The IMF recommended a range of actions to improve financial stability and supervision in Mexicio (photo: MarioGuzman/EPA)
Mexico's financial sector
However, Mexico, the current president of the Group of Twenty (G-20) advanced and emerging economies, will need to be vigilant to risks from outside the country and should strengthen the institutional framework for its supervision of financial regulation by establishing a fixed term for the President of the Banking Commission, rebalancing its Board and promoting stronger legal safeguards for its personnel, the IMF said.
“Our assessment of Mexico’s financial system is very positive,” said Fernando Montes-Negret, a senior financial expert in the IMF’s Monetary and Capital Markets Department and head of the team that conducted the assessment.
Cross-border linkages
“The country has better tools for systemic crisis management and competent supervision. However, there have been episodes of distress in recent years and given Mexico’s significant linkages to the global economy and to Spanish banks, authorities need to monitor closely and respond quickly to emerging risks,” Montes-Negret said. The assessment was published on March 30.
In the wake of the global economic crisis, the IMF has strengthened its surveillance of countries’ financial systems. Since 1999, the IMF has monitored countries’ financial sectors on a voluntary basis through a joint review process with the World Bank called the Financial Sector Assessment Program.
Mexico is one of the major 25 financial sectors that must undergo a review of its financial health as part of the IMF’s economic surveillance and monitoring. The global economic crisis laid bare the devastating economic consequences a financial crisis in one country can have on the global economy. Countries with financial sectors that have the greatest impact on global financial stability are now required to undergo in-depth reviews of their financial health by the IMF every five years.
In its assessment of the health of Mexico’s financial system, the IMF recommended the government enact a series of reforms as Latin America’s second largest economy continues to modernize.
Key reforms
The IMF recommended a wide range of actions to improve financial stability in Mexico, and identified a number of high priority reforms to be implemented within the next three years.
• A fixed term for the President of the Banking and Securities Commission, and a rebalancing of its Board.
• Broaden regulatory and supervisory powers to financial and mixed-activity groups.
• Fully implement new international banking regulation known as Basel III to improve supervisory processes, including criteria to require capital buffers above regulatory minimums.
• Tighten concentration limits in the banking system and introduce capital charge for concentration risk under Basel III regulations.
• Change pension fund investment guidelines and regulatory tools to encourage focus on long term returns, including using long-term benchmarks.
• Improve the legal framework for derivatives.
Main risks
Even though the banking system has adequate levels of capital, Mexico’s financial system is highly concentrated, with the seven largest financial groups holding or managing about three-quarters of the banking system’s total assets worth $600 billion at the end of June 2011. Other risks identified by the IMF are:
• A U.S. economic slowdown that would impact Mexico’s exports, GDP growth, and remittances. Banks could be affected through a severe deterioration of consumer and corporate loans resulting in a major increase in nonperforming loans and capital impairment. Mexican banks experienced a deterioration of their personal and consumer loan portfolios following the 2007–2009 crisis.
• Distress in foreign parent banks of the largest Mexican bank subsidiaries. Ongoing financial pressures in Europe could affect the Mexican subsidiaries in terms of funding costs and liquidity pressures through deposit losses and loss of parent banks’ and other credit lines.
• Solvency problems in a number of smaller banks affecting confidence in the banking system.
This year is busy for the IMF which plans to evaluate 18 countries’ financial health—ranging from France and Spain to Argentina and Armenia—to spot any potential trouble on the horizon. The IMF then produces a detailed report that includes recommendations for the country on how to strengthen its financial stability.
