related party lending. This allows the examiner to compare the indicator to a peer group and review onsite any preferential treatment on loans. All related party lending must have the Board of Directors’ approval based on adequate information and be limited to 50 percent of total capital.

    • The CNBV does require that banks perform an analysis of country risk and concentration on their loan portfolios. Its examiners review country risk within their bank’s loan portfolios, however the risk is limited to letters of credit issued by banks for their customers. Although regulation and supervisory guidelines are very limited to country and transfer risk, the CNBV’s opinion is that these risks are not material and do not deserve special attention. The CNBV indicated that exposure to letters of credit, due from bank accounts, and investments in foreign paper compared to their bank’s capital is minimal. The CNBV has no jurisdiction over parallel banks unless a Mexican bank has some ownership interest, which may inhibit supervision on country risk.

    • The CNBV utilizes its model and information technology systems for calculating Value at Risk (VAR) in accordance with Basel guidance. Its model tests interest sensibility and stress tests a bank’s portfolio utilizing worst case scenarios based on historical data for the Mexican market. Each bank is required to perform tests with their own proprietary VAR models which are then compared to the CNBV’s model to ensure that conservative assumptions and results are within an acceptable range. Mexican banks are beginning to gather data on operational losses in order to quantify operational risk under the Basel II guidelines. A banking circular sets the norms for all contingency plans required of Mexican banks that include liquidity and continuity of management. These contingency plans must be approved by their Board of Directors. Further improvement of the onsite examination verification of contingency plans and their implementation is needed. These contingency plans are reviewed at each annual examination for adequacy and testing.

    • Since 2003 Mexican banks have been required by law to have in place a comprehensive risk management process with board and senior management oversight. The annual bank examinations conducted by the CNBV review how each bank exercises risk management and ensures appropriate capital is assigned to the corresponding risks.

    • In September 2001, the first regulation regarding internal controls for commercial banks was issued with full implementation by June 2002. This Circular under its Title II, Chapter VI, provides a comprehensive regulatory framework for internal controls as well as for internal auditing. It established minimum rules for the implementation of policies and procedures on internal controls, including the segregation of functions and responsibilities, the creation of mechanisms of internal control for their operations, and the planning of internal and external audit programs. In September 2005, this circular was updated to include the current risk environment and issued in accordance with international standards, extending its scope to development banks especially the requirement to retain data on operational risk. The goals were to adequately control operational risk, reinforce comptroller and internal audit functions, develop and update information systems, and minimize conflict of interests and clearly define the field of action for all participants. Examiners analyze at each annual examination the corporate governance function and the independence of the audit function, as well as its adequacy. The minutes of the audit committee for the board are reviewed to ensure that the board and senior management have informed the committee of any deficiencies. The external auditor though hired by management must report to both the board and the committee in accordance with the Circular única de Bancos updated in 2006.

    • Mexico instituted anti–money laundering legislation in early 1997. Regulated institutions (banking institutions, money exchange houses, nonbank financial institutions and securities firms) were required to periodically file by electronic means to the SHCP through the CNBV, a report comprising any cash transactions over US$10,000, as well as suspicious and worrisome transactions. In January 2004, Mexico reformed the legislation to include additional institutions (money transmitters, auxiliary organizations of credit, and non registered money exchange houses). In May of that same year, the General provisions applicable to all sectors of the financial system were enacted, to establish appropriate customer identification procedures, particularly on politically exposed persons, correspondent banking, beneficial owner and trusts, as well as rules to promote high ethical and professional standards in the financial sector. In May 2005, Mexico further refined the legislation to define the politically exposed person’s criteria and include government officials by position. The SHCP has issued a format with a questionnaire for banks to utilize in classifying high–risk customers. Since 2005, the CNBV has implemented a new automated work paper program based on the General provisions enacted in May 2004, on all examinations carried out in banks, which provide ratings on the systems, policies and procedures with regards to anti–money laundering and terrorism financing. During 2006, the CNBV will also implement this program to all regulated financial institutions.

  • Methods of Ongoing Supervision (CPs16–20):

    • The CNBV’s onsite supervision has greatly improved since 2001 partly due to the substantial overhaul of the legal framework that has required banks to set up prudential underwriting standards and credit classifications, internal control systems, risk management systems, and corporate governance. The onsite supervision is conducted at least annually and quarterly for larger banks where these systems are validated and reviewed for appropriate coverage. Internally the CNBV has set up a qualitative directive to review best practices regarding onsite supervision and incorporate these practices in the Supervision Manual, which is continuously updated on the CNBV’s intranet for the examiners in the field. The restructuring within the CNBV also defined specific specialties necessary for adequate oversight. These specialty areas were formed to coordinate with the onsite examiners and plan the scope of risk focused examinations, in order to issue a consolidated report of examination. The methodology for conducting each examination is therefore standardized. Preplanning before each examination ensures newly identified risks are appropriately reviewed by competent staff. The Circular única de Bancos mandates that external auditors report to the CNBV the scope of their audits, any adjustments to their accounting, and the management letter given to the bank at the end of the audit. The CNBV has the authority to request work papers and review the audit. In the event of an inadequate audit, the CNBV will issue a report with their concerns directly to the external audit firm’s management. The CNBV also has the authority to fine or request removal of a partner for failure to follow legislation or regulations.

    • Banks are required to issue monthly financial reports which are reviewed by the CNBV. Prior to issuing this report banks must meet with the CNBV officials who have validated the information. The CNBV meets at a minimum once quarterly with top–tier management to discuss any concerns and this is documented in the examiner’s work papers especially in cases where deficiencies may require official sanctions. Minutes of exit meetings after an examination are taken to ensure both parties understand the findings. The CNBV is sometimes in daily contact with the larger institutions when there are significant changes in the monthly or quarterly financial reports.

    • The offsite supervision is conducted by the CNBV and the BOM through quarterly bank reporting of financial information. These financial reports are later validated by onsite inspections. The system utilized by both of these supervisors allows offsite supervision on a solo basis by each entity. However, large financial groups whose consolidated financial reports encompass numerous activities require close coordination with other supervisors to ensure all activities are transparent and supervised. The CNBV has the authority to fine and sanction banks for poor information and even bank officials individually.

    • Validation of supervisory information is conducted by the CNBV’s examination teams consisting of four to six examiners during a two–to–three month period in accordance with the risks and size of the bank. The CNBV is also actively involved in the creation of an oversight framework for external auditors in Mexico.

    • Legislation is currently under study by the SHCP with the opinion of the CNBV to ensure full comprehensive consolidated supervision. However, although current legislation allows adequate supervision, there is a distribution of duties between several regulators. Bank licensing and supervision are under different regulators for the banking industry, whereas both functions are under one regulator for the securities industry.

    • Information Requirement (CP 21): The CNBV developed regulatory accounting standards in accordance with international accounting standards; for instance, to prepare consolidated financial statements banks have to include all subsidiaries, whether they are financial entities or not. The CNBV had already issued regulation related to external auditors in 1994 and 2000 (Circulars 1222 and 1479). Modifications were issued in April 2005 as a result of changes in the best practices of international regulation (such as Sarbanes–Oxley). The definition of “independence” was updated and revised. Specific guidelines regarding requirements for independence apply to external auditors and their offices (e.g., audit partner rotation shall not be longer than five years). Providing additional services other than auditing are limited from the same firm such as bookkeeping or other services related to accounting records, design and implementation of financial information systems, appraisal or valuation services, internal audit services, and some legal services.

    • Formal Powers of Supervisors (CP 22): The new Circular única de Bancos establishes an early warning system. In addition, the CNBV provides information over its website by rating the banks’ capital levels in five categories. These capital levels are in accordance with the standards set by the BOM and the regulations set forth by the SHCP. The system was tested in 2004 when a bank’s capital fell below the authorized capital level due to derivatives trading. The BOM took immediate action the same day to ensure capital levels at the bank returned to authorized levels. In November 2004, the CNBV issued the “Reglas de Caracter General a que se refiere el Articulo 134 Bis de la Ley de Instituciones de Crédito,” which provides the framework under which PCA is undertaken.

  • Cross–Border Banking (CPs 23–25):

    • The CNBV continues to supervise Mexican subsidiaries, agencies, and branches abroad with its ongoing review of each bank’s strategic plan under the Circular única de Bancos. Difficulty is noted in the structures set up by Mexican individuals that basically form parallel banks in other jurisdictions without the knowledge of the CNBV. Although the shareholders are the same, the bank is set up in a foreign jurisdiction where the CNBV has no authority and legislation has not been granted that gives the CNBV extraterritorial powers to investigate shareholders in other jurisdictions. When the foreign financial institution is owned by a bank holding company, the CNBV has the authority to request financial information to satisfy its concerns. Currently Mexican banks are performing data–processing functions for foreign subsidiaries and the CNBV has the authority to review the process. However, outsourcing to entities outside of Mexico may cause problems for the CNBV in the future.

    • The CNBV maintains a dialog with home country supervisors of all foreign banks represented in Mexico. Primarily the supervisors of the U.S., Canada, and Spain regularly visit the CNBV annually and discuss mutual concerns. Joint examinations with foreign supervisory entities are permitted with advance notice and provided that a Memorandum of Understanding (MOU) with that foreign supervisor is in place prior to the examination.

    • The CNBV has signed bilateral MOUs with 12 foreign bank regulatory agencies and is currently negotiating six more primarily with the authorities of Central American countries. The 12 MOUs are primarily with supervisors of the major banking institutions with subsidiaries in Mexico. The CNBV has also signed 32 MOUs with securities regulatory agencies abroad.

Table 1.

Detailed Assessment of Compliance of the Basel Core Principles for Effective Banking Supervision

article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
Table 2.

Summary of Compliance with Basel Core Principles

article image
Table 3.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

article image

Authorities’ response

17. The financial authorities have willingly cooperated with the World Bank and the International Monetary Fund during the progress of the 2006 Financial Sector Assessment Program carried out in Mexico. In our opinion the assessment has been carried out in a highly professional manner.

18. In connection with the assessment of compliance with the Basel Core Principles for Effective Banking Supervision, we consider that the report provides a fair appraisal of the implementation by the National Banking and Securities Commission (CNBV) of the principles.

19. We will continue our efforts to strengthen our prudential framework and to incorporate new international best practices as they may arise. However, the broad challenge ahead remains the achievement of an autonomous status for the CNBV. Although the impending reallocation of powers among financial authorities will be a significant step forward, we must maintain our efforts in bringing proposals to the legislative branch that will ensure an independent supervisor in accordance with international best practices.

Mexico: Financial Sector Assessment Program Update: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision and Transparency of Banking Supervision
Author: International Monetary Fund