## 1mexea2022002 - 2022. The FSAP findings were discussed with the

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---

### Executive Summary — headline findings
- Mexico has a robust financial system but a low level of financial inclusion.
- The economy "has weathered the COVID-19 pandemic well, reflecting resumption in mobility and support from domestic and global policies."
- Systemic vulnerabilities "appear broadly contained"; financial system emerging from the pandemic with higher capital buffers, lower private sector leverage, and no sign of stretched asset prices.
- The financial system "provides less finance to the real economy than its peers."
- Digital finance is "still embryonic" but "holds the promise of increasing financial access."

### Key risks identified
- Main risk: "the first sustained tightening of global financial conditions since the Global Financial Crisis (GFC), combined with low growth and high inflation."
- Mexico is "highly integrated with global financial markets" and has "a strong presence of non-resident investors in the financial sector and capital markets."
- Disorderly tightening in global liquidity could:
  - "weaken activity and drive system-wide liquidity stress."
  - Be accentuated by cyber events and structural transitions (climate change).
- Climate and cyber risks are "important additional concerns"; climate analysis points to "potentially material risks from transition and physical risk exposures over the medium term."

### Resilience and stress-testing findings
- Under the adverse scenario:
  - "High initial capital and strong profitability help banks absorb most of credit and market losses."
  - "Liquidity risks for banks are expected to be well-contained."
  - Supervisory attention needed on "loan concentration, contingent credit lines, and large holdings of sovereign debt securities."
  - "Corporate debt-at-risk would rise under stress, but risks to the financial system are contained by low leverage."
- System-wide liquidity:
  - "System-wide liquidity risks appear contained, with commercial banks well-placed to provide liquidity to other financial institutions during periods of stress."
  - Authorities "have demonstrated the effectiveness of their toolkit to support systemic liquidity during the pandemic."
  - New global liquidity shocks could generate tail-risks.
  - "High levels of short-term wholesale funding of development banks deserve further consideration," mitigated by sovereign guarantees.
- Climate risk analysis:
  - "Highly uncertain" but indicates "potentially material risks from transition and physical risk exposures over the medium term."
  - Calls for "further refinement of risk analysis to inform policy."

### Progress and outstanding policy actions
- Progress:
  - Rolling out critical Basel reforms, improving supervisory techniques, building cybersecurity capacity, enhancing recovery and resolution planning.
  - MFAs introduced "Total Loss Absorbing Capacity (TLAC) requirements for domestic systemically important banks (D-SIBs)."
  - Measures to boost financial access (e.g., "the 2018 Fintech Law").
- Outstanding issues and recommended upgrades:
  - Autonomy and resources:
    - "Strengthening the autonomy of regulatory government agencies and the legal protection of supervisors is critical."
    - IPAB Board vacancies should be filled swiftly.
    - Need enhanced resources and skills within the MFAs.
  - Supervision and regulation:
    - "The framework for and application of consolidated supervision needs significant enhancement."
    - CNBV could simplify the risk-based rating system (CEFER) and use more principle- rather than rule-based methodologies.
    - Sustainable Finance Committee could integrate climate risks into prudential supervision and introduce disclosure requirements.
    - MFAs could "publish a strategy for macroprudential policy and expand the macroprudential toolkit."
  - Digitalization and cybersecurity:
    - Banxico and CNBV have advanced cyber resilience but need further enhancements on strategy, oversight, and information sharing.
    - "Continued careful consideration in the design phases of Banxico’s central bank digital currency (CBDC) project will be needed."
    - "Generalized adoption of foreign stablecoins seems unlikely at this stage and the risks are mitigated by the robust policy framework."
  - Systemic liquidity and crisis management:
    - Enhance ELA by setting a minimum threshold for its interest rate and improving encumbrance of credit claims.
    - Recovery and resolution plans exist for all commercial banks; further work needed to:
      - "remove impediments to banks’ resolvability,"
      - "reconsider the use of temporary open bank assistance (TOBA),"
      - "eliminate barriers to the effective use of the purchase and assumption (P&A) and bridge bank tools,"
      - "expand the resolution regime’s remit to financial holding companies."
  - Financial integrity:
    - "The authorities will need to complete implementation of the 2018 AML/CFT recommendations."

### FSAP Key Recommendations (selected)
- Cross-cutting:
  - Enhance autonomy and legal protection of supervisors (¶31) — NT
  - Assess and enhance organizational structure and resources of agencies (¶32) — NT
  - Enhance oversight of SPEI relative to PFMI and cybersecurity (¶34) — NT
- Systemic Risk Analysis:
  - Monitor contingent credit lines and portfolio concentration; use Pillar 2 as needed (¶27) — NT
  - Expand liquidity stress test framework and incorporate in Supervisory Review Process (¶27) — MT
- Financial Sector Oversight:
  - Publish macroprudential policy strategy (¶35) — NT
  - Consider LTV and DSTI limits (¶37) — MT
  - Ensure effective consolidated supervision of financial holding companies (¶40) — MT
  - Refine CEFER methodology (¶42) — NT
  - Continue cybersecurity strategy development and market-wide cyber crisis simulations (¶44) — MT
  - Issue supervisory guidance on climate-related risk management and introduce disclosure requirements (¶46-47) — NT
- Systemic Liquidity and Crisis Management:
  - Review liquidity risk mitigation for development banks (¶52) — NT
  - Explore options to enhance the ELA framework (¶55) — NT
  - Introduce statutory bail-in powers and eliminate barriers to P&A and bridge bank tools (¶57) — MT
  - Shorten resolution planning cycle for D-SIBs and midsize banks (¶58) — C
- Financial Development:
  - Broaden regulated fintech activities and finalize open finance (¶61-62) — NT
  - Establish national climate finance strategy; set DFIs climate targets (¶64) — MT
- Legend: C: continuous, I: immediate (less than one year), NT: short term (1–2 years), MT: medium term (3–5 years).

*Prepared by Heedon Kang, with contributions from the Mexico FSAP team; FSAP mission led by Vikram Haksar (IMF) and Ilias Skamnelos (WB) and conducted with Mexican authorities during the Article IV consultation mission in November 2022.*

---

### Macroeconomic recovery and near-term outlook
- The economy contracted by 8.1 percent in 2020.
- Growth bounced back to 4.8 percent in 2021.
- Cumulative output growth and credit growth during 2020-2021 were weaker than other emerging markets.
- Inflation has risen well above Banxico’s target range and is likely to persist for some time.
- Banxico has raised the policy rate by 525 basis points since June 2021.
- Long term yields would be sustained at 11 percent on average during 2022-23 (adverse scenario assumption).
- Stress test scenario horizon spans 2022–2024, starting with data at end-2021. Baseline aligned with IMF projections as of June 2022.

### Financial market impact and policy responses (selected)
- Banxico cut interest rates by 300 basis points during the pandemic and established facilities to support market functioning.
- CNBV issued measures encouraging loan payment deferral and dividend payout restrictions.
- Fiscal stimulus was modest; Mexico benefited from sizable fiscal policy spillovers from the U.S.

### Structural transitions, risks, and opportunities
- Two transitions: digital financial services expansion and transition to a lower carbon economy.
- Internet banking users increased 2.5 times from 33 million in 2016 to 84 million in 2020.
- Opportunities arise from green finance.

### Financial system structure and integration (selected figures)
- Financial system assets about 100 percent of GDP; smaller than EM peers.
- Banking sector accounts for more than half of the system; pension funds and insurers account for about 20 and 8 percent, respectively.
- Mexico has 50 commercial banks. Six D-SIBs comprise ¾ of total banking sector assets.
- Six development banks represent 9 percent of financial system assets and generally depend on wholesale funding.
- Outstanding domestic debt securities and stock market capitalization amounted to 46 and 31 percent of GDP at end-2021.
- Foreign investors hold about one-sixth of outstanding local currency government bonds (share declining).

### Systemic vulnerabilities and financial-sector resilience (key statistics)
- Aggregate capital adequacy ratio in the banking sector: 19.5 percent at end-2021.
- Leverage ratio: about 12 percent.
- Aggregate NPLs: about 2 percent since last FSAP.
- Aggregate LCR and NSFR: above 200 and 120 percent at end-2021, respectively.
- Weighted average mortgage loan-to-value: around 72 percent.
- Weighted average mortgage payment-to-income: around 28 percent.

### Stress testing, scenarios, and key stress-test findings
- Adverse scenario design: low growth, high inflation in major economies, severe recession (2¼ standard deviation shock), de-anchoring of U.S. inflation expectations, faster Fed tightening.
- Bank solvency stress-test results:
  - Banking system broadly resilient; most banks have ample capital buffers.
  - Aggregate capital shortfalls in adverse scenario: less than 0.4 percent of GDP.
  - Top 10 banks’ capital adequacy ratio declines by 4.7 percentage points to 14.5 percent by 2022 under adverse scenario.
  - Contingent credit lines about 2.7 trillion pesos and 10 percent of GDP in May 2022; about 90 percent revocable—simultaneous triggering could affect capital.
  - A +150 bps higher-than-anticipated rise in interest rates leads to mark-to-market losses; top-10 banks’ capitalization declines by 2.4 percentage points by 2022 (hedging not modeled).

---

### Liquidity conditions in the banking sector (selected)
- Aggregate LCR: 225 percent in December 2021; all commercial banks above 100 percent regulatory minimum.
- In most severe scenario, banking sector liquidity shortfalls equal 0.1 trillion pesos (1 percent of total assets).
- Banxico has capacity to support the system during stress events.

### Short-term liquidity management risks
- Risks to monitor:
  - Contingent credit lines could be withdrawn quickly or simultaneously.
  - Retail deposits from high net-worth individuals may behave like wholesale deposits; more granular data needed.

### Contagion and interconnectedness
- Contagion through cross-border exposures limited.
- Mexico vulnerable to inward spillovers from a hypothetical U.S. banking crisis.
- Domestic contagion most likely from failure of development banks, though such failures are unlikely given sovereign backstop.

### Corporate sector vulnerability and solvency testing
- Corporate PIT PDs rise from 2.3 percent in 2021 to 4.1 percent in 2024 in bank solvency stress tests.
- Higher EDFs driven by lower interest coverage, higher interest rates, smaller firm size, weaker profitability, and higher leverage.
- FX depreciation has insignificant role on corporate EDFs.

### System-wide liquidity analysis (methodology and findings)
- Novel approach incorporates direct lending, debt crossholdings, repo exposures, and common asset exposures.
- Aggregate analysis suggests system-wide liquidity would remain resilient; commercial banks can backstop other entities.
- If commercial banks change liquidity preference or face binding constraints, larger system-wide liquidity stress could materialize absent MFA liquidity provision.

### Climate-related risk analysis (selected results)
- Transition risk:
  - Global action scenario: cumulative impacts on bank capital ratios ~0.4 percentage points by 2026.
  - Delayed-uncertain scenario: fatter tails in corporate PDs and bank capital ratios, substantially increasing tail risk.
- Physical risk:
  - Focus on floods and tropical cyclones under RCP4.5 and RCP8.5.
  - Under extreme RCP8.5, physical capital stock damage translates into two percentage points deviation of GDP growth from baseline in 2022; banking sector capital ratio declines by about 1.2 percentage points from baseline solvency stress test.
  - Physical impacts unlikely to generate systemic financial stress in the near term; results subject to major uncertainty.

### Fintech-related risk analysis (selected)
- Hypothetical erosion of NII and non-interest income due to digital payments:
  - Most adverse scenario: banking sector capital ratios drop by 34 basis points over two years relative to baseline.
  - Banks reliant on retail sight deposits and credit card fee income could see capital ratios decline up to 75 basis points.
  - Capping CBDC accounts could mitigate pressure on bank margins; a CBDC cap assumed at 21,000 Mexican pesos in some analyses.

---

### Key policy recommendations (selected, actionable)
- Enhance systemic liquidity assessment:
  - Add comprehensive cash flow analysis to stress testing and advance system-wide liquidity analysis.
  - Banxico could monitor contingent credit lines and assess risks with CNBV.
- Use Pillar 2 requirements to address systemic risks:
  - CNBV could impose capital add-ons via ICAAP to address concentration risk, IRRBB, and stress-identified gaps.
  - Use liquidity analysis in Supervisory Review Process to inform Pillar 2 for both commercial and development banks.
- Improve data collection and sharing:
  - Banxico and SAT collaborate to share anonymized household and corporate income data.
  - Close regulatory reporting gaps (IFRS9 implementation, banks’ IRB parameters).
  - Compile complete sectoral financial accounts and bilateral exposures.
  - Improve firm-level disclosure of carbon footprints.
- Strengthen supervisory autonomy and governance:
  - Progress on independence and legal protection of supervisors; fill IPAB Board vacancies (three positions vacant).
  - Provide IPAB’s executive management a set term and clearer grounds for dismissal.
- SPEI oversight:
  - Establish independent oversight function, conduct continuous PFMI risk assessments, review CPSS‑IOSCO Disclosure, implement timebound workplan to observe PFMI principles.
- Cybersecurity and FMI:
  - Deepen cybersecurity strategy, issue enforceable ICT/cyber regulations across supervised institutions, conduct on-site inspections, develop cyber map and threat intelligence platforms.

---

### Systemic liquidity management, ELA, and crisis preparedness
- ELA framework:
  - Sound legal foundation and comprehensive internal policy; Governing Board has broad flexibility to adjust collateral, term, rate.
  - Shortcomings: encumbrance of credit claims time-consuming; policy should set clear boundaries and binding minimum threshold for ELA interest rate.
  - Policy document should clarify forward-looking solvency assessment basis for ELA decisions.
- Recovery and resolution:
  - Recovery and resolution plans in place for all commercial banks.
  - Recommendations:
    - Introduce bail-in powers while protecting creditors; revise creditor hierarchy to make TLAC more effective.
    - Trigger resolution based on authorities' assessment of nonviability, not only quantitative thresholds.
    - Remove barriers to P&A and bridge bank tools; favor (partial) P&A with bridge bank over TOBA.
    - Adopt recovery and resolution regime for financial holding companies.
  - IPAB cannot remove impediments to resolvability; shorten resolution planning cycle for D-SIBs and mid-size banks.
- Deposit insurance fund:
  - IPAB fund projected to reach 3.4 percent of insured deposits in 2027 and 5.1 percent in 2032.
  - Recommendations: relieve IPAB from 1990s legacy debt, operationalize backup funding, increase public awareness.

---

### Financial sector development — inclusion, competition, fintech, green finance
- Financial inclusion and competition:
  - About half of adults reported having an account in 2021, up from 44 percent in 2015.
  - Access to credit subdued in rural areas and for small/micro enterprises.
- Digital Financial Services and payments:
  - CoDi launched in 2019; 18.3 million registered accounts but only 1.2 million transactions by June 2022.
  - Banxico’s e-KYC efforts could catalyze Digital ID adoption.
- Fintech regulation and open finance:
  - Broaden permitted fintech products under the 2018 Fintech Law; finalize open finance to promote client mobility and competition.
- Development Financial Institutions:
  - Prioritize guarantees and second-tier lending over first-tier direct lending.
  - Revise "aprovechamiento" to be more transparent; ensure Banco del Bienestar balances social objectives with capital preservation.
  - Address Infonavit’s high NPLs.
- Green finance:
  - Establish climate finance strategy and green taxonomy.
  - DFIs could be given more ambitious climate finance targets to deepen green markets.

---

### Institutional arrangements, coordination, and implementation status
- Multiple authorities: SHCP, Banxico, IPAB, CNBV, CNSF, CONSAR, CONDUSEF. Banxico has constitutional autonomy; others vary in autonomy.
- CESF: nine voting members; formal recommendations with de facto comply-or-explain; communicates via quarterly press releases and annual report.
- Organizational/resource needs:
  - Recent reductions in operating budgets (except Banxico) caused staff turnover and experience loss.
  - FSAP recommends strategic review of organizational structure and resources; IPAB evaluation welcomed.
- Macroprudential framework:
  - Authorities could develop and publish a macroprudential policy strategy.
  - Consider augmenting toolkit (e.g., LTV/DSTI) as medium-term measures.
- Consolidated supervision:
  - Seven financial conglomerates have not requested SHCP authorization and are not under CNBV consolidated supervision.
  - 2014 LRAF does not empower CNBV to impose group-level prudential measures—amendment needed.
- AML/CFT:
  - Mexico progressed on technical deficiencies from 2018 MER; follow-ups in June 2021 and May 2022 re-rated several items.
  - Legal deficiencies remain in non-financial sector reporting and beneficial ownership verification; draft law pending in Senate.
  - Recommended: beneficial ownership register, stronger consolidated supervision, adequate resourcing of AML/CFT supervision, empower CNBV to revoke banking licenses for AML/CFT breaches, enhance SAT supervisory activities, continue supervising Virtual Asset Service Providers.

---

### Selected quantitative tables and stress-scenario parameters (preserved values)
- Monetary policy actions since COVID-19:
  - Policy rate cut: Seven times from March 2020 through May 2021, 300 basis points in total.
  - Policy rate hike: Ten times since June 2021, 525 basis points so far.
- Central bank facilities deployed during the COVID-19 crisis (In billions of Mexican peso):
  - Total Envelope (A): 800
  - Disbursed (B): 692
  - Percent (B/A): 86
  - Total (percent of GDP): 3.1 (Envelope) and 2.7 (Disbursed)
  - Individual facility examples:
    - Government securities term repurchase window: Envelope 150; Disbursed 465; Percent 310; Expiration Sep. 2021
    - Provision of resources to banking institutions to channel credit to MSMEs and individuals: Envelope 250; Disbursed 14; Percent 6; Expiration Sep. 2021
- FSAP stress test GDP and macro variables (selected):
  - Real GDP (2021=100) — Baseline: 100.0 (2021), 102.4 (2022), 104.6 (2023), 106.0 (2024); Adverse: 100.0 (2021), 97.5 (2022), 93.9 (2023), 98.3 (2024)
  - Real GDP Growth Rate (y-o-y) — Baseline: 4.8 (2021), 2.4 (2022), 2.2 (2023), 1.4 (2024); Adverse: 4.8 (2021), -2.5 (2022), -3.7 (2023), 4.6 (2024)
  - CPI Inflation Rate (y-o-y) — Baseline: 5.7 (2021), 7.2 (2022), 4.4 (2023), 3.3 (2024); Adverse: 5.7 (2021), 9.6 (2022), 8.7 (2023), 5.8 (2024)
  - Exchange Rate (MXN per USD, end of period) — Baseline: 20.6 (2021), 21.4 (2022), 21.6 (2023), 21.9 (2024); Adverse: 20.6 (2021), 24.1 (2022), 26.1 (2023), 25.8 (2024)
  - Policy Rate (year averages) — Baseline: 5.5 (2021), 7.9 (2022), 9.1 (2023), 8.1 (2024); Adverse: 5.5 (2021), 9.4 (2022), 10.1 (2023), 6.9 (2024)
  - 10-Year Sovereign Bond Yield (year averages) — Baseline: 8.0 (2021), 9.4 (2022), 9.4 (2023), 9.4 (2024); Adverse: 8.0 (2021), 10.9 (2022), 11.2 (2023), 10.2 (2024)
- Bank liquidity stress test results (Table 9):
  - Regulatory Scenario: Aggregate LCR 225; Number of Banks with LCR<100: 0
  - Retail Shock: Aggregate LCR 157; Number of Banks with LCR<100: 6
  - Wholesale Shock: Aggregate LCR 128; Number of Banks with LCR<100: 13
- Deferred loans (end-2021, In millions of Mexican pesos):
  - Total bank loans 1/: 5,459,257 (Total)
  - Bank loans benefited from loan deferral program: 1,067,334 (Total)
  - Amount of loans under deferred loan category: 708,660 (Total)
    - Performing: 553,424 (Total)
    - Restructured: 121,024 (Total)
    - Nonperforming: 34,212 (Total)
  - Shares (In percent of total commercial bank loans, end-2021): Bank loans benefited from loan deferral program: 19.6 (Total); Amount of loans under deferred loan category: 13.0 (Total)
  - Performance of loans under deferred loan category (percent): Performing 78.1 (Total); Restructured 17.1 (Total); Nonperforming 4.8 (Total)
- Financial soundness indicators (latest 2022 Q2):
  - Regulatory capital to risk-weighted assets: 18.7 (2022 Q2)
  - Aggregate capital adequacy ratio (end-2021): 19.5 percent
  - Nonperforming loans to total gross loans: 2.3 (2022 Q2)
  - Aggregate LCR (Dec 2021): 225 percent; NSFR (end-2021): above 120 percent

*Source: IMF staff.*

### 2022. The FSAP findings were discussed with the

### 1mexea2022002 - 2022. The FSAP findings were discussed with the

### Executive Summary — headline findings
- Mexico has a robust financial system but a low level of financial inclusion.
- The economy "has weathered the COVID-19 pandemic well, reflecting resumption in mobility and support from domestic and global policies."
- Systemic vulnerabilities "appear broadly contained"; the financial system is emerging from the pandemic with higher capital buffers, lower private sector leverage, and no sign of stretched asset prices.
- The financial system "provides less finance to the real economy than its peers."
- Digital finance is "still embryonic" but "holds the promise of increasing financial access."

### Key risks identified
- The key risk is "the first sustained tightening of global financial conditions since the Global Financial Crisis (GFC), combined with low growth and high inflation."
- Mexico is "highly integrated with global financial markets" and has "a strong presence of non-resident investors in the financial sector and capital markets."
- A disorderly tightening in global liquidity could:
  - "weaken activity and drive system-wide liquidity stress."
  - Be accentuated by risks from cyber events and structural transitions, i.e., climate change.
- Climate and cyber risks are highlighted as "important additional concerns" with climate risk analysis pointing to "potentially material risks from transition and physical risk exposures over the medium term."

### Resilience and stress-testing findings
- Under the adverse scenario:
  - "High initial capital and strong profitability help banks absorb most of credit and market losses."
  - "Liquidity risks for banks are expected to be well-contained."
  - Noted areas for supervisory attention: "loan concentration, contingent credit lines, and large holdings of sovereign debt securities" in some cases.
  - "Corporate debt-at-risk would rise under stress, but risks to the financial system are contained by low leverage."
- System-wide liquidity:
  - "System-wide liquidity risks appear contained, with commercial banks well-placed to provide liquidity to other financial institutions during periods of stress."
  - Authorities "have demonstrated the effectiveness of their toolkit to support systemic liquidity during the pandemic."
  - New global liquidity shocks could generate tail-risks.
  - "High levels of short-term wholesale funding of development banks deserve further consideration," with risks attenuated by liabilities guaranteed by the sovereign.
- Climate risk analysis:
  - "Highly uncertain" but points to "potentially material risks from transition and physical risk exposures over the medium term."
  - The uncertainty "points to the need for further refinement of risk analysis to inform policy."

### Progress and outstanding policy actions
- Progress made:
  - "Rolling out critical Basel reforms, improving supervisory techniques and methodologies, building cybersecurity capacity, and enhancing recovery and resolution planning of commercial banks."
  - MFAs introduced "Total Loss Absorbing Capacity (TLAC) requirements for domestic systemically important banks (D-SIBs)."
  - Measures to boost financial access (e.g., "the 2018 Fintech Law").
- Outstanding issues and recommended upgrades:
  - Autonomy and resources:
    - "Strengthening the autonomy of regulatory government agencies and the legal protection of supervisors is critical."
    - "The vacancies on the Board of the Bank Deposit Insurance and Resolution Agency (IPAB) should be filled swiftly."
    - Need for enhanced resources and skills within the MFAs.
  - Supervision and regulation:
    - "The framework for and application of consolidated supervision needs significant enhancement."
    - CNBV could "improve supervisory techniques by simplifying the risk-based rating system (CEFER) and using more principle-rather than rule-based methodologies."
    - The Sustainable Finance Committee could support integration of climate risks into prudential supervision and introduce disclosure requirements for firms and investors.
    - MFAs could "publish a strategy for macroprudential policy and expand the macroprudential toolkit."
  - Digitalization and cybersecurity:
    - "Banxico and CNBV have made significant progress in strengthening the cyber resilience of the financial system but need to make further enhancements on strategy, oversight, and information sharing."
    - "Continued careful consideration in the design phases of Banxico’s central bank digital currency (CBDC) project will be needed."
    - "Generalized adoption of foreign stablecoins seems unlikely at this stage and the risks are mitigated by the robust policy framework."
  - Systemic liquidity and crisis management:
    - "The ELA framework could be enhanced by setting a minimum threshold for its interest rate and improving the encumbrance process of credit claims."
    - Recovery and resolution plans are now in place for all commercial banks, but further enhancements are necessary, including:
      - "removing impediments to banks’ resolvability,"
      - "reconsidering the use of temporary open bank assistance (TOBA),"
      - "eliminating barriers to the effective use of the purchase and assumption (P&A) and bridge bank tools,"
      - "expanding the resolution regime’s remit to financial holding companies."
  - Financial integrity:
    - "The authorities will need to complete implementation of the 2018 AML/CFT recommendations."

### Financial development priorities
- Competition and fintech:
  - "Fintech’s pro-competitive impact can be amplified by broadening regulated fintech activities and full implementation of the open finance framework."
  - "Banxico’s e-KYC efforts could catalyze the adoption of Digital ID."
- Role of the state and development banks:
  - Development banks "can be more impactful in addressing market failures and advancing developmental priorities."
  - They "should prioritize the use of guarantees and second-tier lending rather than the first-tier direct lending."
- Green finance:
  - "The financial sector should play a bigger role in reaching Mexico’s climate goals."
  - Authorities could "establish a climate finance strategy and introduce a green taxonomy."
  - Development financial institutions could be given "more ambitious climate finance targets to deepen green markets."

### FSAP Key Recommendations (summary table highlights)
- Cross-Cutting Themes:
  - Enhance the autonomy of regulatory government agencies and legal protection of supervisors (¶31) — NT
  - Assess and enhance the organizational structure and resource needs of individual agencies (¶32) — NT
  - Enhance the oversight of the Interbank Electronic Payment System (SPEI) relative to the PFMI and cybersecurity (¶34) — NT
- Systemic Risk Analysis:
  - Monitor contingent credit lines and portfolio concentration; use Pillar 2 requirements as needed (¶27) — NT
  - Expand liquidity stress test framework and incorporate in Supervisory Review Process (¶27) — MT
- Financial Sector Oversight:
  - Develop and publish a macroprudential policy strategy (¶35) — NT
  - Consider expanding toolkit with limits on loan-to-value and debt-service-to-income ratios (¶37) — MT
  - Ensure effective consolidated supervision of financial holding companies (¶40) — MT
  - Refine CEFER risk-based supervisory methodology (¶42) — NT
  - Continue cybersecurity strategy development and improve practices (¶44) — NT
  - Improve cyber response and conduct market-wide cyber crisis simulations (¶44) — MT
  - Issue supervisory guidance on climate-related risk management and introduce disclosure requirements (¶46-47) — NT
- Financial Integrity:
  - Implement remaining 2018 Mutual Evaluation Report recommendations (¶50-51) — NT
- Systemic Liquidity and Crisis Management:
  - Review liquidity risk mitigation framework for development banks (¶52) — NT
  - Explore options to enhance the ELA framework (¶55) — NT
  - Strengthen mechanisms for credible and feasible banks’ contingency arrangements while preserving resolvability (¶57) — C
  - Introduce statutory bail-in powers and eliminate barriers to P&A and bridge bank tools (¶57) — MT
  - Shorten resolution planning cycle for D-SIBs and midsize banks; eliminate impediments to resolvability (¶58) — C
- Financial Development Issues:
  - Broaden regulated fintech activities and finalize open finance implementation (¶61-62) — NT
  - Establish a national climate finance strategy; set ambitious climate finance targets for DFIs (¶64) — MT

- Legend used in Table 1: "C: continuous, I: immediate (less than one year), NT: short term (1–2 years), and MT: medium term (3–5 years)."

*Prepared by Heedon Kang, with contributions from the Mexico FSAP team; FSAP mission led by Vikram Haksar (IMF) and Ilias Skamnelos (WB) and conducted with Mexican authorities during the Article IV consultation mission in November 2022.*

### 6.     Mexico is    gradually recovering from the

### 6.     Mexico is    gradually recovering from the economic effects of the pandemic

### Macroeconomic recovery and near-term outlook
- The economy contracted by 8.1 percent in 2020.
- Growth bounced back to 4.8 percent in 2021.
- Cumulative output growth and credit growth during 2020-2021 were weaker than other emerging markets (EMs).
- Inflation has risen well above Banxico’s target range and is likely to persist for some time.
- Banxico has raised the policy rate by 525 basis points since June 2021.
- Long term yields would be sustained at 11 percent on average during 2022-23 (adverse scenario assumption).
- The stress test scenario horizon spans 2022–2024, starting with the data at end-2021. The baseline scenario is aligned with the IMF projections as of June 2022.

### Financial market impact and policy responses
- Mexico experienced capital outflows and a sharp exchange rate depreciation during the pandemic, but overall spreads of risky financial assets remained low and market functioning was orderly.
- Policy responses:
  - Banxico cut interest rates by 300 basis points to aid the economy and established facilities to support market functioning.
  - CNBV issued regulatory support measures, encouraging loan payment deferral and dividend payout restrictions.
- Fiscal stimulus was modest, and Mexico benefited from sizable fiscal policy spillovers from the U.S.

### Structural transitions, risks, and opportunities
- Two structural transitions noted:
  - Expansion of digital financial services (still embryonic but picking up), with attendant risks from cyberattacks and new forms of digital monies.
  - Transition to a lower carbon economy, with possible effects on earnings in carbon-intensive industries and their bank lenders, and rising climate physical risk.
- Internet banking users increased 2.5 times from 33 million in 2016 to 84 million in 2020.
- Opportunities arise from green finance.

### Financial system structure and integration
- The financial system has assets of about 100 percent of GDP, smaller than EM peers, and has not grown much in size and complexity since the 2016 FSAP.
- The banking sector accounts for more than half of the system; pension funds and insurers account for about 20 and 8 percent, respectively.
- The system is structured around financial holding companies (FHCs); all six D-SIBs are fully owned by FHCs.
- Mexico has 50 commercial banks. Six D-SIBs comprise ¾ of total banking sector assets.
- Five D-SIBs are foreign subsidiaries and generate a large share of parent groups’ profits.
- Six development banks (DBs) represent 9 percent of financial system assets and generally depend on wholesale funding; only two small DBs accept some deposits.
- Capital markets: outstanding domestic debt securities and stock market capitalization amounted to 46 and 31 percent of GDP at end-2021.
- Foreign investors hold about one-sixth of outstanding local currency government bonds (their share has been declining).

### Systemic vulnerabilities and financial-sector resilience
- Aggregate indicators and heatmap show generally low and declining systemic vulnerability levels, but uncertainty over bank asset quality and other weak pockets exist.
- Banking sector buffers and liquidity:
  - Aggregate capital adequacy ratio in the banking sector increased to 19.5 percent at end-2021.
  - Leverage ratio stood at about 12 percent.
  - Aggregate NPLs have been about 2 percent since the last FSAP.
  - Aggregate Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) were above 200 and 120 percent at end-2021, respectively; some smaller banks have lower buffers than D-SIBs.
- Households and corporates:
  - Private sector leverage and debt service burden remain low compared to EM peers.
  - Weighted average mortgage loan-to-value and payment-to-income ratios have been stable at around 72 and 28 percent, respectively.
  - Mexican NFCs have low leverage and debt service burden compared to EM peers; corporate balance sheets showed pandemic weakening but began rebounding in 2021.
- Non-bank financial institutions and development banks:
  - NBFIs and DBs are typically long-term investors; pension funds are the main institutional investors.
  - Some NBFIs and DBs depend on wholesale funding and use repos for short-term liquidity; DBs secure more than 30 and 34 percent of their funding from bond issuance and repo operations, respectively.
  - Market concerns over refinancing and repricing of global debt securities might increase funding pressures on DBs in tail-risk events.

### Stress testing, scenarios, and key stress-test findings
- Adverse scenario design:
  - Entails low growth and high inflation in major economies and significant stress in global financial markets; considers shocks such as supply chain disruptions and commodity price surges, de-anchoring of U.S. inflation expectations, and faster Fed policy tightening.
  - Would lead to a widespread risk-off event, causing sharp currency depreciation, a rise in sovereign and corporate spreads, liquidity strains, and negative macrofinancial feedbacks.
  - The adverse scenario implies a severe recession in line with a 2¼ standard deviation shock to output growth and a high inflation episode not experienced since 1994.
- Components of the systemic risk analysis included bank solvency tests, bank liquidity tests, contagion analysis, corporate sector analysis, system-wide liquidity analysis, climate risk analysis, and fintech-related risk analysis.
- Bank solvency stress-test results:
  - Banking system is broadly resilient to severe external shocks; most banks have ample capital buffers relative to hurdles.
  - Aggregate capital shortfalls in the adverse scenario are relatively small (less than 0.4 percent of GDP).
  - The top 10 banks’ capital adequacy ratio declines by 4.7 percentage points to 14.5 percent by 2022 under the adverse scenario.
  - Net interest income remains a positive contributor to capital under higher rates, though at a more moderate level compared to baseline.
  - MXN depreciation has limited impact because banks have very small net open FX positions.
  - Contingent credit lines are substantial (about 2.7 trillion pesos and 10 percent of GDP in May 2022) and unevenly distributed among banks; although about 90 percent are revocable, simultaneous triggering in a tail-risk event could negatively affect capital positions.
  - A higher-than-anticipated rise in interest rates (+150 bps) would have considerable effects via mark-to-market losses on debt securities, leading the top-10 banks’ capitalization to decline by 2.4 percentage points by 2022 (hedging effects not modeled).

### Policy-relevant observations and monitoring priorities
- Continued close monitoring of pandemic-affected deferred loans is needed as most are currently performing.
- Monitor contingent credit lines concentration and the potential for simultaneous triggering in tail events.
- Monitor NBFIs’ and DBs’ reliance on wholesale funding and repo markets for susceptibility to funding shocks.
- Watch inflation dynamics and the trade-off between inflation and growth given the first sustained tightening of global financial conditions since the GFC.
- Address climate-related and digital-finance-related risks as structural transitions progress, while leveraging green finance opportunities.

*Source: IMF staff.*

### 21.     Overall liquidity conditions in the banking sector are robust, but some smaller banks

### 1mexea2022002 - 21.     Overall liquidity conditions in the banking sector are robust, but some smaller banks

### Liquidity conditions in the banking sector
- Aggregate LCR stood at 225 percent in December 2021, with all commercial banks above the 100 percent regulatory minimum.
- Most systemic banks, starting from high LCRs, are well-positioned to manage short-term liquidity pressures.
- Aggregate liquidity shortfalls would occur only in an extreme scenario and amount to about 1 percent of banking sector assets when liquidity shortfalls of some banks are netted out with surpluses of others.
- In the most severe scenario, the banking sector faces liquidity shortfalls equal to 0.1 trillion pesos (1 percent of total assets in the sector).
- Banxico has capacity to support the system during stress events, making the projected shortfalls manageable.

### Short-term liquidity management risks
- Two specific risks to monitor:
  - Contingent credit lines could be withdrawn quickly or simultaneously under stress.
  - Part of retail deposits from high net-worth individuals seeking higher yields could behave like wholesale deposits and be more prone to outflows; more granular data is needed to assess this.

### Contagion and interconnectedness
- Potential for contagion through cross-border bank exposures or domestic networks appears limited.
- Mexico would face inward spillovers from a hypothetical banking crisis in the U.S., reflecting strong regional ties with the U.S. and Spain, but Mexican banks play a limited role as shock originators or transmitters to other countries.
- Domestic interconnectedness analysis with bilateral exposures among banks and NBFIs suggests limited contagion effects.
- Domestic contagion would result from the failure of development banks, although such failures are very unlikely given DB’s sovereign backstop.

### Corporate sector vulnerability and solvency stress testing
- Using conventional econometric modeling, aggregate corporate PIT PDs almost double from a low level during the outer years of the adverse scenario.
  - Corporate PIT PD would rise from 2.3 percent in 2021 to 4.1 percent in 2024 in the bank solvency stress tests.
- Firm-level expected default frequency (EDF) analysis finds heightened default risks under the adverse scenario, concentrated in more highly levered and less liquid firms, which tend to be smaller—limiting implications for the banking sector.
- FX depreciation plays an insignificant role in affecting Mexican corporate EDFs according to the analysis.
- Random forest estimation (best out-of-sample performance) indicates higher EDFs are driven by lower interest coverage ratios, higher interest rates, smaller firm size, weaker profitability, and higher leverage ratios.

### System-wide liquidity analysis
- A novel approach examines the risk of simultaneous liquidity stress across multiple financial institutions, incorporating direct lending, debt crossholdings, repo exposures, and exposures to common assets.
- Aggregate analysis suggests system-wide liquidity would remain resilient, with commercial banks effectively backstopping liquidity needs of other entities.
- Even in the most severe case, commercial banks show only small liquidity shortfalls upon triggering of contingent credit lines and wholesale deposit outflows.
- Commercial banks can act as shock absorbers by providing liquidity through repo transactions, assuming liquidity requirements are lowered and no underlying change in their liquidity preference.
- If commercial banks or entities such as investment funds change liquidity preference or face binding liquidity constraints during tail-risk events, larger system-wide liquidity stress could materialize absent liquidity provision by the MFAs.

### Climate-related risk analysis
- Transition risk:
  - Scenarios: baseline (“current policies”), global action (orderly transition), and delayed-uncertain action (delayed, disorderly transition). A stochastic jump-diffusion model of corporate spreads assesses sudden large market repricing under delayed-uncertain action.
  - Under the global action scenario, cumulative impacts on bank capital ratios would amount to about 0.4 percentage points by 2026.
  - Under the delayed-uncertain scenario, the tail of corporate PDs and bank capital ratios becomes fatter, increasing tail risk substantially.
- Physical risk:
  - Focus on floods and tropical cyclones, including extreme season scenarios over a three-year horizon reflecting RCP4.5 and RCP8.5.
  - Under the extreme RCP8.5 scenario, estimated physical capital stock damage would translate into two percentage points deviation of GDP growth from the baseline in 2022, and the banking sector’s capital ratio would decline by about 1.2 percentage points from the baseline solvency stress test results.
  - Overall, currently estimated physical impacts would not likely generate systemic financial stress in the near term despite substantial impact on growth; results subject to major uncertainty and data/model gaps.

### Fintech-related risk analysis
- Hypothetical sensitivity analysis of banks experiencing erosion of net interest income and non-interest income (payments income proxied by credit card income) due to penetration of new forms of digital payments:
  - In the most adverse scenario, the banking sector’s capital ratios would drop by 34 basis points over two years relative to the baseline solvency stress test results.
  - Banks that rely more on retail sight deposits and credit card fee income could see capital ratios decline up to 75 basis points over the same period.
  - Capping the size of CBDC accounts could mitigate pressure on bank margins if CBDC introduction becomes a source of margin pressure.

### Key policy recommendations
- Enhance systemic liquidity assessment:
  - Add a comprehensive cash flow analysis to the stress testing framework and advance development of system-wide liquidity analysis.
  - Banxico could monitor dynamics of contingent credit lines and assess relevant risks together with CNBV.
- Use Pillar 2 requirements to address identified systemic risks:
  - CNBV could impose capital add-ons based on ICAAP to address concentration risk, interest rate risk in the banking book, and risk management gaps indicated by stress tests.
  - Use liquidity analysis in the Supervisory Review Process to inform Pillar 2 requirements for both commercial and development banks.
- Improve data collection and sharing:
  - Banxico and Tax Service Administration (SAT) could collaborate to share anonymized household and corporate income data.
  - Close data gaps in regulatory reporting—mainly IFRS9 implementation and banks’ internal ratings-based approach parameters.
  - Compile a complete set of sectoral financial accounts (e.g., balance sheet breakdown of NBFIs) and bilateral exposures to strengthen system-wide liquidity analysis.
  - Improve firm-level disclosure of carbon footprints in both listed and unlisted Mexican firms.

### Cross-cutting institutional themes
- Multiple financial authorities with distinct mandates exist: SHCP, Banxico, IPAB, and four supervisors (CNBV, CNSF, CONSAR, CONDUSEF). Banxico has constitutional institutional autonomy; IPAB and CONDUSEF have some financial autonomy; other supervisors report to SHCP.
- Existing coordination arrangements were effective during pandemic market turmoil (including managing failure of two small banks).
- Recommendations to strengthen supervisory autonomy and governance:
  - Progress on strengthening independence and legal protection of supervisors is needed; currently supervisors (except Banxico) lack budget autonomy and legal protection for removal and duties.
  - Filling vacancies for independent members on the IPAB Board is a high priority: four independent members appointed by the president hold a majority; three positions have been vacant and need to be filled.
  - Strengthen safeguards for IPAB’s executive management by introducing a set term of appointment and more objective grounds for dismissal.

*Source: IMF staff calculation.*

### 37.     The organizational structure and resource needs of individual agencies would benefit

### 37.     The organizational structure and resource needs of individual agencies would benefit

### Organizational structure and resource needs
- Recent significant reduction in operating budget (except Banxico) has resulted in staff turnover and loss of experience.
- The FSAP recommends a strategic review of the organizational structure and resources of relevant agencies to make necessary adjustments to address existing and emerging challenges.
- The FSAP welcomes the ongoing evaluation in IPAB as a good example.

### Interagency collaboration and crisis preparedness
- Interagency collaboration could be further enhanced, especially on emerging risks.
- MFAs could regularly conduct table-top crisis simulation exercises with a range of extreme but plausible scenarios, including:
  - fast-fail resolutions of systemic and medium-size banks,
  - concurrent failure of banks,
  - cyber crises.
- Authorities could explore options to pool resources and expertise across institutions to mitigate resource constraints and develop new analysis of cyber and climate-related risks.

### Financial Market Infrastructure (FMI) risks and SPEI oversight
- New risks since the 2016 FSAP include intensified cyber risk, emergent use of instant payments, interaction with distributed ledger technology, and stablecoin arrangements.
- The 2022 FSAP scope does not include a full FMI assessment, but a focused review of SPEI oversight finds that Banxico could enhance its oversight approach by:
  - establishing a formal oversight function independent from SPEI operators,
  - addressing gaps identified through the CPMI‑IOSCO PFMI implementation monitoring exercise.
- CPMI‑IOSCO context (as reported):
  - Level 1 assessment and update in July 2018: measures were fully implemented for adopting legislation, regulations, and policies for the 24 Principles for Financial Market Infrastructures (PFMI) and four of the five authorities’ responsibilities.
  - Authorities observed or broadly observed most responsibilities, and partly observed the application of the principles for FMIs for central counterparties, as of November 2015.
  - SPEI was assessed in detail during the 2016 and 2006 FSAPs.

Box 1 — Recommendations for SPEI oversight (Banxico)
- Establish a more thorough oversight function for the SPEI system:
  - conduct risk assessments against the PFMIs and supplemental guidance on a continuous basis;
  - ensure the oversight function has sufficient resources and independence from SPEI operators;
  - establish a structured oversight approach and methodology after reviewing other central banks’ models.
- Improve transparency:
  - review responses to the CPSS‑IOSCO Disclosure framework for FMIs and disclose publicly every two years.
- Address gaps identified through the CPMI‑IOSCO PFMI implementation monitoring exercise:
  - implement a timebound work plan for the SPEI payment system to fully observe all PFMI principles.
- Conduct periodic self-assessments of observance of Responsibilities A‑E to assess how effectively authorities fulfill responsibilities as regulators, supervisors, and overseers.

### Macroprudential framework
- Authorities could develop and publish a macroprudential policy strategy describing objectives, instruments, decision-making, coordination mechanisms, and the role of discretion.
- A formal strategy can boost communication, accountability, counter inaction bias, enhance coordination, and strengthen credibility and effectiveness.
- A rich set of macroprudential tools has helped build resilience:
  - Capital and liquidity tools and D‑SIB buffers were introduced in line with Basel requirements.
  - A core funding ratio in FX has been effective for banks to manage FX risks.
  - Measures to reduce vulnerabilities in investment funds (e.g., swing pricing, redemption fees) are in place.
- Authorities could consider expanding the toolkit and enhancing time-varying use:
  - Plans for finalizing and publishing a guideline for the countercyclical capital buffer (CCyB) are welcome.
  - With no evidence of credit and housing booms, introducing limits on loan-to-value and debt-service-to-income ratios could be considered as a medium-term agenda.

### Banking regulation and supervision
- Progress made:
  - CNBV has operationalized the ICAAP and the SRP (though enhancements needed per ¶27).
  - Operational risk management framework has significantly improved.
  - Prospects for issuing amended regulations on large exposures in 2022 are important; amendments should follow Basel III standards and best international practices.
- Consolidated supervision gaps:
  - Some financial conglomerates are outside CNBV’s consolidated supervision: seven have not requested SHCP authorization at the time of the FSAP assessment and are not subject to CNBV consolidated supervision.
  - The 2014 Financial Groups Law (LRAF) does not empower CNBV to impose prudential measures at the group level.
  - An amendment is needed to provide CNBV powers to:
    - apply a comprehensive set of prudential requirements on financial groups as a whole,
    - enforce consolidated supervision on all de-facto financial conglomerates in Mexico,
    - impose discretionary powers to oversee all relevant entities of financial groups, including those not declared during authorization and those operating abroad.
- Strengthening risk‑based supervision:
  - CNBV reshaped the risk-based rating methodology (CEFER) in November 2015 and standardized supervisory tools.
  - The CEFER quantitative methodology to determine inherent risks needs simplification.
  - Greater use of flexibility and expert judgment is needed instead of a formal check-list approach.
  - Internal supervisory routines should support development of expert judgment among supervisors.
  - Strengthening legal protection for supervisors would incentivize application of judgment and discretion.

### Cybersecurity regulation and supervision
- Cyber risk has intensified and the CESF recognizes cyber as a financial stability risk.
- Progress:
  - Banxico improved cybersecurity controls, incident response framework, threat intelligence, and participant security measures.
  - CNBV built a dedicated cybersecurity supervision unit and designed a cyber supervision methodology.
- Recommended enhancements:
  - Banxico and CNBV should deepen a cybersecurity strategy specifying identification, management, and reduction of cyber risk and outlining coordination among public/private stakeholders and other jurisdictions.
  - CNBV should issue regulations or enforceable guidance on ICT and cybersecurity to all supervised financial institutions (not only banks), conduct on-site ICT/cybersecurity inspections, improve off-site supervision, and adequately resource the cyber supervision unit.
  - Banxico should strengthen cybersecurity oversight of FMIs through intensive training of overseers, comprehensive oversight tools, and clear regulatory requirements for FMIs under its mandate.
  - Develop a cyber map of the financial system to identify operational and technological interconnectedness (critical nodes, transmission channels, critical service providers).
  - Improve public and private platforms for cyber threat intelligence and information sharing; Banxico could work with the financial sector on an industry-wide initiative.
  - Improve implementation processes around the Bases of Coordination by translating them into operational structures, policies, procedures, and clear leadership by Banxico and CNBV; work with the General Attorney’s office to raise awareness of cyber incident investigations and develop guidance on evidence handling.

### Oversight of climate-related risks
- Authorities have taken initial steps; financial institutions are generally at an early stage of managing climate-related risks.
- CESF launched the Sustainable Finance Committee; Banxico created a directorate in 2021 and published climate risk analysis in recent FSRs.
- Authorities could integrate climate risks into prudential supervision leveraging Basel Committee’s Principles for the Effective Management and Supervision of Climate-related Financial Risks (published in June 2022).
- CNSF could follow IAIS recommendations to develop guidance on climate risks in governance, risk management, business strategy, and disclosure.
- CONSAR has mandatory guidance for retirement funds and could update it with more detailed supervisory guidance.
- Market transparency should be enhanced by introducing disclosure requirements for firms and investors:
  - CNBV could introduce disclosure standards of climate and ESG information for issuers and asset managers and include such disclosure in accounting standards.

### Digital money and CBDC
- Risks of “digital dollarization” arise in principle, but generalized adoption of foreign stablecoins seems unlikely given robust policy and regulatory frameworks and very low level of dollarization in Mexico.
- Crypto-asset activities do not appear to have material penetration in Mexico.
- Banxico’s CBDC project:
  - Aims to foster financial inclusion and payments digitalization within the Payments Strategy and CBDC project.
  - Banxico has deep understanding of CBDC issues but would benefit from preparing a risk management framework and conducting cost-benefit analysis.
  - Design choices should ensure sustainability of new business models and containment of risks to the financial system.
  - Banxico could evaluate alternatives (e.g., private digital monies) to achieve policy objectives at lower costs.
  - The complexity of CBDC issues requires collaboration within Banxico and with stakeholders and sufficient resource allocation at each phase.

### Financial integrity (AML/CFT)
- Mexico has progressed in addressing most technical deficiencies from the 2018 AML/CFT Mutual Evaluation Report (MER).
  - Follow-up reports in June 2021 and May 2022 concluded Mexico made good progress in most technical compliance deficiencies, with several re-ratings and upgrades.
- Strengthened legal framework for the financial sector covers customer due diligence, beneficial owners and politically exposed persons, new technologies, and wire transfers.
- Legal deficiencies remain in the non-financial sector regarding reporting suspicious activities, verification of beneficial ownership, and obligation to apply a risk-based approach; a draft law addressing these issues is pending before the Senate.
- Recommended actions to improve effectiveness:
  - Complement the National Risk Assessment with a comprehensive analysis of risks associated with different types of legal persons.
  - Establish a beneficial ownership register as planned and strengthen AML/CFT consolidated supervision.
  - Ensure adequate allocation of resources to AML/CFT supervision.
  - Apply effective, proportionate, and dissuasive sanctions consistently, including empowering CNBV to revoke a banking license upon AML/CFT breaches.
  - SAT should step up supervisory activities and ensure resources are commensurate with the wide range of supervised professions and businesses.
  - Improve money laundering investigations, including parallel investigations of tax and organized crimes and corruption.
  - Enhance monitoring of financial integrity risks from fintech and virtual assets and continue supervising Virtual Asset Service Providers by enforcing registration requirements and customer due diligence obligations.

### Systemic liquidity management, financial safety net and crisis preparedness — Systemic liquidity management
- Mexican money markets are well-regulated and function efficiently, supported by:
  - marginal level of interbank unsecured transactions,
  - commercial banks’ full compliance with the LCR,
  - depth of the repo market (OTC repo market is bilateral with predominantly government or IPAB debt securities as collaterals).
- Liquidity risk concerns:
  - Development banks (DBs) are not subject to liquidity regulation (Appendix IV).
  - Some DBs have significant reliance on short-term funding with low levels of unencumbered HQLAs.
  - Government backstops their capitalization and explicitly guarantees their liabilities, but DBs might contribute to system-wide liquidity risk in severe tail risk scenarios (Section IV. B).
- Recommended actions:
  - Strengthen liquidity monitoring and reporting for DBs.
  - Leverage DBs’ internal risk committees to assess risk profile and contribution to systemic risk and consider appropriate action.
  - Address remaining impediments to NBFIs’ more balanced participation in the repo market to improve their ability to lend securities via repos.

*Source: 1mexea2022002 - 37.*

### 58.     Banxico’s mid-corridor operating framework fully supports the efficient pricing and

### Banxico’s mid-corridor operating framework fully supports the efficient pricing and distribution of liquidity.

### Monetary policy operations and liquidity management
- Banxico’s mid-corridor operating framework gives banks certainty about day-to -day liquidity conditions and access to:
  - a collateralized intraday facility; and
  - an overdraft as backstops.
- Collateral policy:
  - provides a sufficient volume of securities to efficiently implement monetary policy; and
  - the high quality and liquid nature of the securities minimizes the risks to Banxico’s balance sheet.
- COVID-19 market turmoil response:
  - Functioning of financial markets was restored after a short period of stress.
  - Most measures were not fully utilized but were effective in restoring market functioning due to their strong signaling effects.
  - Banxico’s liquidity support was essential in enabling local market participants to absorb the large amounts of government bonds sold by foreign investors.
  - COVID support measures (e.g., funding for lending facility) helped resolve practical challenges of accepting credit claims as collateral.
- Design features and lessons from COVID support programs:
  - (i) The programs were price-based facilities and served as effective backstops.
  - (ii) Banxico deployed targeted operations to support market participants in the key securities markets by providing them funding liquidity in well-calibrated amounts and against good collateral with appropriate haircuts.
  - (iii) Risk transfer to Banxico remained completely controlled with very limited direct intervention.
  - (iv) Exit strategies were provided by construction as most facilities were term repo or swap transactions.
- USD funding arrangements during the pandemic:
  - Banxico utilized the Fed’s USD swapline.
  - Banxico has other means to provide USD funding to the financial system, such as NDF, other credit facilities (e.g., the FCL arrangement with the IMF) and own FX reserves.

*Emergency Liquidity Assistance (ELA) framework*

### Emergency Liquidity Assistance (ELA) framework — assessment and recommendations
- Current strengths:
  - ELA framework has a sound legal foundation and a comprehensive internal policy.
  - Provides broad flexibility to Banxico’s Governing Board; it can adjust ELA parameters (e.g., collateral, term, and rate) if credit institutions could pose systemic risks.
- Identified shortcomings and suggested enhancements:
  - Credit claims are eligible as collateral, but encumbrance of credit claims is time-consuming and should be accelerated to be consistent with the emergency nature of the activity.
  - The ELA policy should set clear boundaries for flexibility in the decision-making process.
  - The policy document should clarify that ELA decisions are based on a forward-looking assessment of the applicant’s solvency.
  - While the ELA framework mitigates moral hazard by requiring the pledging of the shares of the institution, forbidding dividend payments and restricting operations, the policy should contain a binding minimum threshold for the ELA interest rate as is common with most major central banks.

### Financial safety net and crisis preparedness — progress and remaining gaps
- Progress since last FSAP:
  - Recovery and resolution plans are in place for all commercial banks.
  - D-SIBs are required to increase their loss absorbency.
  - Preparations progressed for using the bridge bank tool.
  - Cooperation agreements signed with all major home jurisdictions of the Mexican systemic banks.
  - Emergency lending facilities clarified including to banks in resolution.
  - Depositor payout process improved.
- Remaining priorities and recommended reforms:
  - Introduce bail-in powers while appropriately protecting creditors; revise creditor hierarchy to make TLAC requirements more effective.
  - Authorities should trigger resolution when they deem a bank nonviable instead of waiting for certain quantitative thresholds to be met.
  - Remove barriers to effective use of P&A transactions and bridge banks.
  - Make a (partial) P&A transaction with a bridge bank—likely preceded by bail-in—the primary resolution strategy for systemic banks instead of TOBA, which is potentially costly and should be reconsidered.
  - Adopt a recovery and resolution regime for financial holding companies to:
    - allow undertaking resolution at the parent level without affecting operating companies; and
    - give supervision and resolution authorities the power to force continuity of intragroup services (e.g., for data support).
- Resolvability and recovery plans:
  - Deficiencies in banks’ recovery plans and impediments to their resolvability need solving to ensure timely and cost-effective resolutions.
  - IPAB does not have the power to remove impediments to banks’ resolvability (e.g., changes in banks’ business practices, structure, or organization) and should continue to identify impediments and measures to mitigate them, while shortening the resolution planning cycle for systemic and mid-size banks.
  - CNBV should actively support the process while awaiting statutory powers for IPAB to remove impediments.
- Deposit insurance fund:
  - IPAB has built a fund that could cover the resolution and payout of most smaller banks despite legacy debt from the Peso crisis.
  - The deposit insurance fund is projected to reach 3.4 percent of insured deposits in 2027 and 5.1 percent in 2032, which would position it better for the concurrent failure of several of the largest non-systemic banks.
  - Recommendations to expedite strengthening the fund:
    - Relieve IPAB from the 1990s’ legacy debt.
    - Operationalize IPAB’s backup funding.
    - Increase public awareness of deposit insurance.

### Financial sector development — inclusion, competition, fintech, and green finance
- Financial inclusion and competition:
  - About half of adults reported having an account at a financial institution in 2021, up from 44 percent in 2015.
  - Those with primary education experience low access and use levels.
  - Access to credit is subdued, particularly in rural areas and for small and micro enterprises.
  - Card and digital/mobile wallet payments are expanding, but cash remains the primary payment method.
  - Large banks derive advantages from vertical integration and financial conglomerate structures, making it difficult for smaller banks to compete.
  - Customers appear insensitive to price differentials, despite limited formal switching costs.
- Digital Financial Services (DFS) and payments:
  - The National Council for Financial Inclusion and its coordination mechanism could boost the DFS agenda, but DFS efforts could leverage more active coordination with an expanded set of public agencies (e.g., National Institute of Transparency, Access to Information and Protection of Personal Data) and private sector entities (e.g., fintech companies).
  - The MFAs could consider expanding the use of Cobro Digital (CoDi) to P2P, P2G, e-commerce, utility bill, and public transportation payments.
  - Banxico’s e-KYC efforts could catalyze the adoption of Digital ID.
  - CoDi note: Banxico introduced CoDi in 2019 as a free-of-charge service that utilizes QR codes for point-of-sale payments and internet/mobile channels for remote transactions. SPEI participants were mandated to offer CoDi to their customers and, despite 18.3 million registered accounts, there were only 1.2 million transactions by June 2022.
- Fintech regulation and open finance:
  - Authorities could broaden the scope of permissible products and services under the 2018 Fintech Law.
  - Swift implementation and finalization of open finance would promote client mobility and foster competition.
  - Some regulatory and technical requirements (e.g., strict rules for contracting and operating banking agents (comisionistas)) could be reviewed and simplified without diluting necessary safeguards.
- Development Financial Institutions (DFIs):
  - DFIs (development banks, development funds, and development trusts) play an important role but can be more impactful.
  - Recommended priorities:
    - Prioritize using guarantees and second-tier lending to advance developmental priorities, making efficient use of their capital.
    - Revise the “aprovechamiento” (fees from DBs against the explicit government guarantee) to become more transparent.
    - Ensure Banco del Bienestar’s social objectives are complemented with competitive neutrality and preservation of capital.
    - Address Infonavit’s high NPLs, given its major role in the Mexican mortgage market.
- Green finance:
  - Authorities should establish a climate finance strategy and introduce a green taxonomy.
  - DFIs could be given more ambitious climate finance targets to deepen green markets.

### Authorities’ views
- General reception:
  - Authorities welcomed the FSAP’s positive assessment of the continued resilience of the financial system and strong financial policy frameworks.
  - They appreciated the FSAP team’s comprehensive assessment and found the engagement useful to bring an additional perspective to their risk analysis, explore emerging issues, and discuss the evolution of their financial sector policy frameworks.
  - While expressing some reservations on a few FSAP recommendations, they indicated their intent to consider all of them and agreed to publish the FSSA.
- Agreement with systemic risk assessment:
  - Authorities broadly agreed with the systemic risk assessment and concurred that the Mexican financial system is robust and resilient to plausible future adverse shocks.
  - They underscored commitment to monitoring and containing emerging systemic risks as the financial sector grows in size, complexity, and interconnectedness.
  - They share the view that the policy framework performed well during the pandemic shock and are considering further analysis of potential system-wide liquidity risks.
  - They agreed to consider the recommendation to further evaluate liquidity risk management in development banks, though they view it as non-pressing because these entities are fully backed by the sovereign.
  - They noted the climate risk analysis was useful but points to the need for further work given the high level of uncertainties ahead.
- Regulatory and supervisory framework:
  - Authorities welcomed the assessment that the regulatory and supervisory framework supported positive resilience outcomes.
  - They flagged that the financial system had weathered the COVID-19 shock well, reflecting agile policy responses and progress in strengthening financial sector policies.
  - Institutional arrangements supporting autonomy of regulatory agencies are defined in organic legislation; supervisors and regulators operate with a high level of independence.
  - They intend to continue developing the risk-based supervisory framework and plan to issue an amended regulation on large exposures in 2022.
  - They take note of recommendations to improve de jure application of the consolidated supervision framework but noted that all D-SIBs provide regular information to supervisors on a consolidated basis and each regulatory agency has powers over different entities in a financial group, which de facto reduces the gap to consolidated supervision.
  - They are committed to boosting cyber resilience and will continue to evaluate new areas, such as climate and fintech, including in the context of their digital payments strategy focused on promoting financial inclusion.

*Source: IMF staff.*

### 73.     The authorities also welcomed the positive assessment of the liquidity management

### 1mexea2022002 - 73.     The authorities also welcomed the positive assessment of the liquidity management

### Liquidity management and crisis management/resolution frameworks
- Authorities welcomed the positive assessment of the liquidity management framework and progress on strengthening the crisis management and resolution frameworks.
- Authorities have invested heavily in developing a globally state of the art liquidity management framework that was effectively deployed by Banxico to help contain risks during the massive pandemic shock.
- Advances made with implementation of the new Basel standards, including the TLAC requirement.
- Authorities view their track-record of managing the few instances of failure in smaller financial institutions as evidence the framework works well, while remaining mindful of the need to keep constantly improving and updating given evolving financial sector dynamics.

### Monetary policy decisions during the COVID-19 crisis
- Policy rate cut: Seven times from March 2020 through May 2021, 300 basis points in total.
- Policy rate hike: Ten times since June 2021, 525 basis points so far.

### Central bank facilities deployed during the COVID-19 crisis (In billions of Mexican peso)
- Total Envelope (A): 800
- Disbursed (B): 692
- Percent (B/A): 86
- Total (percent of GDP): 3.1 (Envelope) and 2.7 (Disbursed)
- Individual facilities:
  - Government securities term repurchase window: Envelope 150; Disbursed 465; Percent 310; Expiration Sep. 2021
  - Reduction of the Monetary Regulatory Deposit: Envelope 50; Disbursed 50; Percent 100; Expiration Nov 2020
  - Temporary securities swap window: Envelope 50; Disbursed 63; Percent 126; Expiration Sep. 2021
  - Swap of government securities: Envelope 100; Disbursed 15; Percent 15; Expiration Feb. 2021
  - Corporate Securities Repurchase Facility: Envelope 100; Disbursed 45; Percent 45; Expiration Sep. 2021
  - Provision of resources to banking institutions to channel credit to MSMEs and individuals affected by the COVID-19 pandemic: Envelope 250; Disbursed 14; Percent 6; Expiration Sep. 2021
  - Collateralized financing facility for commercial banks with corporate loans to finance MSMEs: Envelope 100; Disbursed 40; Percent 40; Expiration Sep. 2021

### Other financial sector measures during COVID-19
- Liquidity support:
  - FX swap line with the U.S. Fed by December 2021 and the FCL arrangement with the IMF in November 2021.
  - FX Hedging auction program (USD NDF auctions).
  - Temporary flexibilities on liquidity requirements for banks, including:
    - Allowed banking institutions to consider as liquid assets those eligible as of February 28 2020;
    - Excluded from the Look Back Approach March 2020 margin calls or valuation changes;
    - Temporary halt to application of certain corrective measures when institutions report LCR below minimum regulatory requirement;
    - Extraordinary classification for LCR scenarios combining average and minimum LCRs to allow use of the liquidity buffer;
    - LCRs below the minimum regulatory requirement were not considered a breach of the liquidity framework (economic sanctions not applicable).
  - The liquidity flexibilities were gradually undrawn by February 2022.
- Credit and capital support:
  - Special Account Criteria (SAC) to help creditors provide temporary deferral of payments of principal and/or interest to performing loans in March 2020 for up to four months with the possibility of extending it for two additional months, six months for micro-credits, or up to eighteen months for credits directed to agricultural and rural sectors by July 2020.
  - Credit restructuring measure after the expiration of SAC to help creditors restructure deferred loans and increase probability of payment.
  - Use of bank’s capital conservation buffer up to 50 percent of the buffer, without impairing the minimum regulatory requirement by December 2021.
  - Restriction on paying dividends, share buy-backs, or other remunerations relaxed in April 2021 to allow remuneration up to 25 percent of the results in 2019, 2020 and 2021 with banks’ regulatory capital being above 13 percent after the remuneration.
  - Relief on the minimum credit card payment by January 2021.

### Structure of the financial system (selected figures, 2016 and 2021)
- Commercial banks:
  - 2016: Number 47; In billions of Mexican pesos 8,668; In percent of financial sector assets 48.1; In percent of GDP 43.1
  - 2021: Number 50; In billions of Mexican pesos 11,078; In percent of financial sector assets 43.8; In percent of GDP 42.2
- Domestic banks:
  - 2016: Number 32; In billions of Mexican pesos 2,803; In percent of financial sector assets 15.5; In percent of GDP 13.9
  - 2021: Number 30; In billions of Mexican pesos 3,643; In percent of financial sector assets 14.4; In percent of GDP 13.9
- Foreign subsidiaries:
  - 2016: Number 15; In billions of Mexican pesos 5,865; In percent of financial sector assets 32.5; In percent of GDP 29.1
  - 2021: Number 20; In billions of Mexican pesos 7,435; In percent of financial sector assets 29.4; In percent of GDP 28.3
- D-SIBs:
  - 2016: Number 7; In billions of Mexican pesos 6,879; In percent of financial sector assets 38.1; In percent of GDP 34.2
  - 2021: Number 6; In billions of Mexican pesos 8,099; In percent of financial sector assets 32.0; In percent of GDP 30.8
- Pension funds (Siefores):
  - 2016: Number 73; In billions of Mexican pesos 2,754; In percent of financial sector assets 15.3; In percent of GDP 13.7
  - 2021: Number 117; In billions of Mexican pesos 5,236; In percent of financial sector assets 20.7; In percent of GDP 19.9
- Investment funds (Fondos de inversión):
  - 2016: Number 578; In billions of Mexican pesos 2,047; In percent of financial sector assets 11.4; In percent of GDP 10.2
  - 2021: Number 613; In billions of Mexican pesos 2,795; In percent of financial sector assets 11.1; In percent of GDP 10.6
- Total assets:
  - 2016: Total 2,845; In billions of Mexican pesos 18,034; In percent of financial sector assets 100.0; In percent of GDP 89.6
  - 2021: Total 2,337; In billions of Mexican pesos 25,271; In percent of financial sector assets 100.0; In percent of GDP 96.2
- Memo: Financial holding companies (FHCs)
  - 2016: Number 10; In billions of Mexican pesos 6,546; In percent of financial sector assets 36.3; In percent of GDP 32.5
  - 2021: Number 15; In billions of Mexican pesos 8,798; In percent of financial sector assets 34.8; In percent of GDP 33.5

### Foreign D-SIBs’ contribution to group profits (In percent, 2020; selected)
- BBVA Mexico: Total Assets 2,443.40 (In billions of Mexican pesos); 122.9 (In billions of U.S. Dollars); Parent Bank BBVA Spain; Share of Total Assets in Mexico 14.7; Share of Gross Income from Mexico 30.5; Share of Net Profit from Mexico 44.6; Share of Employees in Mexico 29.8
- Santander Mexico: Total Assets 1,855.80; 93.4; Parent Banco Santander Spain; Share of Total Assets in Mexico 5.3; Share of Gross Income from Mexico 8.2; Share of Net Profit from Mexico 11.2; Share of Employees in Mexico 11.3
- Citibanamex: Total Assets 1,357.10; 68.3; Parent Citi U.S.; Share of Total Assets in Mexico 3.7; Share of Gross Income from Mexico 8.5; Share of Net Profit from Mexico n/a; Share of Employees in Mexico n/a
- HSBC Mexico: Total Assets 780; 39.3; Parent HSBC U.K.; Share of Total Assets in Mexico 1.7; Share of Gross Income from Mexico 4.4; Share of Net Profit from Mexico -2.1; Share of Employees in Mexico n/a
- Scotiabank Mexico: Total Assets 638.2; 32.1; Parent Scotiabank Canada; Share of Total Assets in Mexico 5.1; Share of Gross Income from Mexico 7.6; Share of Net Profit from Mexico 5.1; Share of Employees in Mexico n/a

### Financial soundness indicators (In percent, latest values shown 2022 Q2)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets: 14.9 (2016), 15.6 (2017), 15.9 (2018), 16.0 (2019), 17.7 (2020), 19.5 (2021), 18.7 (2022 Q2)
  - Regulatory Tier 1 capital to risk-weighted assets: 13.2 (2016), 14.2 (2017), 14.2 (2018), 14.4 (2019), 16.1 (2020), 18.1 (2021), 17.3 (2022 Q2)
  - Capital to assets: 9.9 (2016), 10.4 (2017), 10.7 (2018), 11.0 (2019), 10.7 (2020), 11.8 (2021), 10.8 (2022 Q2)
- Asset quality:
  - Nonperforming loans to total gross loans: 2.1 (2016), 2.1 (2017), 2.1 (2018), 2.1 (2019), 2.4 (2020), 2.0 (2021), 2.3 (2022 Q2)
  - Provisions to Nonperforming loans: 157.1 (2016), 154.9 (2017), 152.4 (2018), 146.2 (2019), 160.1 (2020), 160.5 (2021), 143.4 (2022 Q2)
- Earnings and profitability:
  - Return on assets: 1.7 (2016), 2.0 (2017), 2.2 (2018), 2.2 (2019), 1.2 (2020), 2.1 (2021), 1.9 (2022 Q2)
  - Return on equity: 16.3 (2016), 19.6 (2017), 20.9 (2018), 20.5 (2019), 11.7 (2020), 18.6 (2021), 17.4 (2022 Q2)
  - Interest margin to gross income: 73.8 (2016), 73.3 (2017), 74.5 (2018), 74.3 (2019), 76.0 (2020), 72.7 (2021), 76.0 (2022 Q2)
  - Trading income to total income: 4.4 (2016), 5.0 (2017), 4.5 (2018), 5.8 (2019), 5.5 (2020), 6.7 (2021), 9.4 (2022 Q2)
- Liquidity:
  - Liquid assets to total assets: 31.4 (2016), 32.0 (2017), 31.6 (2018), 31.1 (2019), 35.7 (2020), 36.3 (2021), 38.5 (2022 Q2)
  - Liquid assets to short-term liabilities: 42.4 (2016), 42.2 (2017), 42.3 (2018), 40.8 (2019), 48.0 (2020), 47.0 (2021), 49.8 (2022 Q2)
  - Customer deposits to total loans, excluding interbank loans: 88.9 (2016), 91.4 (2017), 89.3 (2018), 90.7 (2019), 100.2 (2020), 105.2 (2021), 99.5 (2022 Q2)
  - Net open position in foreign exchange to capital: 0.8 (2016), 1.1 (2017), 1.2 (2018), 2.9 (2019), 1.8 (2020), 0.1 (2021), 2.2 (2022 Q2)

### Deferred loans and performance (end of 2021, In millions of Mexican pesos)
- Total bank loans 1/: 5,459,257 (Total); 2,560,732 (Commercial); 837,478 (Consumer); 1,118,610 (Mortgage)
- Bank loans benefited from loan deferral program: 1,067,334 (Total); 499,978 (Commercial); 243,083 (Consumer); 324,273 (Mortgage)
- Amount of loans voluntarily reduced by banks: 358,674 (Total); 272,226 (Commercial); 26,421 (Consumer); 60,027 (Mortgage)
- Amount of loans under deferred loan category: 708,660 (Total); 227,752 (Commercial); 216,662 (Consumer); 264,246 (Mortgage)
  - Performing: 553,424 (Total); 166,428 (Commercial); 156,518 (Consumer); 232,478 (Mortgage)
  - Restructured: 121,024 (Total); 51,895 (Commercial); 48,048 (Consumer); 21,081 (Mortgage)
  - Nonperforming: 34,212 (Total); 9,429 (Commercial); 12,096 (Consumer); 12,687 (Mortgage)
- Shares (In percent of total commercial bank loans, at the end of 2021):
  - Bank loans benefited from loan deferral program: 19.6 (Total); 19.5 (Commercial); 29.0 (Consumer); 29.0 (Mortgage)
  - Amount of loans voluntarily reduced by banks: 6.6 (Total); 10.6 (Commercial); 3.2 (Consumer); 5.4 (Mortgage)
  - Amount of loans under deferred loan category: 13.0 (Total); 8.9 (Commercial); 25.9 (Consumer); 23.6 (Mortgage)
    - Performing: 10.1 (Total); 6.5 (Commercial); 18.7 (Consumer); 20.8 (Mortgage)
    - Restructured: 2.2 (Total); 2.0 (Commercial); 5.7 (Consumer); 1.9 (Mortgage)
    - Nonperforming: 0.6 (Total); 0.4 (Commercial); 1.4 (Consumer); 1.1 (Mortgage)
- Performance of loans under deferred loan category (In percent of total loans under deferred loan category, at the end of 2021):
  - Performing: 78.1 (Total); 73.1 (Commercial); 72.2 (Consumer); 88.0 (Mortgage)
  - Restructured: 17.1 (Total); 22.8 (Commercial); 22.2 (Consumer); 8.0 (Mortgage)
  - Nonperforming: 4.8 (Total); 4.1 (Commercial); 5.6 (Consumer); 4.8 (Mortgage)
- Note: 1/ The official name of the deferred loan category is Special Accounting Criteria.

### FSAP stress test scenarios (Table 8)
- Real GDP (2021=100):
  - Baseline: 100.0 (2021), 102.4 (2022), 104.6 (2023), 106.0 (2024)
  - Adverse: 100.0 (2021), 97.5 (2022), 93.9 (2023), 98.3 (2024)
- Real GDP Growth Rate (In percent, y-o-y):
  - Baseline: 4.8 (2021), 2.4 (2022), 2.2 (2023), 1.4 (2024)
  - Adverse: 4.8 (2021), -2.5 (2022), -3.7 (2023), 4.6 (2024)
- CPI Inflation Rate (In percent, y-o-y):
  - Baseline: 5.7 (2021), 7.2 (2022), 4.4 (2023), 3.3 (2024)
  - Adverse: 5.7 (2021), 9.6 (2022), 8.7 (2023), 5.8 (2024)
- Exchange Rate (Mexican peso per U.S. dollar, end of period):
  - Baseline: 20.6 (2021), 21.4 (2022), 21.6 (2023), 21.9 (2024)
  - Adverse: 20.6 (2021), 24.1 (2022), 26.1 (2023), 25.8 (2024)
- Policy Rate (In percent, year averages except 2021):
  - Baseline: 5.5 (2021), 7.9 (2022), 9.1 (2023), 8.1 (2024)
  - Adverse: 5.5 (2021), 9.4 (2022), 10.1 (2023), 6.9 (2024)
- 10-Year Sovereign Bond Yield (In percent, year averages except 2021):
  - Baseline: 8.0 (2021), 9.4 (2022), 9.4 (2023), 9.4 (2024)
  - Adverse: 8.0 (2021), 10.9 (2022), 11.2 (2023), 10.2 (2024)
- Equity Prices (2021=100):
  - Baseline: 100.0 (2021), 106.7 (2022), 113.3 (2023), 119.7 (2024)
  - Adverse: 100.0 (2021), 90.3 (2022), 78.1 (2023), 76.0 (2024)
- Price of Commodities (energy/oil, 2016 = 100):
  - Baseline: 184.4 (2021), 346.5 (2022), 262.4 (2023), 224.1 (2024)
  - Adverse: 184.4 (2021), 443.9 (2022), 258.8 (2023), 191.9 (2024)

### Bank liquidity stress test results (Table 9)
- Regulatory Scenario1/:
  - Aggregate LCR (In percent): 225
  - Number of Banks with LCR<100: 0
- Retail Shock2/:
  - Aggregate LCR (In percent): 157
  - Number of Banks with LCR<100: 6
- Wholesale Shock3/:
  - Aggregate LCR (In percent): 128
  - Number of Banks with LCR<100: 13
- Notes:
  - 1/ In the regulatory scenario, the LCR is computed by using the regulatory run-off and haircut rates.
  - 2/ In the retail shock scenario, run-off rates on retail deposits are increased above the regulatory rates.
  - 3/ In the wholesale shock scenario, run-off rates on wholesale deposits are increased above the regulatory rates.

### Existing macroprudential instruments (selected comparisons, Table 10)
- Countercyclical capital buffer: Brazil yes; China yes; Colombia no; India yes; Mexico yes; Russia yes; South Africa yes
- Positive countercyclical capital buffer: all listed countries no
- Capital conservation buffer: all listed countries yes
- Limit on leverage ratio: all listed countries yes
- Forward-looking loan loss provisioning requirement: Brazil yes; China yes; Colombia no; India no; Mexico yes; Russia yes; South Africa yes
- Household sector capital requirements: Brazil yes; China no; Colombia no; India yes; Mexico yes; Russia yes; South Africa no
- Cap on loan-to-value ratio: Brazil yes; China yes; Colombia yes; India yes; Mexico no; Russia no; South Africa no
- Liquidity Coverage Ratio: all listed countries yes
- Net Stable Funding Ratio: Brazil yes; China yes; Colombia no; India yes; Mexico yes; Russia yes; South Africa yes
- Limits on foreign exchange positions: all listed countries yes
- Capital surcharges for G-SIFIs or D-SIFIs: all listed countries yes

### Annex I — Credit and market risks in development banks and top twenty nonbank credit institutions
- CNBV analyzed credit and market risks for all commercial banks, development banks, and non-bank credit institutions under the FSAP adverse scenario, enabling expansion of the solvency stress tests to six development banks and the twenty largest non-bank credit institutions.
- Results show impact of market and credit risks is limited under the adverse scenario.
  - Market risk is contained and driven mainly by the revaluation of bonds and the impact on P&L from derivatives’ exposures for both commercial and development banks.
  - Non-bank credit institutions do not have material market risk exposures in their portfolio.
  - Reflecting different credit quality, credit losses under the adverse scenario would be higher for development banks and non-bank credit institutions than for commercial banks.

### Annex II — Organization of the MFAs and institutional arrangements
- Interlocking boards:
  - CNBV’s Board consists of ex officio officials, with five out of 13 members appointed by SHCP.
  - IPAB’s Board comprises three ex officio officials—the finance minister (chair), the Banxico governor, and the CNBV president—and four independent members.
  - The finance minister and deputy finance minister are not members of Banxico’s Governing Board but may participate in its sessions without a vote.
  - SHCP does not have a Board.
- Financial System Stability Council (CESF):
  - Explicit, formal mandate to promote stability of the financial system.
  - Comprises nine voting members: the finance minister (Chair) and the deputy minister; the Banxico governor and two deputy governors; the heads of three supervisors (CNBV, CNSF, CONSAR); and the chief executive of IPAB.
  - Makes formal recommendations with a de facto comply-or-explain mechanism to mitigate systemic risks over the medium term.
  - Recommendations have been decided by consensus and fully implemented by members; Banxico plays a strong role as secretariat.
  - CESF communicates through quarterly press releases and an annual report, separately from Banxico’s Financial Stability Report (FSR).
- Banking Stability Committee (CEB):
  - Platform to decide on systemicness of a failing bank and extent to which liabilities be protected in resolution.
  - Comprises eight voting members: the finance minister (Chair) and the deputy minister; the Banxico governor and a deputy governor appointed by the governor; the CNBV president and the vice president overseeing CNBV; and the chief executive of IPAB and an IPAB board member.
- Banking Liquidity Regulation Committee (CRLB):
  - Committee composed of SHCP, Banxico, and CNBV to dictate guidelines for liquidity requirements for commercial banks and any amendments.
  - At the beginning of the COVID-19 shock, CRLB met to establish temporary general exceptions to the Liquidity Provisions.

*Source: IMF staff and Mexican authorities (excerpt from 1mexea2022002).*

### Appendix I. Implementation Status of Key Recommendations in

### Appendix I. Implementation Status of Key Recommendations in the 2016 FSSA

### Institutional Arrangements and Governance
- Recommendation: Integrate all prudential supervision aimed at the safety and soundness of financial institutions, in one Prudential Supervisor, covering banks, securities, insurance firms, pension funds and other financial institutions.
  - Timeframe: MT
  - Status: Not implemented.
  - Details: The organizational architecture for financial system oversight remains as it was in 2016. The authorities consider there is no need to change the current supervisory architecture, since coordination and cooperation arrangements in place among authorities, reinforced by the oversight of the Financial System Stability Council (CESF), are effective for financial stability purposes. The CESF makes formal recommendations, coupled with a de facto comply-or-explain mechanism.

- Recommendation: Amend relevant laws to (a) clearly establish financial stability as the primary objective for the new supervisor, other objectives (e.g., development) are secondary and should be narrowly defined; and (b) strengthen the governance of the supervisor and IPAB (e.g., composition of governing boards and the appointment and dismissal of senior personnel) and ensure their supervisory and budgetary independence.
  - Timeframe: MT
  - Status: Not implemented.
  - Details: Full political and budgetary autonomy are still missing. The institutional governance arrangements remains as it was in 2016, thus supervisors ́ budgets are still determined by SHCP. Likewise, the heads of the Commissions are appointed by the Executive Branch, via the Minister of Finance. For IPAB, the Banks Savings Protection Law establishes that the Government Board has the power and duty to appoint, upon proposal of at least two of its directors, the Institute’s Executive Secretary.

### Financial Stability Policy Framework
- Recommendation: Establish more clearly the status of the CESF as the preeminent voice of its members regarding the assessment of financial stability risks.
  - Timeframe: ST
  - Status: Partially implemented.
  - Details: The macroprudential mandate is shared among various agencies, including the Ministry of Finance and Public Credit, Banxico, regulatory and supervisory agencies, and IPAB. They coordinate in the macroprudential issues within the Financial System Stability Council (CESF). The CESF makes formal recommendations, coupled with a de facto comply-or-explain mechanism. The CESF communicates its coordinated risk assessments and policy intentions through quarterly press releases and an annual report on the stability of the financial system.

### Financial Sector Oversight
- Recommendation: Adopt a consolidated supervision framework that corrects for legal gaps on CNBV’s ability to perform consolidated supervision and strengthen the regulatory reporting framework for related party lending.
  - Timeframe: ST
  - Status: Not Implemented.
  - Details: Although some efforts to better understand financial groups ́ activities and risks have been introduced, the current legal and regulatory framework falls short of creating conditions for effective consolidated supervision.

- Recommendation: The corporate governance of development banks should be revised in line with international best practices in some key areas such as the composition of board members and mechanisms for the election of CEOs.
  - Timeframe: ST
  - Status: Not reviewed.

- Recommendation: The definitions of “common risk” and “related party” should be enhanced, including explicit definition of “economic dependency” in exposures to corporations, provision for grouping loans that are collateralized by the same collateral, and explicit references to persons who, while not having a quantitative relationship with other borrowers, exercise significant control over them.
  - Timeframe: ST
  - Status: Not yet Implemented.
  - Details: Amended regulations on large exposures have been delayed due to the COVID-19 outbreak and are expected to be issued by the second half of 2022. The revised regulation would include new definitions and revised limits for “common risk” and “related party” in accordance with Basel III standards and best practices.

- Recommendation: Review the role of Banxico in determining certain capital requirements. CNBV, as the agency charged with the prudential supervision of banks, should assume sole responsibility for such function.
  - Timeframe: MT
  - Status: Not yet Implemented.
  - Details: The authorities argue that all capital requirements fall under the CNBV domain. We need to better understand the recommendation. Banxico and CNBV are finalizing the guideline for countercyclical capital buffers.

- Recommendation: Streamline the regulation and supervision of “other financial institutions” to facilitate and promote consolidation and integration.
  - Timeframe: MT
  - Status: Not reviewed.

### Deposit Insurance, Crisis Management, and Resolution
- Recommendation: Transfer the legacy debt at IPAB to the sovereign balance sheet.
  - Timeframe: MT
  - Status: Not Implemented.
  - Details: The legacy debt continues to weigh heavily on IPAB finances: each year 75 percent of banks’ contributions to IPAB are allocated to repay this debt. This debt is projected to be fully repaid in 2069. While IPAB has not set a formal target ratio for the FPAB, it is projected to stand at around 3.4 percent of insured deposits in 2027 and 5.1 percent in 2032. The modalities for IPAB borrowing from Banxico have not been worked out.

- Recommendation: Adopt legislation removing bail out options for shareholders and subordinated debt holders of systemic banks.
  - Timeframe: NT
  - Status: Implemented.
  - Details: IPAB has adopted internal procedures for the “Establishment, organization and operation of commercial banks by IPAB (Bridge Bank),” setting out the model corporate charter and model contracts for asset and liability transfers, and the provision of services; IPAB has also developed methodologies for valuations for purposes of a bridge bank. The ex-ante incorporation of a bridge bank without using it in the near term would be costly. IPAB’s 2016 systemic bank resolution simulation covered using bridge banks.

- Recommendation: Develop formal contingency plans and simulation exercises to deal with a systemic crisis.
  - Timeframe: MT
  - Status: Partially Implemented.
  - Details: While the MFAs individually undertake simulation exercises, there are no system-wide contingency plans, and no collective simulation exercise for a systemic event was undertaken since 2011. Preparations for an interagency crisis simulation were well advanced when it had to be postponed due to the COVID-19 outbreak. This exercise will test the MFAs’ response to a cybersecurity incident and the resulting financial fallout.

### Development Banks
- Recommendation: Revise the strategy and objectives for development banks targets to include indicators of financial inclusion and private sector crowding-in, eliminating quantitative targets.
  - Timeframe: ST
  - Status: Implemented.
  - Details: SHCP published the National Development Financing Program 2020-2024 (PRONAFIDE 2020-2024) in the Official Gazette of the Federation (DOF), including a component aimed at generating greater financial inclusion through development banking. The Program aligns development banks’ priority objectives, strategies, lines of action and indicators to the pillars indicated in PRONAFIDE, thereby addressing financial inclusion, among other issues that they considered important for the attention of their target markets.

### Pensions
- Recommendation: Increase the contribution rates to fully funded pension schemes to ensure higher replacement rates and reduce fiscal risk.
  - Timeframe: ST
  - Status: Implemented.
  - Details: The Mexican government has introduced several changes to guarantee higher replacement rates for Mexicans during retirement. One of the most important changes recently introduced was to increase the total contribution from 6.5 percent to 15 percent mainly through an increase in the employer’s contribution and to establish in the Constitution a non-contributory pension, granting universal economic support to all older adults. The latter means that all Mexicans automatically receive a pension when they reach sixty-five years old, which constitutes a social protection floor that guarantees a higher replacement rate for workers who contribute to their pension, as well as for those who do not.

### Small and Medium-size Enterprise Finance
- Recommendation: Create a credit registry to increase financial information available to lenders.
  - Timeframe: MT
  - Status: Not implemented.
  - Details: There are three private credit bureaus which play an effective role in providing credit information to lenders. Regulated financial entities must report information to at least one of them, but non-regulated ones and commercial firms may also do so. Information is also sent by some public service or fiscal authorities (Federal Electricity Commission and the Tax Administration Service). Regulated entities include commercial banks, development banks, insurance institutions, surety institutions, public trusts, credit unions, savings and loans institutions, non-bank banks, microfinance companies, etc. While data may be fragmented in each credit bureau’s database, credit reports include consolidated data from all registries.

*Source: IMF staff, Appendix I. Implementation Status of Key Recommendations in the 2016 FSSA*

### 5. Regulatory

### 5. Regulatory

### Calibration of risk parameters
- Banking system regulated under a full Basel III prudential framework.
- Accounting provisions set by CNBV regulations (IFRS 9 was only implemented in January 2022 and CNBV has the mandate to set requirements for the accounting loan loss provisioning). Stress test follows regulatory definitions of PDs and LGDs where applicable.
- Credit exposure portfolios under the Standardized (STA) and the Advanced Internal Rating Based (A-IRB) regulatory approach.
- Risk-weighted asset densities:
  - STA portfolios: assumed to remain constant.
  - A-IRB portfolios: follow the PD PIT path with use of a smoothening factor for the TTC effect.

### Regulatory/accounting and market-based standards
- Baseline hurdle rates include regulatory minimums and applicable capital buffers:
  - CET1: 4.5 percent
  - Tier1: 6 percent
  - Total Capital: 8 percent
  - Applicable capital buffers: CCB, D-SIB surcharge, P2R.
  - D-SIB charge ranges from 0.6 percent to 1.5 percent for the banks within scope.
- Adverse scenario:
  - Regulatory minimum (including D-SIB surcharge and P2R) is assumed to be the hurdle rate, as banks can draw down the CCB.
  - Note: D-SIB surcharge is not considered as a buffer in Mexico.
- Hurdle rates are based on the CET1, Tier1, and Total Capital ratios.

### Reporting format for solvency results
- System-wide evolution of aggregate CET1 and capital ratios.
- Distribution of banks’ capital positions.
- Contribution to key drivers of system-wide net income and capital position, including differences between baseline and adverse scenarios.
- Share of institutions with capital below the hurdle rates.

---

### Banking Sector: Liquidity Risk — Institutional perimeter
- Institutions included: The fifty commercial banks in Mexico at the highest level of consolidation.
- Market share: 100 percent of commercial banking sector assets.
- Data and baseline date:
  - Banxico’s regulatory reports monitoring the Liquidity Coverage Ratio and the Net Stable Funding Ratio and the additional (synthetically constructed) monitoring report capturing liquidity contractual maturity ladder.
  - Data as of December 2021; December 2019 data will also be used to highlight the impacts of the pandemic on liquidity positions of banks.
  - Scope of financial consolidation: group-wide at the highest level.

### Channels of risk propagation — Methodology
- Three types of tests: LCR test, cash-flow analysis and NSFR test.
- LCR test:
  - In line with Banxico (and Basel compliant) monitoring tool, featuring total consolidated liquidity and liquidity in significant currencies (mainly USD).
  - Set of scenarios for LCR outflows and HQLA haircuts produce stressed LCR ratios (by currency and consolidated level).
  - Stress test horizon: 30 days.
- Cash-flow analysis:
  - Analyzes net cash balance accounting for available unencumbered assets, contractual cash inflows and outflows, and behavioral flows.
  - Range of scenarios with funding run-off rates, liquid assets haircuts and assumptions on inflows/outflows; central stress-horizon: 3 months.
  - Positive counterbalancing capacity post-scenario implies resiliency; negative indicates liquidity stress.
  - Asset haircuts reflect (i) shocks to interest rates and asset prices from macrofinancial scenarios and (ii) additional haircuts required by counterparties to accept assets as collateral.
- NSFR:
  - Became a binding requirement for Mexican banks in March 2022.
  - Banks reported NSFR calculations to authorities since 2017.

### Risks and buffers
- Risks:
  - Funding liquidity risk reflected in funding run-off rates and asset roll-over rates.
  - Market liquidity risk reflected in asset haircuts, influenced by market movements, potential fire sales and collateral supply considerations.
- Behavioral adjustments:
  - Liquidity from central bank emergency lending assistance (ELA) is not considered.
  - Inflows from maturing loans are ignored in cash-flow analysis after a certain severity level to capture systemic liquidity stress.
  - Cash-flow analysis may consider behavioral assumptions about counterparties’ willingness to transact based on banks’ solvency and liquidity.

### Tail shocks — Scenario analysis
- LCR test: 12 scenarios combining:
  - Three scenarios on liquid assets shocks (regulatory, mild, and severe).
  - Four scenarios on liability outflows (regulatory; retail outflows; higher wholesale outflows; combined retail and wholesale).
- Cash-flow analysis: series of scenarios from mild to severely adverse liquidity conditions; considers both funding and market liquidity risks.

### Regulatory and market-based calibration
- LCR tests based on regulatory and stress parameters.
- Cash-flow analysis may incorporate relevant second-round effects.
- Stress funding run-off rates, asset roll-over rates, and asset haircuts calibrated on empirical evidence and international experiences.
- Hurdles:
  - LCR per Basel III; hurdle at 100 percent.
  - Net cash balance for cash-flow analysis; pass requires non-negative net cash balance.
  - NSFR per Basel III; hurdle at 100 percent.

### Reporting format for liquidity results
- Changes in system-wide liquidity position, including drivers for cash outflows, inflows and counterbalancing capacity.
- Distribution of banks’ liquidity positions.
- Number of institutions with LCR/NSFR below 100 percent and/or negative net cash balance.
- Amount of liquidity shortfalls, including by currencies.

### Sensitivity analysis
- Coverage of policy support measures and identification of how such measures impacted regulatory liquidity metrics.
- Assessment of how gradual unwinding of measures will affect liquidity positions of banks.

### Infrastructure
- LCR test: Banxico’s infrastructure to run IMF-developed scenarios and Banxico’s Liquidity at Risk tests.
- Cash-flow analysis: IMF-developed comprehensive infrastructure using Banxico’s regulatory reports as data repository. MATLAB and Excel based.

---

### Climate Change: Physical Risk — Institutional perimeter
- Institutions included: Same set as in solvency stress test (10 largest commercial banks).
- Data and baseline date:
  - Sectoral exposure breakdown Source: Supervisory data.
  - Data as of December 2021 (cut-off).

### Channels of risk propagation — Methodology
- Climate scenario around tropical cyclones and/or floods based on historical repetition and/or identification of future acute events (data/model availability permitting) generating direct economic losses and physical capital damage rates (provided by the WB FSAP team).
- Adverse physical risk via capital damage rates used as a shock layer in a DSGE macro model, leading to persistent productivity shocks with considerations of investment adjustment costs and/or investment specific technological shocks.
- DSGE model used to calibrate a full macroeconomic scenario.

### Risks and buffers
- Risks:
  - Credit channel risks assumed (revised PD paths). All other channels assumed unaffected.
  - Scenario-dependent capital projections produced based on physical risk shock-dependent PD paths.
- Buffers:
  - Banks’ own capital.

### Reporting format for physical risk results
- Delta PDs at bank and system-wide level for corporate credit exposures.
- System-wide capital path projection under physical risk scenarios (partial analysis assuming only corporate credit risk).
- Comparison with central baseline scenario.
- Bank-level capital impact and shortfalls.

---

### Climate Change: Transition Risk — Institutional perimeter
- Institutions included: Same set as in solvency stress test (10 largest commercial banks).
- Data and baseline date:
  - Sectoral exposure breakdown Source: Supervisory data.
  - Firm-specific emission: from Urgentem.
  - Firm balance sheets: DataStream and Capital IQ.
  - Firm-specific historical default rates: Moody’s firm-level EDFs.

### Channels of risk propagation — Methodology
- Firm balance sheet stress approach with multi-step process:
  - Step 1 (Bridge equation): relate firm-specific default rates to three firm-level indicators (interest coverage ratio, current ratio, leverage ratio) using a fixed effects panel regression on historical firm-level default rates.
  - Step 2: Apply scenario-dependent carbon prices and sectoral paths to firms’ balance sheets; produce multi-year projections of balance sheet and profit components (forward-looking vulnerability indicators).
  - Step 3: Use elasticities from Step 1 to infer stressed default rates for the firm sample.
  - Step 4: Produce weighted sectoral aggregate scenario-dependent PDs by aggregating firm-level default rates using total outstanding debt as weights.
  - Step 5: Use bank-level sectoral corporate exposure breakdown to produce delta PDs using baseline and adverse default rates.
  - Step 6: Feed stressed delta PDs (reflecting transition risk) to standard solvency stress test machinery to produce capital projections.
- Horizon: One to five years.

### Tail shocks — Scenario analysis
- Based on transition risk scenarios anchored to NGFS scenario categories and augmented via CGE model.
- Baseline: Hot house world/business as usual.
- One to two adverse scenarios aligned to orderly and/or disorderly NGFS categories.

### Risks and buffers
- Risks:
  - Credit channel risks; all other channels assumed unaffected.
  - Delta PDs relative to baseline by bank are the envisaged outcome.

### Reporting format for transition risk results
- Delta PDs by sector, by bank and (weighted) system-wide average.
- Bank-level capital impact and shortfalls (optional).

---

### Financial System: Contagion Risk — Institutional perimeter
- Institutions included: All commercial and development banks, brokerage houses, investment and pension funds and the largest credit providing NBFIs (subject to data availability) in Mexico, at the highest level of consolidation.
- Market share: Almost the entire system in terms of asset coverage.
- Data and baseline date:
  - Source: Supervisory data and ad-hoc data request.
  - Data as of December 2021 (random day cut-off, to avoid window dressing effects).
  - BIS consolidated banking statistics, data as of end-Sept 2021.

### Channels of risk propagation — Methodology
- Interbank and cross-border network model by Espinosa-Vega and Solé (2010).

### Risks and buffers
- Risks:
  - Credit and funding losses related to interbank/inter-entity cross-exposures and cross-border banking exposures.
- Buffers:
  - Banks’ and brokerage houses’ own capital buffers; other entities are not assumed to default in the simulation (internal loss absorption).

### Tail shocks
- Size of shock:
  - Pure contagion: default of individual institutions.
  - Consideration of secured, unsecured, crossholdings of debt instruments, settlement exposures with potentially different LGDs.
  - Simulation of multiple concurrent defaults may be examined.

### Reporting format for contagion results
- Contagion and vulnerability indicators.
- System-wide capital shortfall.
- Bank-level capital shortfall.
- Number of undercapitalized and/or failed institutions, and their shares of assets in the system.
- Evolution and direction of spillovers.

---

### Financial System: System-Wide Liquidity (SWL) Analysis — Institutional perimeter
- Entities included:
  - Central Bank
  - Government
  - Commercial Banks
  - State-owned banks
  - Investment Funds
  - NFCs
  - Households
  - Foreign investors
- Data and baseline date:
  - Ad-hoc data request capturing available collateral (encumbered and unencumbered) by asset class, remaining maturity bucket and eligibility for CB operations; existing collateralized funding and margin positions; composition of major B/S assets and liabilities by agent type; bilateral exposures informed by who-to-whom holdings.
  - Data as of December 2021, at aggregate B/S level and on a best effort basis.
  - Scope of financial consolidation: group-wide at the highest level.

### Channels of risk propagation — Methodology
- Analysis conducted on aggregated B/S data per agent type.
- For each scenario, measure liquidity counterbalancing capacity for each agent in response to direct shocks and second-round effects from calls on available collateral.
- Shocks generated from correlated distributions (copula) with adjustable ranges and correlation factors.
- Cash and unencumbered collateral considered as accessible liquidity buffers.
- Pecking order of liquid asset utilization:
  1. Cash and equivalences
  2. Short term assets including short term paper and outstanding reverse repos
  3. Repos using unencumbered assets
- Assess willingness and capacity to roll-over funding after measuring liquidity excess or shortfalls.
- Resilience assessed via net liquidity distribution across simulated scenarios (shortfall probability density).
- Agents classified by liquidity shortfall propensity and contribution to system-wide resiliency or vulnerability.
- Measure existing counterbalancing capacity of unencumbered collateral against severe tail events as the point that would force Banxico to increase perimeter of eligible collateral.

### Risks and buffers
- Risks:
  - Funding liquidity risk reflected in funding run-off rates, capital outflows, share redemption and offshore switching.
  - Market liquidity risk reflected in asset haircuts influenced by market movements, potential fire sales and collateral supply considerations.
- Buffers:
  - Available unencumbered collateral (CB eligible and non-eligible), cash position and capacity to absorb pressure across market segments (sovereign, repo, derivatives, etc.)

### Behavioral assumptions
- Liquidity from central bank ELA or any other increase in perimeter of eligible collateral or eligible counterparts is not considered.
- Pecking order in roll-over decisions may be important.
- Binding liquidity requirements (LCR constraints) can be switched on/off.

### Tail shocks — Scenario analysis
- Simulate a material number of random (but correlated) layers of shocks including:
  - Sovereign market repricing shocks due to capital outflows and risk premia reassessment.
  - Drawdown of existing credit and liquidity facilities by NFCs due to global tightening.
  - Run-offs on wholesale and retail deposits and switch to offshore accounts.
  - Investment Fund redemption shocks and associated short-term funding stress (e.g., via the repo market).
  - FX depreciation and shocks attributed to shortage of sufficient FX reserves (implemented but muted).
  - Shocks from dislocated derivatives markets and margin requirements and derivative basis shocks (implemented but muted).

### Sensitivity analysis
- Single factor sensitivity by increasing correlation factor between shock parameters.
- Mute repo or pull back other short-term funding from commercial banks to other agents as commercial banks reach liquidity regulatory threshold (e.g., LCR).
- Allow expanded access of investment fund to repo market to assess benefit of repo participation.

### Regulatory and market-based standards
- LCR and other liquidity constraints are not used for identification of bank pass/failure since analysis is at aggregate level (not entity specific).

### Reporting format for SWL results
- Probability distribution of excess/shortfall for the system and by agent type.
- Impact attribution by agent type in overall resiliency or vulnerability.
- Shortfall thresholds for different agents.
- Contribution of each layer of shocks to overall liquidity shortfalls.

### Infrastructure
- Fully comprehensive and novel infrastructure developed by IMF staff using the ad-hoc data request as data repository. MATLAB based.

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### Banking Sector: Transition Risk with Digital Money — Institutional perimeter
- Institutions included:
  - All D-SIBs (6 banks) and other important banks (4 additional mid-tier commercial banks) for top-down stress test at the highest level of consolidation.
- Market share:
  - For the 10 commercial banks within scope, approximately 84 percent of banking sector assets.
- Data source:
  - Banxico’s regulatory returns and supervisory data.

*Content unit: 1mexea2022002 - 5. Regulatory (IMF).*

### 2. Channels of

### 2. Channels of Risk Propagation

### Methodology
- Balance sheet approach.
- Projections of key balance sheet, income statement and capital account items.
- Static balance sheet assumption.
- Non-interest income and interest expense projections are produced for all banks within scope.
- Non-interest income is shocked by a fall of in income from payment fees, due to more competition from new forms of payments that contest markets and force banks to compress fees. Given lack of granularity in the data, income from payments fees is proxied by credit cards income from merchants and users. Given the lack of variability in the historical data, the shock is calibrated in a similar order of magnitude than a similar analysis done for the U.K. FSAP.
- Interest expense increases as banks must increase remuneration to offset competition from new forms of payment that compete with sight deposits. The shock is calibrated to be the mid-point from two theoretical models with different assumptions in terms of banks’ market power and households’ preferences.

### Stress test horizon
- Three years (2022 Q1 – 2024 Q4).

### Scenario analysis
- Based on two scenarios: private digital money and CBDC.
- In both scenarios banks lose 20 percent of income from credit card fees at the end of the projection.
- In the private money scenario, banks have to increase the remuneration of retail sight deposits (here defined as below 1 million Mexican pesos) by 50 basis points at the end of the projection.
- In the CBDC scenario, banks must increase the remuneration of a smaller retail sight deposit as CBDC is assumed to be designed with a cap of 21000 Mexican pesos per account. The increase in remuneration is also 50 basis points at the end of the projection.
- All shocks are phased-in as 30 percent in the 2022, 70 percent in 2023, and a full impact in 2024.

### Results — Output presentation
- System-wide evolution of aggregate Core Equity Tier 1 and capital ratios relative to the baseline solvency stress test.

### Appendix IV. Cash Flow Analysis — Scenario Parameters (selected entries)
- Segment Name: Liabilities resulting from securities issued (if not treated as retail deposits) — Type: Outflows — Unsecured bonds due: Value Min 0 Max 1 Collateralization 1
- Regulated covered bonds — Outflows — Value Min 0 Max 1 Collateralization 1
- Securitizations due — Outflows — Value Min 0 Max 1 Collateralization 1
- Liabilities resulting from secured lending and capital market driven transactions collateralized by Level 1 excluding covered bonds — Outflows — Value Min 0.1 Value Max 0.3 Collateralization 1.02
- Level 1 (CQS2, CQS3) — Outflows — Value Min 0.1 Value Max 0.5 Collateralization 1.02
- Level 1 (CQS4+) — Outflows — Value Min 0.2 Value Max 0.5 Collateralization 1.02
- Level 1 covered bonds (CQS1) — Outflows — Value Min 0.2 Value Max 0.5 Collateralization 1.02
- Level 2A tradable assets — Outflows — Value Min 0.2 Value Max 0.5 Collateralization 1.02
- Level 2B shares — Outflows — Value Min 0.35 Value Max 1 Collateralization 1.5
- Other tradable assets — Outflows — Value Min 0.35 Value Max 1 Collateralization 1.5
- Other assets — Outflows — Value Min 0.35 Value Max 1 Collateralization 1.5
- Stable retail deposits — Outflows — Value Min 0.05 Value Max 0.1 Collateralization 1
- Other retail deposits — Outflows — Value Min 0.1 Value Max 0.2 Collateralization 1
- Operational deposits — Outflows — Value Min 0.05 Value Max 0.25 Collateralization 1
- Non-operational deposits from credit institutions — Outflows — Value Min 0.2 Value Max 1 Collateralization 1
- Non-operational deposits from other financial customers — Outflows — Value Min 0.2 Value Max 1 Collateralization 1
- Non-operational deposits from central banks — Outflows — Value Min 0 Value Max 0.25 Collateralization 1
- Non-operational deposits from non-financial corporates — Outflows — Value Min 0.2 Value Max 0.4 Collateralization 1
- FX-swaps maturing — Outflows — Value Min 0 Value Max 0 Collateralization 1
- Derivatives amount payables other than those reported in 1.4 — Outflows — Value Min 0 Value Max 0 Collateralization 1
- Monies due from secured lending and capital market driven transactions collateralized by Level 1 excluding covered bonds — Inflows — Value Min 0.1 Value Max 0.3 Collateralization 1.02
- Level 1 (CQS2, CQS3) — Inflows — Value Min 0.1 Value Max 0.5 Collateralization 1.02
- Level 2A tradable assets — Inflows — Value Min 0.2 Value Max 0.5 Collateralization 1.05
- Level 2B ABS (CQS1) — Inflows — Value Min 0.2 Value Max 0.5 Collateralization 1.05
- Level 2B shares — Inflows — Value Min 0.35 Value Max 1 Collateralization 1.5
- Monies due not reported in 2.1 resulting from loans and advances granted to Retail customers — Inflows — Value Min 0 Value Max 1 Collateralization 1
- Withdrawable central bank reserves CBL — Value Min 0 Value Max 0 Collateralization 1
- Level 1 excluding covered bonds CBL — Value Min 0 Value Max 0.1 Collateralization 1
- Level 1 (CQS2, CQS3) CBL — Value Min 0 Value Max 0.1 Collateralization 1
- Level 1 covered bonds (CQS1) CBL — Value Min 0 Value Max 0.2 Collateralization 1
- Level 2A tradable assets CBL — Value Min 0.05 Value Max 0.2 Collateralization 1
- Level 2B tradable assets CBL — Value Min 0.1 Value Max 0.2 Collateralization 1
- Level 2B ABS (CQS1) CBL — Value Min 0.1 Value Max 0.2 Collateralization 1
- Level 2B corporate bonds (CQ1-3) CBL — Value Min 0.1 Value Max 0.2 Collateralization 1
- Level 2B shares CBL — Value Min 0.1 Value Max 0.2 Collateralization 1
- Central government (CQS 2 & 3) CBL — Value Min 0 Value Max 0.2 Collateralization 1
- Undrawn committed facilities received — CBL — Level 1 facilities — Value Min 0.8 Value Max 1 Collateralization 1
- From intragroup counterparties CBL — Value Min 1 Value Max 1 Collateralization 1
- From other counterparties CBL — Value Min 1 Value Max 1 Collateralization 1
- Outflows from committed facilities Contingencies — Committed credit facilities Contingencies — Considered as Level 2B by the receiver — Value Min 0.15 Value Max 0.3 Collateralization 1
- Liquidity facilities Contingencies — Value Min 0.5 Value Max 1 Collateralization 1
- Outflows due to downgrade triggers Contingencies — Value Min 0.5 Value Max 1 Collateralization 1

*Source: 2. Channels of Risk Propagation (1mexea2022002).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mexea2022002.pdf_