## _cr06350 ## Source details **Canonical URL:** [_cr06350](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06350.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06350.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06350.pdf.json) --- ### Executive Summary — System soundness and recent developments - The Mexican banking system is sound and has strengthened considerably in recent years. - Overall, private banks are profitable and well-capitalized. - Some development banks (DBs) have reported adequate capital positions and positive results. - Economic recovery has: - boosted credit demand; - contributed to a steady improvement in banks’ asset quality. - Derivatives markets (OTC and exchange-traded) have grown significantly, improving market-risk management. ### Shortcomings identified by the 2001 FSAP and key reforms implemented - 2001 FSAP shortcomings: - Insolvent banks could access the Bank of Mexico (BOM)’s liquidity support. - No system of prompt corrective actions. - Weak bank resolution framework. - Serious deficiencies in development banks’ financial performance. - Housing finance required overhaul. - Financial sector supervision required strengthening; regulatory agencies lacked adequate autonomy. - Key reforms since 2001: - Strengthened legal and regulatory framework; progress toward risk-based supervision and enhanced CNBV professionalism. - Expanded CNBV legal authority and improved securities market transparency and infrastructure. - Payment systems: uncollateralized BOM credit lines and guarantees virtually eliminated; legal basis for clearing and settlement improved; BOM oversight powers clarified. - Pension funds: increased competition among private managers; fees decreased but remain high; expected replacement rates increased. - Insurance regulation and supervision significantly strengthened; state-of-the-art framework implemented. - Housing finance: SHF bridged post-1994–95 gap; private mortgage originators (Sofoles) expanded; emergence of mortgage-backed securities (MBS); 2009 “sunset clause” for SHF second-tier financing highlighted as paramount. - Banking safety net: PCAs in place meeting international best practices; legislative changes to deal with insolvent commercial banks; need to amend bylaws and establish operational guidelines for financial group resolution. - AML/CFT: proposed law in congress to address mutual evaluation shortcomings; Senate approved law penalizing terrorism financing and forwarded to the Chamber of Deputies. ### Macrofinancial and institutional setting - Fiscal consolidation: gross augmented public debt is now around 45 percent of GDP. - Independent central bank has brought inflation down to about 3 percent in a floating exchange rate regime. - Benefits from lower inflation and expectations: - lower interest rates; - increased financial intermediation; - rebirth of fixed nominal interest rate mortgage market; - increased access to credit; - dedollarization of credit markets; - lower costs of government debt servicing; - extended yield curve enabling deeper domestic capital market. - Proactive debt management: - shifted debt away from foreign currency instruments; - supported yield curve extension and deeper secondary markets; - contributed to investment-grade rating, uninterrupted low-cost capital access, and resilience to global shocks. - Growth: - Average 2001-05 real GDP growth was only about 2 percent; - growth is expected to reach 4 percent in 2006; - growth is expected to moderate to 3.5 percent in 2007. ### Key remaining challenges and priority actions (selected from Box 1) - Reinforce monitoring of credit risks from consumer and mortgage lending. ST 1/ - Strengthen consolidated supervision of financial conglomerates. ST - Reassess mandates, functions, and instruments of development banks. ST - Establish full autonomy of supervisory agencies, with adequate accountability standards. ST - Establish plans for orderly consolidation of mortgage Sofoles once the SHF stops second-tier lending. MT - Maintain the 2009 sunset date for state-owned SHF second-tier lending for middle- and high-income housing. MT - Introduce interagency contingency planning and internal protocols for emergency liquidity assistance. ST - Promote competition among credit providers by timely disclosure of standardized interest rate indicators and improve registry systems and contract enforcement across states. ST - Carry out CPSS/IOSCO self-assessments for SIAC, SPEI, SIDV, and CCPs. ST - Promote competition on net returns in the private pension system and resolve disability benefits impasses hindering annuities. ST - Consider market-discipline measures for deposit insurance such as reduced coverage and risk-based premiums. ST - Establish effective framework for bank liquidation and enable partial deposit transfers under P&As. ST - Seek formula to improve IPAB’s financial condition, including transferring its debt to the federal government. MT 2/ - Foster interoperability and economies of scale in retail payment systems. MT ### Main macroeconomic risk factors - A slowdown in U.S. industrial production would adversely affect domestic activity, credit demand, and bank asset quality. - Low external current account deficit and external financing needs reduce vulnerability to external financing deterioration relative to peers. - Fiscal accounts rely on oil revenue; adverse oil developments without fiscal adjustment could increase borrowing requirements and public debt sustainability risks. - Considerable share of government domestic debt has short remaining maturity or interest-rate indexing, raising vulnerability to global liquidity tightening and sharp interest-rate increases with possible “snowballing” financing needs. - Banks’ exposure to the public sector remains at about half of their earning assets (excluding repo operations exposure is around 30 percent). ### Financial system composition, concentration, and competition (as of December 2005) - Financial system includes commercial banks, insurance companies, pension funds, broker dealers, investment banks, development banks, Sofoles, securities firms, leasing and factoring companies. - Sofoles: non-deposit takers licensed by SHCP to grant credit to specific segments; mortgage Sofoles financed by SHF among others. - Large multinational financial groups dominate most lines of business except insurance. - Financial Sector Assets composition (In percent): - Commercial banks 48.9% - Development banks 12.6% - Pension funds 13.5% - Investment banks 11.2% - Insurance 7.3% - Sofoles 4.6% - Other intermediaries 1.9% - Three largest institutions account for close to 60 percent of banking assets. - Foreign ownership represented close to 80 percent of all banking assets as of December 2005. - Policy actions to foster competition recommended: (a) foster consumer mobility; (b) prevent collusive practices; (c) relax entry barriers; (d) level the playing field. ### Banking system soundness and performance - Minimum capital requirement: 8 percent of risk-weighted assets; banks hold significantly more capital than minimum. - Nonperforming loans (NPLs): less than 2 percent of gross loans, down from close to 6 percent in 2000. - Provisions coverage ratios: over 200 percent (partly due to tax incentives). - Total financing to the private sector as a fraction of GDP increased by about 2 percent since 2000. (Footnote: domestic financing to the private sector has increased by almost 4 percent of GDP since 2000.) - Commercial banks accounted for over a third of total financing to the private sector; credit represented about 50 percent of their assets at end-2005. - Bank private loan portfolio shifted toward consumer credit at expense of commercial lending; increase in domestic suppliers’ credit. ### Banking stability analysis and stress testing — key results - Risk management in systemically important banks strengthened: independent risk units, VaR/back-testing, liquidity monitoring under normal and stress. - BOM and CNBV stress tests used historical stress scenarios and peer volatility. - Market risk: - Exchange rate risk not main market risk as of December 2005. - A 180 bp increase in the EMBI did not appreciably impact system CAR on average. - Most relevant shock: sharp upward parallel shift in the yield curve; one bank’s capital drops below regulatory CAR under this shock. - CNBV “Tequila” and “Oil” scenarios: - “Tequila” (stress calibrated to 1994–95) affects banks’ capital more than oil scenario. - In most extreme “Tequila” scenario, on average large commercial banks lost 40 percent of regulatory capital, but CAR never dropped below regulatory CAR (partly due to active hedging). - Credit risk: - BOM assessed corporate default rate increases calibrated to 1994–95; at peak (six months after initial trigger), two small banks could see CAR below regulatory 8 percent. - Commercial banks’ exposure to the public sector declined but still about half of earning assets, increasing sensitivity to government securities valuation changes and potential crowding out. ### Housing finance markets and mortgage Sofoles - Government actions via SHF since 2001: guarantees, property appraisal standards, mortgage default insurance, funding for Sofoles; fostered standardization and MBS issuance. - CNBV carries out limited supervision of Sofoles; SHF and market monitor Sofoles tapping markets directly. - Smaller Sofoles exposed to residential construction lending with higher credit risk. - Mortgage Sofoles participation in outstanding housing loans grew from 6.2 percent in 2000 to 17.3 percent in 2005. - System-wide mortgage portfolio grew cumulatively 65 percent between 2000 and 2005; stands at 9.6 percent of GDP. - Since 2003, 15 MBS issues worth MEX$11.5 billion have come to market, representing 0.7 percent of credits outstanding at end-2005. - Deficient due diligence example: one mortgage pool where SHF sought insurance had 30 percent loans with documentation problems; auditor reviewed small sample; rating agency did not review loan files. - Policy recommendation: enforce due diligence reviews to boost Mexican MBS market. - Middle-income households can obtain peso-denominated 15-year fixed nominal mortgages at about 9 percent. - INFONAVIT: - Market share rose from 49 percent in 2000 to 60 percent at end-2005. - Improved management, operations, and corporate governance; cash flows increasingly from loan collections. - Securitizations expensive: required 18–23 percent subordination of residual certificate for senior certificates. ### Development banks (DBs) — reforms and remaining challenges - 2001 FSAP recommended separating subsidies from finance, consolidating DBs, transforming DBs into development agencies (DAs) funded through budget, not taking deposits or issuing debt. - Since 2001: DBs regulated and supervised as private banks; interest rate loan subsidies reduced; more subsidies financed through government budget; lending shifted toward private institutions; partial guarantees declined from 80 percent+ to about 50 percent on average. - Financiera Rural and FIRA largely operate as DAs: prohibited from taking deposits; financed from endowments and loan collections; FIRA lending exclusively second-tier. - BANSEFI: promotes savings for low-income households and development of credit cooperatives; administers one-off government investment subsidy for technical assistance and governance improvements. - Remaining DB challenges: - NAFIN, BANCOMEXT, BANOBRAS initial niches being eroded by commercial banks and capital markets. - BANCOMEXT’s return to first-tier lending should be financed from government budget. - BANOBRAS faces sub-sovereign portfolio challenges as state and local governments access private markets. - BANCOMEXT continues to make losses on export promotion activities. - Policy recommendations: - Establish a “subsidies bureau” to rationalize programs. - Systematically assess net benefits of loan, guarantee, and subsidy programs. - Eliminate duplication across DBs and separate subsidies from credit via market-based pricing funded from budget. - Consider SME-oriented DA replacing NAFIN and BANCOMEXT; consolidate FIRA and Financiera Rural; transform BANOBRAS into a DA focused on capacity building. ### Derivatives markets, exchange-traded products, and recommendations - OTC market is main derivatives market; most traded instruments: currency options, forwards, cross-currency swaps, peso-denominated interest rate swaps (TIIE-swaps). - By end-2005 BIS estimated outstanding notional in OTC market at US$530 billion. - MexDer (exchange-traded) is less than one-sixth the size of the OTC market; offers futures and options on equities, indices, currencies, and government bonds. - Repo and securities lending: - Regulatory changes enabling AFORE participation in repo and securities lending expected to increase repo market liquidity. - Restrictions on borrowing government securities from BOM to primary dealers and prohibitions on pension funds and insurers lending securities may restrict repo development. - Clearing and risk management: - MexDer has adequate contingency plan; ASIGNA acts as CCP for MexDer. - Formal assessment of ASIGNA against CPSS/IOSCO recommendations recommended by BOM and CNBV. - Measures to enhance derivatives market stability and efficiency: - Streamline tax law to facilitate collateral transfer on counterparty default; current taxation unless trust established increases costs and tilts investors offshore. - Improve availability/quality of corporate credit information and harmonize recovery legal framework to enable credit derivatives and support corporate bond market. - Authorize insurance companies to use OTC derivatives (e.g., TIIE swaps) for hedging, subject to appropriate regulation. ### Institutional investors: AFOREs, pension funds, and insurance/annuities - AFOREs: - Competition on fees increased; six new AFOREs entered market during 2001–05; migration to lower-fee funds increased. - Mexican equivalent fees over assets remain above regional average. - CONSAR should consider promoting competition on net (risk-adjusted) returns and encourage single asset-based fee structure. - Recommend individualization of fee reporting in pension account statements and possible centralization of scale-sensitive functions in PROCESAR (PROCESAR should not be owned by AFOREs). - Asset availability and concentration: - Pension funds’ growth outstrips suitable local assets; exposure to housing sector (including mortgage Sofoles debt) exceeded 40 percent of assets. - Need to allow greater portfolio diversification including international markets. - Insurance sector and annuities: - 2002 legal amendments improved licensing, corporate governance, and internal controls. - CNSF has not achieved full political, budgetary, and operational autonomy. - CNSF completed and implemented a dynamic solvency model (step toward Solvency II framework). - Stress tests indicate resilience to severe shocks overall. - Annuities industry stalled due to IMSS issuing disability benefits under old regime after 2001 legislation; authorities should consider closing the loophole and improve mortality table data accuracy. ### Payments, clearing and securities settlement — legal and operational reforms - Payment System Law implemented December 2002 regulates finality of payments in systemically important payment systems (SIPS); payments final and irreversible; judicial/administrative resolutions effective one day after SIPS administrator notification. - SPEI replaced SPEUA in 2005: no BOM or participant credit lines; intraday liquidity via repos and DRM; payments in SPEI are final and irrevocable. - BOM oversight: - Power to oversee all systemically important payment and securities settlement systems; designates systems annually. - Instruments include approving internal rules, requesting information, imposing adjustment programs, and sanctioning providers. - Collateral arrangements: - BOM now uses repos and pledge of DRMs; repos main instrument; eligible collateral list restricted to liquid paper; margins set; immediate compensation or sale of collateral allowed on default. - Retail payments: - CECOBAN centralized clearing and settlement of checks and EFTs; checks remain 50 percent market share of noncash payments. - Card transactions growing; switches: e-GLOBAL (owned by two largest banks) and PROSA (owned by most other banks). - Retail infrastructure underdeveloped relative to peers; competitive measures include publishing bank fees, abolishing EFT interchange fee, and promoting common interbank infrastructures and CHIP-NIP technology. - Securities settlement and CCPs: - CCV is CCP for equities (operated by INDEVAL); ASIGNA is CCP for MexDer. - SIDV redesign envisaged to improve operational reliability. - Remaining payment exposures: some uncollateralized overdrafts in interbank reference rate schemes and cash withdrawal process to be fully collateralized by mid-2006. ### Banking safety net, PCAs, IPAB issues, and recommended measures - PCA reform (June 2004): - Early warnings and PCAs begin once bank’s capital falls below 10 percent; minimum corrective actions mandatory including regularization plan. - Suggestion to broaden PCA triggers beyond capital to cover chronic liquidity and unsound management. - Bank resolution framework (April 2006): - Cessation of payments is a trigger; options include insured deposit transfers, P&As, and bridge banks subject to least cost criteria; allows open-bank resolution for too-big-to-fail banks as decided by Financial Stability Committee (FSC). - Concerns: need for by-law amendments to implement share-pledge mechanisms (75 percent share pledge to IPAB) and complexity in designing a “haircut” on uninsured liabilities in too-big-to-fail cases. - IPAB: - Has not built a deposit insurance fund; must service debt from 1994 bail-out now at 8 percent of GDP; servicing uses 75 percent of deposit insurance premiums. - Premiums set at minimum 0.4 percent of total bank liabilities (roughly equivalent to 0.6 percent of total deposits), considered rather high internationally. - Recommended measures: - Ensure all banks amend by-laws promptly. - Draft FSC guiding principles. - Finalize bankruptcy law enabling partial deposit transfers under P&As. - Transfer IPAB’s debt to federal government. - Reduce maximum insured deposit (about US$120,000.00) and change premium base from total liabilities to total deposits. - Consider market-discipline measures for deposit insurance (reduced coverage, risk-based premiums). ### Financial sector supervision and regulation — CNBV, BCPs, and IOSCO assessment - CNBV improvements since 2001: - Internal reorganization, recruitment/training of examiners, quality control, On/Offsite Examination Manual, electronic data storage and automated rating. - Operational autonomy expanded; statutory political and budgetary autonomy lacking. - Consolidated supervision requires strengthening; interagency coordination and strong MOUs recommended. - Outsourcing/offshoring regulation under development. - Regulatory inconsistencies remain across product access and treatment. - Compliance with Basel Core Principles (BCPs): - Most 2001 shortcomings addressed; CNBV implementing prudential rules aligned with Basel I and preparing for Basel II advanced approaches (parallel runs from 2007 expected for large institutions). - New provisioning and concentration rules: related lending limit 75 percent of Tier 1 capital; maximum concentration to individuals/groups 12 percent of Tier 1 capital; top-three borrowers limit 100 percent of Tier 1 capital. - Onsite supervision: annual for most banks, quarterly for larger banks; external auditors required to report to CNBV; CNBV can sanction auditors. - Accounting: CNBV developed regulatory accounting standards aligned with international standards; consolidated financial statements must include all subsidiaries. - Cross-border supervision: CNBV maintains MOUs (12 with bank regulators, 32 with securities regulators); joint examinations permitted; challenges remain for parallel banks set up abroad by Mexican individuals. - Recommended action plan highlights: - Make CNBV a single autonomous supervisory agency with full powers from licensing to demise of institutions (BCP 1). - Grant CNBV formal authority to approve bank investments and ownership changes (BCP 5). - Strengthen CNBV consolidated supervision powers and enterprise-wide examination authority (BCP 20). - Extend CNBV supervisory reach over outsourced/data-processing functions regardless of jurisdiction (BCP 23). - IOSCO assessment and securities regulatory structure: - 2005 New Securities Market Law (LMV) expanded CNBV authority, enforcement powers, and minority shareholder protections; transferred licensing of securities firms to CNBV; effective June 2006. - Corporate governance reforms: audit committees, independent directors, fiduciary duties, tighter tender-offer regulation, creation of SAPI and SAPI B corporate vehicles to facilitate SME access to capital. - SROs: AMIB, AMAII, INDEVAL, Bolsa, MexDer, ASIGNA; CNBV oversight expanded; CNBV began publicizing disciplinary actions and soliciting public input via COFEMER. ### Stress testing — peer market-risk scenarios, insurance, MexDer, and payments - Market-risk peer scenario results: - Shocks: 180 EMBI+ spread; 30 percent exchange rate depreciation; 600 bp increase in short-term (Cete 28) interest rate; drop in USD-peso by 30 percent. - Key result: system’s CAR would fall to about 12.9 percent under the peer scenario. - Selected figures (Table 7): - Commercial banks: CAR Dec 2005 = 14.31; “Peer” scenario = 12.89. - Banca Múltiple I: CAR Dec 2005 = 14.16; “Peer” scenario = 12.56. - Banca Múltiple II: CAR Dec 2005 = 14.35; “Peer” scenario = 13.87. - Recommendations to strengthen stability analysis: - Improve coordination between BOM research and credit risk units and between CNBV and treasury macro unit. - Cross-check BOM and CNBV stress-test results with commercial banks using common shocks/scenarios. - Expand credit-risk analysis to consumer and mortgage lending (consumer and mortgage credit ≈ 15 percent of commercial banks’ assets; household indebtedness to disposable income = 17 percent). - Insurance sector stress testing (CNSF): - Scenarios include premiums shock (no nominal premium growth), interest rate fall, loss rate increases, and combined scenario. - Combined scenario: number of institutions with solvency ratio below 1 increases from four (Dec 2005) to 11; these 11 represent about 7 percent of market solvency requirement. - Table 10 selected figures: - Number of companies with solvency ratio > 1.5 as of Dec 2005 = 43. - Percentage of insurance companies below solvency ratio of 1 under baseline and shocks = 6.7, 13.3, 15, 16.7, 18.3. - Capital insufficiency as percentage of market solvency requirement = 1.3, 2.7, 3.4, 5.7, 7.3. - MexDer / ASIGNA stress testing: - MexDer scenario: 100 percent peso/USD depreciation; IPC drop 15 percent; Cete 91 increase 360 bp; TIIE increase 270 bp. - MexDer’s finding: clearing trusts’ resources and contingency plan sufficed without ASIGNA mutualizing losses or using its own equity. - ASIGNA contingency steps: draw resources of defaulting clearing trusts; draw other clearing trusts’ resources; use clearing fund; mutualize loss across clearing trusts and minimum equity; ASIGNA equity contribution if needed. - Payments and securities settlement progress: - Payment System Law (2002) and SPEI implementation eliminated prior BOM credit exposures from SPEUA; SPEI provides finality and irrevocability. - Intraday repo facility core to liquidity management; only banks access BOM credit lines collateralized by DRMs. - Remaining uncollateralized overdrafts in some schemes to be fully collateralized by mid-2006. - Retail payments: checks still 50 percent share; adoption of electronic payments, interoperability, and consumer education recommended to foster usage. *Source: IMF Financial Sector Assessment Program Update (Mexico), _cr06350_* ### Executive Summary ...................................................................................................... ### Executive Summary ### System soundness and recent developments - The Mexican banking system is sound and has strengthened considerably in recent years. - Overall, private banks are profitable and well-capitalized. - Some development banks (DBs) have reported adequate capital positions and positive results. - The system benefited from the current economic recovery, which has: - boosted credit demand; - contributed to a steady improvement in banks’ asset quality. - Markets for derivatives (both over-the-counter (OTC) and exchange-traded) have grown significantly, allowing for better management of market risks. ### Shortcomings identified by the 2001 FSAP - Insolvent banks could access the Bank of Mexico (BOM)’s liquidity support. - There was no system of prompt corrective actions. - The bank resolution framework was weak. - Serious deficiencies in the financial performance of development banks. - Housing finance required an overhaul. - Financial sector supervision required strengthening. - Regulatory agencies lacked adequate autonomy. ### Key reforms implemented since the 2001 FSAP - Major improvements in compliance with the Basel Core Principles for Effective Banking Supervision (BCP) and the implementation of IOSCO Objectives and Principles of Securities Regulation, including: - strengthened legal and regulatory framework; - progress toward risk-based supervision; - enhanced professionalism of the National Banking and Securities Commission (CNBV). - Securities regulation: expanded legal authority of the CNBV and improved transparency and market infrastructures. - Removal of significant shortcomings in payment systems identified in 2001 FSAP: - the uncollateralized BOM credit lines and guarantees were virtually eliminated; - legal basis for payments and clearing and settlement was substantially improved; - oversight powers of the BOM were adequately clarified. - Increased competition among private managers of the defined-contribution pension funds: - policies loosened barriers to entry and facilitated migration to lower fee funds; - fees have decreased and expected replacement rates have increased (fees still high). - State-of-the-art regulation and supervision of the insurance industry: regulation and supervision significantly strengthened. - Major improvements in the housing finance market: - SHF (Federal Mortgage Society) bridged the gap after the 1994–95 “Tequila” crisis; - private mortgage originators (Sofoles) expanded rapidly and have started tapping the market directly; - mortgage-backed securities (MBS) are emerging; - achieving the 2009 “sunset clause” for second-tier financing by SHF of housing lending is paramount for private mortgage market development. - Significant progress on the banking safety net: - prompt corrective actions (PCAs) in place meet international best practices; - recent changes to the banking law to deal with insolvent commercial banks represent significant improvements; - bylaws need amendment to make new resolution clauses fully implementable; - need to establish a framework and operational guidelines for the resolution of financial groups. - Anti-money laundering/combating the financing of terrorism (AML/CFT): - a proposed law in congress intended to address shortcomings identified in the second mutual evaluation; - the Mexican Senate approved a law penalizing terrorism financing and forwarded it to the Chamber of Deputies. ### Macrofinancial and institutional setting - Fiscal consolidation has put the public debt ratio on a gradually declining trend (gross augmented public debt is now around 45 percent of GDP). - An independent central bank has been able to bring inflation down to about 3 percent in the context of a floating exchange rate regime. - The steady drop in inflation and inflation expectations has produced benefits including: - lower interest rates; - increased financial intermediation; - a rebirth of the fixed nominal interest rate mortgage market; - increased access to credit; - a dedollarization of credit markets; - lower costs of government debt servicing; - an extended yield curve providing the foundations for a deeper domestic capital market. - A proactive debt management strategy has: - shifted the structure of debt away from foreign currency-denominated instruments, reducing vulnerability to sharp exchange rate fluctuations; - supported the extension of the yield curve and contributed to deeper and more liquid secondary securities markets; - contributed to Mexico’s achievement of investment-grade rating, uninterrupted access to capital at low cost, and resilience to global financial shocks (e.g., 1998 Russian crisis and 2001–02 worldwide recession). - Growth has been muted due to incomplete reforms in the business and investment environment and in market flexibility and competition: - Average 2001-05 real GDP growth was only about 2 percent; - growth is expected to reach 4 percent in 2006; - growth is expected to moderate to 3.5 percent in 2007. ### Key remaining challenges and priority actions (Box 1: Key FSAP Update Recommendations) - Reinforce the monitoring of credit risks associated with consumer and mortgage lending. ST 1/ - Further strengthen consolidated supervision of financial conglomerates. ST - Reassess the mandates, functions, and instruments of development banks. ST - Establish full autonomy of supervisory agencies, subject to adequate accountability standards. ST - Establish plans for orderly consolidation of mortgage Sofoles once the SHF stops second-tier lending to them. MT - Maintain the 2009 sunset date for the state-owned SHF second-tier lending to fund middle- and high-income housing. MT. - Introduce interagency contingency planning and develop internal protocols regarding emergency liquidity assistance. ST - Promote greater competition among different credit providers by the timely disclosure of standardized interest rate indicators for different loan products; and improve the registry systems and contract enforcement environments across state jurisdictions. ST - Carry out self-assessment of SIAC and SPEI regarding observance of the CPSS CPSIPS. Also, carry out self-assessments of the SIDV and the two Central Clearing Counterparties (CCPs) regarding observance of CPSS/IOSCO recommendations. ST - Promote competition on net returns in the private pension system and resolve the impasses regarding disability benefits that have stalled the development of the annuities market. ST - Consider market discipline-supporting measures for deposit insurance such as a reduction in coverage and the charging of risk-based premiums. ST - Establish an effective framework for the liquidation of banks and enable partial deposit transfers under Purchase and Assumption (P&As). ST - Seek a suitable formula to improve the financial condition of the Institute for the Protection of Bank Savings (IPAB), including the transferring of its debt to the federal government. MT 2/ - Further foster interoperability and economies of scale in retail payment systems. MT *Executive Summary — IMF Financial Sector Assessment Program Update (Mexico).* ### 5. Main macroeconomic risk factors relate to the links with the U.S. economy and ### _cr06350 - 5. Main macroeconomic risk factors relate to the links with the U.S. economy and ### Main macroeconomic risk factors - A slowdown in U.S. industrial production would have an adverse effect on domestic economic activity, and as a result, on credit demand, and bank asset quality. - Mexico’s low external current account deficit and external financing needs make the country less vulnerable to a deterioration of external financing conditions than some other emerging economies. - Fiscal accounts rely on oil revenue; in the absence of offsetting fiscal adjustment, adverse developments in the oil sector could result in increased borrowing requirements with crowding out effects and implications for the sustainability of public debt. - A considerable share of government domestic debt is still of short remaining maturity or interest-rate indexed, raising vulnerability to a tightening of global liquidity and sharp increases in interest rates and the possibility of “snowballing” government financing needs and deterioration of public sector default risk. - Banks’ exposure to the public sector, although declining, still remains at about half of their earning assets. (Footnote: Excluding repo operations the commercial bank exposure to the public sector is lower (around 30 percent).) ### Household and lending risks - High rates of growth in consumer and mortgage lending could, without proper monitoring, raise macroeconomic concerns in the future. - Household debt remains relatively contained for now, but further rapid growth could weaken debt service capacity and deteriorate the quality of households’ creditors. - Credit institutions’ need to address nonperforming loans could reduce overall credit to the private sector and contribute to an economic downturn. ### Regulatory vulnerabilities - Existing sound oversight and regulatory practices are vulnerable to reversal due mainly to the lack of full autonomy of regulatory agencies. - Without full autonomy, regulatory agencies could be forced into regulatory forbearance policies that contribute to a sudden deterioration in credit quality and an unsustainable credit boom, with adverse macroeconomic consequences. ### Financial system: composition and concentration - The financial system includes commercial banks, insurance companies, pension funds, broker dealers, investment banks, development banks, non bank financial institutions (Sofoles), securities firms, and leasing and factoring companies. - Sofoles do not take deposits and are licensed by the Secretariat of Finance and Public Credit (SHCP) to grant credit to specific segments of the economy; financing of mortgage Sofoles comes from different sources, including the SHF. - Large, multinational financial groups are involved in almost all salient lines of financial business—with the exception of insurance—and dominate the financial landscape. - As of December 2005, Financial Sector Assets composition (In percent): - Commercial banks 48.9% - Development banks 12.6% - Pension funds 13.5% - Investment banks 11.2% - Insurance 7.3% - Sofoles 4.6% - Other intermediaries 1.9% ### Credit institutions: concentration, ownership, and competition - The three largest institutions account for close to 60 percent of the banking sector’s assets. - Foreign ownership represented close to 80 percent of all banking assets as of December 2005. - Policy actions to foster competition recommended: - (a) fostering consumer mobility; - (b) preventing collusive practices; - (c) relaxing entry barriers; - (d) leveling the playing field. ### Banking system soundness and performance - Minimum capital requirements are set at 8 percent of risk-weighted assets, but overall banks hold significantly more capital than the minimum required. - Nonperforming loans (NPLs) are less than 2 percent of gross loans, down from close to 6 percent in 2000. - Banks have built sizeable provisions against NPLs, with coverage ratios over 200 percent (due in part to tax incentives). - Total financing to the private sector, as a fraction of GDP, increased by about 2 percent since 2000. (Footnote: domestic financing to the private sector has increased by almost 4 percent of GDP since 2000.) - Commercial banks accounted for over a third of total financing to the private sector, with credit representing about 50 percent of their assets at end-2005. - The composition of banks’ private loan portfolio has shifted toward consumer credit at the expense of commercial lending; this shift coincided with an increase in domestic suppliers’ credit. ### Banking system stability analysis and stress testing - Since 2001, risk management practices in systemically important commercial banks have strengthened substantially; practices include independent risk units, VaR and back-testing analysis, liquidity monitoring under normal and stress scenarios. - Stress tests were carried out by BOM and CNBV in consultation with the FSAP team using shocks based on historical stress scenarios, periods of heightened volatility, and historical distributions of key macro variables for peer economies. - Market risk results: - Exchange rate risk is not the main market risk as of December 2005. - A shock to sovereign risk proxied by a 180 bp increase in the EMBI did not have an appreciable impact on the system’s CAR on average. - The most relevant shock appears to be a sharp upward parallel shift in the yield curve (Tables 6 and 7), where one bank’s capital drops below the regulatory CAR. - CNBV “Tequila” and “Oil” scenario exercises: - The “Tequila” scenario (calibrated to stress observed up to 12 months from the onset of the 1994–95 crisis) would affect banks’ capital more than the oil scenario. - In the most extreme scenario, on average, large commercial banks lost 40 percent of regulatory capital, but their CAR would never drop below the regulatory CAR (due in part to active hedging). - Credit risk results: - BOM assessed corporate default rate increases calibrated to 1994–95 crisis; at the peak (six months after the initial stress trigger), two small banks could see their CAR falling under the regulatory 8 percent. - Commercial banks’ exposure to the public sector has been declining but still amounts to about half of commercial banks’ earning assets, making banks sensitive to potential changes in the value of government securities and contributing to potential crowding out of the private sector. ### Housing finance markets - Since 2001, government actions (via SHF) have: provided guarantees, created new property appraisal standards, sold mortgage default insurance, and provided funding for mortgage Sofoles, fostering standardization of private mortgage origination and tapping private capital markets through mortgage-backed securities. - Monitoring of mortgage Sofoles’ risks is carried out by the SHF and the market; CNBV carries out limited supervision of Sofoles. Market discipline applies to Sofoles tapping the markets directly. - Smaller Sofoles are significantly exposed to residential construction lending, which carries significantly higher credit risk than lending to home owners. - Participation of mortgage Sofoles in outstanding housing loans grew from 6.2 percent in 2000 to 17.3 percent in 2005. - The system-wide mortgage portfolio grew by a cumulative 65 percent between 2000 and 2005 and stands at 9.6 percent of GDP. - Since 2003, 15 MBS issues worth MEX$11.5 billion have come to the market, representing 0.7 percent of the balance of credits outstanding in the system at end-2005. - A specific instance of deficient due diligence was noted: in one mortgage pool where SHF was asked to provide mortgage insurance, 30 percent of the loans suffered from documentation problems; the auditor had reviewed only a small sample of loans, the rating agency did not review any loan files, nor did institutions offering credit enhancements. - Policy recommendation: The authorities should enforce due diligence reviews to boost the nascent Mexican MBS market. - Middle-income households can obtain peso-denominated 15-year mortgage loans at a fixed nominal interest rate of about 9 percent. - INFONAVIT and FOVISSTE: - INFONAVIT’s dominance of the primary mortgage market increased from 49 percent of outstanding balances in 2000 to 60 percent at the end of 2005. - INFONAVIT has improved management, operations, and corporate governance; cash flows increasingly come from loan collections rather than mandatory contributions. - INFONAVIT allows members to leverage savings for market-based mortgage finance, has implemented new systems reducing NPLs, adopted international accounting standards, and put in place executive committees for risk management, auditing, and strategic policy. - INFONAVIT has securitized portfolios, although securitizations have been expensive, requiring 18–23 percent subordination of the residual certificate for the senior certificates. ### Development banks (DBs) and reform progress - The 2001 FSAP recommended separating subsidies from finance, consolidating DBs, and transforming DBs into development agencies (DAs) that would be funded through the government budget, not take deposits, nor issue debt or participate in the payments system. - In the last five years, some DBs reformed: DBs are now regulated and supervised as private banks; interest rate loan subsidies have been reduced; an increasing share of subsidies is financed through the government’s budget; lending has shifted from direct lending to lending through private financial institutions; partial guarantees declined from 80 percent or more to about 50 percent on average. - Some DBs have reported adequate capital positions and positive results, though reform depth and breadth have been uneven across DBs. - Financiera Rural and FIRA operate largely as development agencies: prohibited from taking deposits (Financiera Rural also prevented from issuing any liability instruments), fund lending from endowments and loan collections, and lend largely at market interest rates (FIRA lending is exclusively second-tier). - BANSEFI has the mandate of promoting savings for low-income households and spearheading development of credit cooperatives (cajas populares); it administers a one-off government investment subsidy to finance technical assistance to set up common network and infrastructure and to raise governance, transparency, and management capacity to standards required for licensing by the CNBV. *Source: Mexican authorities and Staff calculations* ### 29. In the case of other DBs, mandates remain unclear and their initial raison d’être ### 29. In the case of other DBs, mandates remain unclear and their initial raison d’être ### Development Banks: current situation and challenges - The initial niches of NAFIN, BANCOMEXT, and BANOBRAS (financing of SMEs, export promotion, and sub-sovereigns, respectively) are being eroded by international commercial banks and the capital markets. - BANCOMEXT’s return to first-tier lending should be financed from the government’s budget (rather than via the current cross-subsidization within BANCOMEXT’s activities). - As the most creditworthy state and local governments increasingly access private financial markets, BANOBRAS is being left with a sub-sovereigns portfolio which creates major challenges to meet its mandate while preserving its capital. - The only exception is BANCOMEXT, which continues to make losses on account of its export promotion activities. - Financiera Rural was created after the liquidation of Banrural. ### Policy recommendations and institutional reforms (going forward) - Continue with current plans for establishing a “subsidies bureau” in an effort to rationalize the numerous financial subsidy and guarantee programs. - Continue with efforts in assessing systematically the net benefits of loan, guarantee, and subsidy programs. - Continue with the elimination of operations and infrastructures’ duplications across DBs. - Continue with efforts to fully separate subsidies from credit, by moving to market-based pricing of DB products while ensuring that remaining subsidies are well-designed, well-targeted, and funded directly from the government budget. - Subject to a clear definition of objectives and mandate, an SME oriented DA should replace NAFIN and BANCOMEXT. The export promotion of the latter should be financed through the government budget. - Consider consolidating FIRA and Financiera Rural in a single, rural-oriented DA. - Consider transforming BANOBRAS into a DA oriented toward capacity building in state and local governments. ### Performance measurement - As the DB system evolves towards a DA model, there will be a need to reform the way in which DB performance is measured and evaluated using international best practices. - The current criteria—of measuring performance in terms of the volume of loan disbursements—is bound to become increasingly less relevant. ### Derivatives Markets #### Market structure and activity - The main derivatives market in Mexico is the OTC market, which is globally integrated. - Currently, the most traded instruments in this market are currency options, forwards, cross-currency swaps, and peso-denominated interest rate swaps (TIIE-swaps). - Currency options have been popular given their declining costs (proxied by implied volatility, Figure 6). - By end-2005, the Bank for International Settlements (BIS) estimated that the outstanding notional amount in the OTC market amounted to US$530 billion. - The Mexican OTC market is inexpensive relative to other Latin American countries (Figure 7). #### Exchange-traded derivatives (MexDer) - MexDer is much smaller than the OTC market—less than one-sixth the size of the OTC market—and offers futures on individual equities, equity indices, foreign currencies, and government bonds; and options on equities, equity indices, and on exchange-traded funds. - While the derivatives exchange grew steadily from 2001 to mid-2004, the notional outstanding amount has shown significant volatility since then. - MexDer officials expect this volatility to diminish significantly with the new withholding tax and capitalization rules for local banks and brokers and as institutional investors expand their trading. - MexDer has introduced measures to attract liquidity from international players, such as the creation of omnibus accounts and the enhancement of its payment settlement system. #### Repo and securities lending - Recent regulatory changes enabling the participation of AFOREs in repo and securities lending operations are expected to contribute to increasing liquidity in the repo market. - However, restricting borrowing of government securities from the BOM to primary dealers, and prohibiting institutional investors, such as pension funds and insurance companies, from lending securities may restrict the development of the repo market. #### Clearing and risk management - MexDer seems to have implemented an adequate contingency plan to withstand the default of a number of its members via different lines of defense. - A formal assessment of the risk management structure of the Clearing Fund (ASIGNA), in terms of its observance of the CPSS/IOSCO recommendations for central counterparties, should be carried out by the BOM and the CNBV. - ASIGNA acts as a central counterparty for the trades conducted on MexDer. ### Measures to enhance stability and efficiency of derivatives markets - Streamline the tax law to facilitate the transfer of collateral in case of default of a counterparty to a derivatives transaction. - Note: Unless a trust is established in connection to the transaction (caución bursátil or prenda de garantía), the transfer of collateral in case of a counterparty default is taxed. Establishing a trust, however, increases transaction costs for contracts written onshore and tilts investors toward the offshore market. - Set up the conditions for the development of a credit derivatives market. In particular: - Improve the availability and quality of credit information on corporations. - Harmonize the legal framework governing the recovery process in case of default across jurisdictions and states. - This measure would also contribute to the development of the local corporate bond market. - Authorize insurance companies to use OTC derivatives to hedge their risks. - Insurance companies hold long duration portfolios, which could be efficiently hedged using TIIE swaps. - Current regulations prevent them from using derivatives other than those listed in organized exchanges. - While MexDer has recently introduced an interest rate swap-like product, this product is more expensive and less liquid than the OTC TIIE swap. ### Institutional Investors #### Privately managed pension funds (AFOREs) - Although the authorities have succeeded in increasing competition on fees in the defined-contribution pension fund industry, fees for asset management remain high. - CONSAR, the sector’s regulator, has lowered entry barriers and facilitated switches to lower-fee funds. As a result, six new AFOREs entered the market during 2001–05, and migration to lower-fee funds has increased in recent years. - Mexican equivalent fees over assets, regardless of the time horizon, are above the regional average (Table 3). - CONSAR’s equivalent fee calculation is valid only for an “average” individual, making it difficult to compare AFOREs’ effective fees across participants. - Automatically assigned accounts to low-fee AFOREs are likely to be characterized by low balances and low contribution densities, endangering the sustainability of these AFOREs. #### Recommendations for pension fund regulation and competition - CONSAR should consider a shift in focus toward gradually promoting competition on net (ideally, risk-adjusted) returns. Efforts in this direction would be greatly facilitated if the industry were to converge toward a single, asset-based fee structure, as this would make it easy to compare funds by net returns. - Further simplification and individualization of the ranking of AFOREs according to fees charged by requiring funds to report in the pension account statement, each individual worker’s fees paid to his/her AFORE. - The authorities should examine the possibility of continuing transferring to PROCESAR—the entity in charge of processing pension collections, transfers, and withdrawals—functions currently performed by AFOREs that are subject to economies of scale (e.g., back-office accounts management), in order to further reduce costs and fees. - To avoid conflict of interest, PROCESAR should not be owned by AFOREs. - Legal reform would also be needed to give CONSAR regulatory authority over the main operational processes of the pension system. #### Asset availability and concentration risks - The growth of pension funds in Mexico is outstripping the availability of suitable local assets resulting in a high exposure to the housing sector. - Exposure of pension funds (including those administered by INFONAVIT) to the housing sector exceeded 40 percent of assets, if one considers the debt issued by mortgage Sofoles. - The currently limited availability of eligible local assets suggests the need to allow greater portfolio diversification including in international markets. #### Insurance sector and annuities - Regulations for the insurance industry have been strengthened in line with the 2001 FSAP recommendations. - Legal amendments in 2002 led to several improvements including harmonizing licensing rules for life and nonlife insurance companies and making them applicable to changes in control; and strengthening standards for corporate governance and internal controls (e.g., on the role of the Board, conflict of interest, establishing the compliance officer, and requiring independent directors). - CNSF has not yet achieved full political, budgetary, and operational autonomy. - Solvency regulation has evolved to include projections of liabilities to better assess the adequacy of reserves. - The CNSF has completed and implemented a dynamic solvency model, an important step toward the adoption of statutory solvency rules envisioned within the Solvency II’s framework. - The model uses historical data to construct claim distributions for different lines of business and allows the CNSF to calculate the probability of capital shortages of each insurance company by stressing variables that affect its underwriting and overall profit. - According to stress tests conducted in the context of the FSAP update, the insurance sector appears resilient to severe shocks (Appendix III). - The annuities industry has stalled and measures are needed to ensure that it remains solvent. - The 1997 pension reform introduced the option of purchasing private annuities with IMSS’s disability, death, and workers’ compensation benefits. During 1997–2001 the annuity market grew rapidly (Figure 8). - Because disability payments under the pre-1997 regime come from the government budget (and not IMSS reserves), IMSS took advantage of legislation introduced in 2001 that allows it to issue disability benefits under the old regime, and this led to a collapse of the annuities market. - The authorities should consider introducing legislation to close the unintended loophole. - The National Council of Populations’ mortality table that annuity companies are required to use consists of preliminary data that should be made more accurate. ### Financial Sector Supervision and Regulation #### Banking supervision (CNBV) - Since 2001, a significant internal reorganization has been implemented at the CNBV. - Allocation of considerable resources to attract, train, and retain qualified examiners. - Establishment of a quality control structure to ensure standardization by examiners. - A standardized “On/Offsite Examination Manual” utilizing both international best practices and locally developed best practices. - Introduction of electronic data storage to automate the rating system. - Operational autonomy of the CNBV has been significantly expanded, but statutory political and budgetary autonomy are still lacking. - Regulations have been issued to ensure transparency in financial disclosure by financial institutions and a standardized format for regulatory reporting, including regulatory accounting standards in line with international standards for all banks to be applied on a consolidated basis. - Consolidated supervision of financial conglomerates requires strengthening: - Factors prevent double gearing of capital (coordinated supervisory visits, legal entity structure, permissible investments deduction), but the lack of full-fledged consolidated supervision complicates early detection of group-wide risks. - Interagency coordination could be further boosted via strong MOUs between agencies. - Outsourcing and offshoring of bank operations lack formal regulations; the CNBV is engaged in the design of a new outsourcing and offshoring activities regulation. - Certain regulatory inconsistencies remain, e.g., different norms for similar financial products (derivatives access differs for banks, AFOREs, and insurance companies; insurance savings products differ from bank savings products; mutual fund-like products from insurance companies may not follow mutual fund segregation rules). - The system of cross opinions on regulations by different regulators is not binding and sometimes lacks time limits; the requesting authority should explain its rationale when acting against an opinion and deadlines to issue opinions should be established. - The high degree of globalization of the Mexican financial system increases the importance of cross-border cooperation among financial regulators and supervisors: - Implementing effective group-wide cross-border consolidated supervision, enhancing cross-border supervisory cooperation, and readying an efficient resolution process for failure of a foreign-owned financial group are critical. - Formal MOUs with foreign regulators should be cemented in practice by continuously enhancing existing strong working relationships. ### Securities Markets - The quality of the regulatory and supervisory framework, and of its enforcement, has improved significantly since the 2001 FSAP. - Expansion in the responsibility of the CNBV to license, oversee, and regulate capital markets. - Clarification of CNBV’s responsibility and powers to investigate violations of securities laws, take disciplinary action, and share information with other regulatory entities in Mexico and internationally. - Improvements in CNBV internal operations, including updated codification of secondary regulations on disclosure requirements for listed companies; stronger requirements to promote independence of external auditors; and greater transparency in regulation development. - Recent legal and regulatory changes have significantly improved corporate governance practices and the protection of minority shareholder interests: - The 2005 New Securities Market Law lists the fiduciary duties of a corporation’s Board of Directors to shareholders and identifies prohibited activities that violate these obligations. - Tender offers are now strictly regulated to protect minority interests and violators are now subject to civil and criminal liability. - Regulatory transparency in corporate disclosure could be enhanced: - The CNBV should continue to provide informal technical assistance on compliance and increase resources for reviewing financial statements and corporate disclosure of accounting issues. - The CNBV should consider how best to monitor the OTC market for corporate securities should the new investment promotion vehicles (SAPIs) and SAPI B develop as expected; the CNBV has the authority to develop secondary regulations pertaining to the SAPI and the SAPI B. - Further reforms needed: - The OTC market for thinly traded debt securities is illiquid and lacks transparency; market efficiency would benefit from mandatory timely reporting and public disclosure of all debt transactions. - The Mexican Institute of Public Accountants (IMCP) should continue to maintain work to continuously review and upgrade Mexican auditing standards in line with International Standards on Audit (ISA). - Mutual funds and pension plan managers rely heavily upon the two independent price vendors for valuation of assets and calculation of net asset value: the functioning of price vendors should be carefully examined, including methodologies used and the frequency with which they adjust asset market prices. *Source: _cr06350 - 29. In the case of other DBs, mandates remain unclear and their initial raison d’être* ### 56. The 2001 FSAP found a series of shortcomings in the large value payments ### 56. The 2001 FSAP found a series of shortcomings in the large value payments ### Large-value payments: findings and reforms - 2001 finding: no clear rules to prevent troubled institutions from accessing the BOM’s liquidity support; BOM exposed to credit risk; legal basis for clearing and settlement needed strengthening; scope of BOM oversight responsibilities needed clarification. - Reforms adopted by 2005: - Replacement of the old system with a modern hybrid payment system, Sistema de Pagos Electrónicos Interbancarios (SPEI). - In SPEI, neither the BOM nor the bank participants extend credit lines. - Liquidity must be managed by fund transfers between the SPEI and the Sistema de Atención de Cuentahabientes (SIAC). - Payments settled in SPEI are final and irrevocable. - Introduction of explicit regulation of finality and the use of electronic transfers and electronic data in courts. - Elimination of credit lines in the old securities settlement system; settlement is no longer guaranteed by the BOM. - Clarification of BOM oversight: explicit powers to oversee all payment and securities settlement systems, including the CCPs, and provision of effective compliance instruments. - Risk reduction: - Most of BOM’s risk exposures from explicit guarantees and inadequately collateralized credit lines were eliminated. - New credit facilities enable the BOM to immediately liquidate the collateral in case of a default. - Intraday liquidity facility: - The intraday repo facility is the core of liquidity management. - Participant banks can obtain intraday loans against eligible collateral: federal government or IPAB bonds, the BOM’s paper portfolio, and the DRM (Depósito de Regulación Monetaria) posted with the BOM. - Footnote detail: - Only banks have access to the BOM’s credit lines. The eligible collateral for these credit lines are cash deposits (Depósitos de Regulación Monetaria) that banks have posted with the BOM. ### Retail payments: competition, risks, and policy actions - Market structure concern: - In concentrated financial systems such as Mexico’s, large banks (as owners and main users of key retail payments networks) have incentives to limit outsiders’ access to EFT, payroll, or direct debits through exclusive networks, potentially raising financial services’ costs and fees. - BOM measures to promote greater competition: - Publishing fees and commissions charged by individual banks. - Fostering use of common interbank infrastructures by setting standards for EFTs (including tertiary information). - Abolishing the interchange fee for EFTs and allowing clients to fulfill credit card or interest payment obligations via an EFT from an account with another bank. - Abolishing limits on access to switch services for nonbanking institutions. - Enhancing consultations with banks on the methodology to set interchange fees for debit and credit card transactions and noting the possibility of regulatory action to foster greater competition. - Further measures authorities could consider to balance competition and cooperation: - Enhancing the role of nonbank service providers, such as department stores; - Educating employees about their electronic payroll disbursement choices; - Eliminating barriers to the provision of services using common platforms, such as direct debits and payroll via CECOBAN; - Fostering the adoption of CHIP-NIP technology to promote the use of debit cards in point-of-service (POS) terminals; - Changing the law to give EFTs the status of legal tender and coordinating with the SHCP the substitution of checks with EFTs for payments of social benefits, pensions, and wages; - Promoting public trust in the use of electronic payments through education and consumer protection programs. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - Initiatives following the 2003-04 AML/CFT assessment: - Gateways and clear procedures instituted to allow judicial authorities to obtain financial information directly from financial institutions, and to allow law enforcement to do the same on the basis of a court order during investigation and prosecution of money laundering and terrorism financing cases. - December 2005: the Senate approved a draft law to penalize international terrorism and terrorism financing and sent it to the Chamber of Deputies; two Commissions of the Chamber of Deputies were discussing the draft and approval was expected later in 2006. - Timing: the next evaluation of Mexico using the 2004 methodology, if approved by FATF, could be conducted in 2008. ### Banking safety net: reforms, concerns, and recommendations - Prompt corrective action (PCA) reform: - June 2004 legal reform introduced a modern system of early warnings and PCAs. - The new system imposes (cumulative) restrictions of increasing rigor as a bank’s capital ratio deteriorates below a threshold. - PCAs begin once a bank falls below the 10 percent capital ratio, somewhat before the required minimum of 8 percent. - The regime requires CNBV to enforce and banks to comply with a minimum set of corrective actions, including a regularization plan and other measures deemed necessary by CNBV. - Effect: significantly curtails regulatory forbearance and contributes to market discipline. - Suggested refinement: - Broaden PCA triggers beyond capital adequacy to include chronic inadequate liquidity and unsound management. - Bank resolution framework (April 2006): - New legal framework includes cessation of payments as a trigger for bank resolution. - Provides for information exchange between relevant agencies. - Establishes flexible closed-bank resolution options—insured deposit transfers, purchase and assumption (P&A), and bridge banks—subject to the least cost criteria. - Improves legal protection for supervisors acting in good faith. - Allows open-bank resolution for banks considered too-big-to-fail by a Financial Stability Committee (FSC) composed of high-level officials from the SHCP, BOM, CNBV, and IPAB. - Elements meriting close monitoring: - Conditioned capital restoration plan and the “haircut” in too-big-to-fail cases: - Under the new regime, a bank can establish a corrective action plan with the regulator by pledging 75 percent of its shares to IPAB. - Banks need to amend their by-laws to enter this pledge. Risk: banks might obtain preemptive judicial injunctions to avoid amending by-laws, arguing no capital deficiencies, potentially rendering the law ineffective. - The FSC must decide on a “haircut” to all uninsured liabilities in too-big-to-fail cases without jeopardizing the financial stability of nondepositor creditors or the functioning of the payments system; the design of the haircut can be complex and may add pressure on the FSC. - IPAB and deposit insurance: - IPAB has not been able to build a deposit insurance fund. - IPAB must service debt associated with the 1994 bank bail out, now at 8 percent of GDP, and servicing this debt uses 75 percent of deposit insurance premiums; therefore IPAB has not been able to build a fund and will not be able to do so in the near future. - Premiums are currently set at a minimum of 0.4 percent of total bank liabilities (rather than of deposits). This is roughly equivalent to 0.6 percent of total deposits, described as rather high by international comparison. - Further measures to strengthen the banking safety net (authorities might consider): - Ensuring that all banks amend their by-laws as soon as possible (as per PCAs); - Drafting guiding principles for the FSC’s mandate; - Finalizing the new bankruptcy law for banks (complementary reforms are necessary to enable partial deposit transfers under P&As; under the recently introduced bank resolution framework, P&As can only involve the whole amount of deposits and, hence, partial transfers are not permitted); - Transferring IPAB’s debt to the federal government; - Reducing the maximum insured deposit amount which, at about US$120,000.00 is one of the highest in the world; - Changing the premium base from total liabilities to total deposits. *Source: _cr06350 - 56. The 2001 FSAP found a series of shortcomings in the large value payments* ### 72. The banking system has significantly improved its compliance with the 25 BCPs. ### _cr06350 - 72. The banking system has significantly improved its compliance with the 25 BCPs. ### Summary of overall findings - The 2001 FSAP identified supervisory and regulatory shortcomings: CNBV autonomy needed strengthening; the definition of capital did not reflect banks’ economic capital; inconsistency in treatment of information, decision making, and enforcement within the CNBV; need for greater contribution and accountability from Boards of Directors and external auditors. - Most of the observed shortcomings have been addressed according to the assessment. ### Preconditions for effective banking supervision (BCP 1) - Current legislation parcels oversight among three regulators: the SHCP, the BOM, and the CNBV. - The SHCP has begun to transfer some regulatory powers to the CNBV. - The new Securities Market Law-LMV (December 2005) transfers the granting of licenses for securities intermediaries to the CNBV. - Planned amendments to the Law of Credit Institutions (LIC) would transfer bank licensing to the CNBV. - No formal protocol for sharing information and joint examinations exists, yet inter-agency cooperation has been highly effective. - The CNBV shares information with other regulatory bodies and performs joint inspections regularly. ### Licensing and structure (BCPs 2–5) - SHCP currently grants bank licenses; planned LIC reforms would give CNBV licensing authority for banks and securities intermediaries. - Changes in ownership or controlling interests for existing banks must be approved by the SHCP; the CNBV issues de facto binding opinions. - The CNBV is seeking amendments to the LIC to grant it control over ownership changes and formal authority to approve investments by banking institutions. ### Prudential regulations and requirements (BCPs 6–15) - Mexican banks comply with Basel I’s recommended capital requirements and are positioned to comply with Basel II recommendations regarding credit and operational risk. - Large financial institutions (including large foreign banks) are expected to start parallel runs in 2007 to adopt the advanced approaches of Basel II. - August 2005 banking regulation updated prudential oversight governing the credit process: - Functions and responsibilities for officers in the credit process were clarified. - Credit approval process modified to ensure Board of Directors accountability. - CNBV reviews underwriting methodology and follows up on deficiencies. - CNBV can require precautionary loan-loss provisions and may bar new credits. - New provisioning rules align with international best practices; August 2004 reforms allow internal credit rating use for provisions on all types of private and sub sovereign loans and rely on credit risk mitigation techniques (guarantees, collateral). - 2003 modification on concentration risk sets limits: - Maximum concentration of credit risk to individuals or groups: 12 percent of Tier 1 capital. - Banks may lend more than 12 percent to a group if they have higher capital levels. - Maximum exposure to the top three borrowers cannot exceed 100 percent of Tier 1 capital. - Connected lending framework revised: - Related lending must be approved by the bank’s Board of Directors and be limited to 75 percent of Tier 1 capital. - Banks must provide an indicator on related lending in monthly reports to the CNBV. - Country risk and transfer risk: - CNBV requires banks to analyze country risk and concentration; examiners review country risk limited to letters of credit issued by banks for customers. - CNBV views these risks as not material; exposure to letters of credit compared to bank capital is minimal. - CNBV lacks jurisdiction over parallel banks in foreign jurisdictions unless a Mexican bank has ownership interest. - Market risk and contingency planning: - CNBV uses VAR models and stress tests based on historical Mexican market data; banks must run proprietary VAR models for comparison. - A banking circular sets norms for contingency plans which must be approved by Boards; further improvement in onsite examination and verification of contingency plans is needed. - Risk management and internal controls: - Since 2003 banks are required by law to have comprehensive risk management processes with Board and senior management oversight; annual CNBV examinations review these processes. - Regulations on internal controls and auditing introduced in 2001 and updated in 2005; extended to development banks. - Objectives: control operational risk; reinforce comptroller and internal audit; update information systems; minimize conflicts of interest; define participants’ roles. - Examiners review corporate governance and audit function independence; minutes of audit committee are reviewed. - External auditors must report to both the Board and the committee per the Circular Única de Bancos updated in 2006. ### Methods of ongoing supervision (BCPs 16–20) - Onsite supervision has greatly improved since 2001: - Onsite supervision conducted at least annually (quarterly for larger banks). - CNBV has a qualitative directive to incorporate best practices into the Supervision Manual. - Examination methodology standardized. - Circular Única de Bancos requires external auditors to report audit findings to the CNBV. - CNBV can review audits, report shortcomings to audit firm management, fine, or request removal of a partner for violations. - Reporting and interaction: - Banks required to issue monthly financial reports reviewed and validated by CNBV officials prior to issuance. - CNBV meets at least quarterly with top-tier management; documented in examiners’ work papers. - Exit meeting minutes ensure mutual understanding of findings. - CNBV may be in daily contact with larger institutions when significant changes occur. - Offsite supervision: - Conducted by CNBV and BOM through quarterly reports; validated by onsite inspections. - System allows solo offsite supervision by each entity; consolidated supervision of large financial groups requires close coordination. - CNBV has authority to fine and sanction banks and individual bank officials for poor reporting. - Validation of supervisory information: - CNBV examination teams of four to six examiners validate information over two-to-three month periods depending on bank risk and size. - CNBV is involved in creating an oversight framework for external auditors in Mexico. - Consolidated supervision legislation: - Legislation under study by SHCP with CNBV opinion to ensure comprehensive consolidated supervision. - Current distribution of duties across regulators suggests consideration of a single regulator for banking similar to securities industry. ### Accounting standards (BCP 21) - CNBV developed regulatory accounting standards aligned with international accounting standards. - Consolidated financial statements must include all subsidiaries, regardless of whether they are financial entities. - CNBV issued regulations related to external auditors in 1994 and 2000 (Circulars 1222 and 1479); modifications in April 2005 updated independence definitions (e.g., audit partner rotation shall not be longer than five years). - Limitations on non-audit services by auditing firms: bookkeeping, design and implementation of financial information systems, appraisal or valuation services, internal audit services, and some legal services. ### Formal powers of supervisors (BCP 22) - The new Circular Única de Bancos establishes an early warning system. - CNBV rates banks’ capital levels in five categories on its website, aligned with BOM and SHCP standards. - The system was tested in 2004 when a bank’s capital fell below authorized level due to derivatives trading. - In November 2004, CNBV issued “Reglas de Caracter General a que se refiere el Artículo 134 Bis de la Ley de Instituciones de Crédito,” providing the PCA framework. ### Cross-border banking (BCPs 23–25) - CNBV supervises Mexican subsidiaries, agencies, and branches abroad via review of strategic plans under the Circular Única de Bancos. - Difficulty exists with structures set up by Mexican individuals forming parallel banks in other jurisdictions where CNBV has no authority. - When foreign financial institution is owned by a bank holding company, CNBV can request financial information. - Mexican banks perform data-processing functions for foreign subsidiaries; CNBV has authority to review these processes, but outsourcing outside Mexico may create future supervisory problems. - International cooperation: - CNBV maintains dialogue with home country supervisors of foreign banks in Mexico; supervisors from the U.S., Canada, UK, and Spain regularly visit annually. - Joint examinations with foreign supervisors are permitted with advance notice and a prior MOU. - CNBV has signed bilateral MOUs with 12 foreign bank regulatory agencies and is negotiating six more (primarily Central American authorities). - CNBV has signed 32 MOUs with foreign securities regulatory agencies. ### Recommended Action Plan (as presented) - Objectives, Autonomy, Powers, and Resources (BCP 1): - Make the CNBV a single autonomous supervisory agency with power to control all activities from licensing through demise of a financial institution including all nonbank subsidiaries. - Investment Criteria (BCP 5): - CNBV should have formal authority to approve investments by banking institutions; currently approval authority is shared with the SHCP. - Connected Lending (BCP 10): - CNBV should have authority to make discretionary judgments about connections between banks and other parties, especially where concealed. - Consider limits to shareholders as a share of shareholder’s investment rather than Tier 1 capital. - Consolidated Supervision (BCP 20): - CNBV should have full power to license or revoke licenses of any bank, nonbank subsidiary, or financial group and demand full consolidated disclosure with concurrence of CNBV’s Board. - Legislation must authorize CNBV to approve investments or outsourcing of critical functions and to examine institutions enterprise-wide. - Globally Consolidated Supervision (BCP 23): - Continue formulating legislation to allow CNBV to supervise financial or nonfinancial institutions set up by Mexican individuals that form parallel banks abroad. - CNBV should have supervisory authority to review data-processing and outsourced functions regardless of jurisdiction. ### Authorities’ response - Financial authorities cooperated with the World Bank and the IMF during the 2006 FSAP in Mexico; assessment considered highly professional. - Authorities consider the report a fair appraisal of CNBV’s implementation of the Basel Core Principles. - Authorities will continue efforts to strengthen prudential framework and incorporate international best practices, with the broad challenge remaining the achievement of autonomous status for the CNBV. - Impending reallocation of powers among financial authorities is seen as significant; continued legislative proposals are needed to ensure an independent supervisor in accordance with international best practices. ### IOSCO assessment and securities regulatory structure (summary) - The assessment updates the 2001 IOSCO assessment of the CNBV and other regulatory agencies/SROs, following IOSCO Assessment Methodology Guidelines (December 2003). - CNBV governance and appointments: - CNBV created in 1995; headed by a 10-member Board of Governors. - Five members (including President) appointed by SHCP, three appointed by BOM, CONSAR and CNSF each appoint one member. - SHCP retains broad supervisory responsibilities over CNBV: sets annual budget, final authority over legal interpretations, final authority over referral to Ministry of Justice for criminal action. - SHCP has final responsibility for approval of exchange licenses, derivative firms and banks, with a duty to consult CNBV and BOM; until 2005 it had similar responsibility for licensing securities firms. - BOM has final authority over government debt market matters and extension of credit. - Regulatory review and consumer protection: - COFEMER (created 2001) has advisory responsibility over governmental regulations; all CNBV regulations are subject to COFEMER review and public comment process. - CONDUSEF acts as an informal ombudsman for consumer disputes without enforcement authority. - Self-regulatory organizations (SROs): - Designated SROs include: the Bolsa, MexDer, AMIB, AMAII, INDEVAL (and its CCV), and ASIGNA. - Bolsa’s surveillance is limited: staff monitor trading, impose trading halts when a stock moves more than 15 percent in a day or when possible nondisclosure; Bolsa reviews prospectuses with CNBV but cannot compel testimony, conduct investigations, or take disciplinary actions—suspicious activities are referred to CNBV. - MexDer performs analogous functions in the futures market. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06350.pdf* ### 101. AMIB conducts licensing exams for employees of securities firms, mutual funds, ### _cr06350 - 101. AMIB conducts licensing exams for employees of securities firms, mutual funds, ### Self-regulatory organizations, market infrastructure, and CNBV oversight - AMIB conducts licensing exams for employees of securities firms, mutual funds, and bank employees who are involved in selling securities. - AMIB adopts regulations for securities firms concerning internal operations, such as compliance and risk management functions and receives and monitors member firms compliance with CNBV capital requirements. - AMIB has the authority to fine its members for failure to file or for filing incorrectly, required reports. - The CNBV maintains oversight of those sectors in addition to the powers enjoyed by SROs. - AMAII is a voluntary organization. It has 25 members (out of 45 registered independent advisers) who have agreed to be inspected periodically. - AMAII has retained a large accounting firm to perform eight inspections annually. - INDEVAL, the securities depository, performs some self-regulatory functions but has no disciplinary authority. - INDEVAL owns and operates the CCV, the central counterparty for equities clearance and settlement. - The CNBV audits INDEVAL and CCV regularly. ### Mexican legal framework for securities markets - The 1934 Mexican Corporation Law (LSM) and the New 2005 Securities Market Law (LMV) form the framework for securities regulation. - In 2001, five limitations were identified as impeding IOSCO’s core securities regulation objectives: - (a) the scope of the CNBV’s enforcement authority, its ability to publicize its actions and thereby promote investor confidence in the securities markets and deter misconduct by others; - (b) the need to promote market efficiency and reduced regulatory overhead by introducing greater flexibility in the regulatory structure; - (c) the need to enhance public confidence in regulation by adopting procedures to ensure public input into the regulatory process and to enhance procedural due process in the disciplinary process; - (d) the need to enhance minority shareholder rights through improved corporate governance standards and easier access to the courts to protect these rights; and - (e) the difficulty in obtaining assistance from overseas regulators when pursuing investigations of possible Mexican securities law violations due to an inability to provide reciprocal assistance to foreign regulators because of Mexican bank secrecy laws. - Congressional reforms were enacted to address these limitations: - Expanded CNBV authority to conduct investigations and to publicly disclose disciplinary actions. - Authority to share information with other government regulators and with foreign regulators. - Authority to enact secondary regulations to protect minority shareholder rights and to shift from a merit-based to a disclosure-based system of securities offering review. - Mandated changes in public listed company governance: creation of an audit subcommittee of a company’s Board of Directors, mandatory minimum percentage of independent directors on a company Board, specific rights of representation for minority shareholders with 10 percent holdings and the right to initiate private litigation by holders of 20 percent interests. - Amendments to mutual fund law to require separation of certain operational functions to expand competition and increase fund investor protections. ### CNBV operational changes and disclosure practices - After the 2001 reforms, the CNBV: - Updated and codified many discrete secondary regulations into unified regulations. - Became a signatory to the IOSCO multilateral agreement on information sharing. - Began publicizing basic information on completed disciplinary actions. - Began systematically soliciting public and industry input in the development of secondary regulations, through informal communication and formal publication for comment of regulatory proposals through COFEMER’s website. - Adopted a secondary regulation on tender offers requiring price equality for different classes of securities, even those with different voting rights. ### 2005 New Securities Market Law (LMV) — scope and effects - The new LMV, enacted in December 2005 and effective in June 2006, brought significant changes grouped into: - (a) further expansion of the CNBV’s authority; - (b) substantial changes in the corporate governance of publicly listed companies; - (c) creation of two new types of corporate entities to facilitate SME capital raising and transition to public listed company status. - Key regulatory and enforcement changes: - Authority to license securities firms transferred from the SHCP to the CNBV. - CNBV may now issue limited-function brokerage licenses. - CNBV authority to appoint special administrators to manage failing securities firms and, if necessary, revoke a firm’s license. - Additional enforcement powers: investigate and sanction attorneys, auditing firms and external auditors, and corporate officers and Board members responsible for securities law violations; refer misconduct to the Ministry of Justice for criminal action. - Clarification of prohibitions regarding insider trading and manipulative activities in the derivatives market. ### Corporate governance reforms (2001 amendments and 2005 expansions) - 2001 amendments (responsibilities designed to increase minority investor rights): - Boards of listed companies required to include at least 25 percent of independent directors. - Audit subcommittee required, composed of a majority of independent directors and chaired by an independent director. - Companies required to have a comisario, an internal reviewer and certifier of the external audit report. - Shareholders controlling 10 percent of company stock given right to appoint a second comisario. - Comisario required to deliver a report at each annual general meeting on accuracy, adequacy, and rationality of financial and other information presented to the Board, including an opinion on whether financial statements were prepared in accordance with Mexican accounting standards. - Investors with 20 percent of a company stock authorized to bring a private lawsuit against a company for violation of Mexican law. - CNBV given authority to adopt a secondary regulation on tender offers. - December 2005 reforms further expanded minority protections: - CNBV secondary regulation on tender offers enacted in 2003 was codified into law. - Audit committees required to be composed of 100 percent independent directors. - Creation of the title of company Director General (comparable to an American CEO) with explicit delineation of CEO and Board responsibilities. - CEO made responsible for the company’s records and accounting processes; Board, through the Audit Committee, given responsibility for review of the external audit and duties previously assigned to the comisario (comisario function eliminated for publicly listed companies). - Creation of the concept of a single economic unit; Board’s responsibilities extended to any company subsidiary or affiliate that is part of a company single economic unit. - Audit committee granted power to require appearances by all company employees to discuss accounting and auditing questions, including employees of these subsidiaries. - Fiduciary duties and enforcement: - The 2005 law specifies that company Board members and officers have fiduciary duties to the company and its shareholders, a duty of due care and a duty of loyalty. - Board members are specifically prohibited from: (a) authorizing related party transactions without full disclosure and formal actions; (b) voting if a conflict of interest exists; and (c) using privileged information and taking advantage of company assets or corporate activities without authorization. They must also disclose any conflicts. - Violation of these duties can be punished in civil litigation brought by the company or a minority shareholder owning 5 percent (a reduction from the 2001 law). - Private derivative litigation remains rare. A private action can be resolved through a negotiated settlement, with explicit approval of the company Board. - The CNBV can bring an action under the law to suspend or bar an officer or a director for up to five years. ### New corporate vehicles: SAPI and SAPI B - The 2005 New Securities Market Law created two new corporate vehicles, SAPI and SAPI B corporations, to facilitate capital raising and transition to public listing for small and medium private companies. - SAPI features: - Can issue securities to institutional investors and qualified investors in private transactions without having to register with the CNBV or on the National Corporate Registry. - No disclosure obligations. - Not subject to the corporate governance and auditing requirements that apply to listed companies. - No restrictions on types of securities it may offer or special features it can attach to a security. - SAPI B features: - A three-year transitional status for a SAPI interested in becoming a listed public company. - During the three-year period a SAPI B will have special listing status on the Bolsa while it implements a plan to fully conform to the legal obligations of listed companies. ### Recommended Action Plan to Improve Implementation of the IOSCO Objectives and Principles (selected items from Table 5) - Principles Relating to the Regulator (P 1–5) - Enhance CNBV’s budgetary independence. SHCP control over the CNBV operating budget has resulted in an annual budgets typically 10-20 percent less than the regulatory fees collected. - Create fixed-term appointments for Board members and reduce the number of areas requiring formal consultation with other governmental entities. - Additional transparency and due process protection in the CNBV disciplinary process would be beneficial. - Principles of Self-Regulation (P 6–7) - The multiplicity of governmental agencies involved in the oversight of SROs has impeded the futures market’s ability to innovate and expand. - Principles for the Enforcement of Securities Regulation (P 8–10) - CNBV should continue to develop its enforcement program and utilize enhanced powers. - It would be beneficial if the CNBV had legal authority to issue orders requiring remedial or corrective action and some ability to require persons or entities to reimburse persons who suffered losses from violations. - CNBV should utilize its authority to publicize its activities to inform the investing public and educate regulated persons about improper conduct. - Principles for Cooperation in Regulation (P 11–13) - CNBV should continue efforts to promote and enhance information sharing among Mexican financial regulators and with foreign regulators. - Principles for Issuers (P 14–16) - CNBV should emphasize analysis of financial statements and accounting issues in its disclosure review program. - Enact secondary regulations to implement the SAPI and SAPI B provisions of the 2005 reform law. - Monitor the impact of tender offer restrictions on share price to ensure they do not unintentionally become a statutory poison pill. - CNBV should assist the private sector in identifying and properly training independent directors and educating them on their responsibilities under the 2005 reforms. - The IMCP should review and upgrade Mexican auditing standards in line with International Standards on Audit (ISA). - Principles for Collective Investment Schemes (P 17–20) - CNBV should continue moving toward disclosure regulation of mutual funds and reexamine the need for its categorization system and restrictions on fund manager investment strategies. - Finalize secondary regulations to enable mutual funds to invest in derivatives and eliminate restrictions on stock lending, short selling, and repo transactions. - Review reliance on price valuators and consider secondary regulation on alternative pricing methodology and usage occasions. - CNBV should resolve with the insurance regulator the problem of insurance companies marketing insurance products inaccurately described as mutual funds. - Principles for Market Intermediaries (P 21–24) - CNBV should complete its secondary regulation on licensing of limited function securities firms. - AMIB should be encouraged to develop tests for certification of compliance and risk management officers at firms. - CNBV should continue efforts to monitor risk management on a consolidated basis. - Principles for the Secondary Market (P 25–30) - The futures market would benefit from a streamlined oversight system that does not unduly delay development and offering of new products. - The goals and objectives of the Mercado Global should be examined, including costs from higher transaction costs and lost tax revenue. - Improve price transparency in the debt market by expanding access to quotations and timely access to last sale reporting information on thinly traded debt issues. ### Authorities’ response - The financial authorities cooperated with the World Bank and the International Monetary Fund during the 2006 Financial Sector Assessment Program carried out in Mexico. - Authorities consider the assessment was carried out in a highly professional manner. - They consider the report provides an adequate evaluation of CNBV implementation of the IOSCO Principles. - Authorities expressed confidence that the New Securities Market law will constitute a very sound framework for continuing development of the securities markets. *Excerpt from _cr06350 - 101.* ### 119. As in the case of banking, the broad challenge ahead remains the achievement of an ### _cr06350 - 119. As in the case of banking, the broad challenge ahead remains the achievement of an ### Autonomous status for the CNBV - As in the case of banking, the broad challenge ahead remains the achievement of an autonomous status for the CNBV. - Although a significant reallocation of powers among financial authorities has already taken place in the securities field, efforts must be maintained to bring proposals to the legislative branch that will ensure an independent supervisor in accordance with international best practices. ### Key milestones in the reform of the financial sector (2001-2006) - Credit Institutions Law and Financial Groups Law. Aimed at channeling a greater proportion of national savings through the financial system; fostering long-term savings; strengthening banking regulation and supervision; promoting transparency and competitiveness; fostering new financial products and services; and strengthening the credit institutions’ corporate governance; and broadening the range of services offered. - Amendments to the Rules of Capitalization Requirements for Multiple Banking Institutions and Development Banks. Aimed at advancing the convergence between banking regulation and international standards. - Amendments to the Miscellany on Credit Collateral. Aimed at promoting bank lending by reducing transaction costs; widening the options to secure credit transactions; granting greater judicial certainty to creditors and borrowers; and promoting an orderly and sustainable recovery of defaulted bank loans. - Credit Information Institutions Law. Aimed at regulating the establishment and operation of credit information societies; and ensuring a proper access to credit information, while respecting valid privacy concerns. - Credit Institutions Law. Established a prompt corrective regime consistent with international best practices. - Law of Transparency and Ordering of Financial Services. Regulates commission fees, interbanking fees and other aspects related with the provision of financial services; prohibits discriminatory practices between credit institutions and between users; establishes transparency requirements in contracts and check account balances, credit and debit cards; foresees transparency mechanisms to allow clients of credit institutions to know the carried out transactions and their fees; and establishes sanctions for breaches of the law. - Organic Law of the Federal Mortgage Society. Aimed at increasing the housing supply for wage earners and other workers; promoting the construction and acquisition of housing, preferably low-income; and fostering mortgage securitization and increasing credit supply for housing construction and acquisition. - Popular Savings and Credit Law and Organic Law of the Bank of National Savings and Financial Services. Strengthened the institutional and regulatory framework of popular savings and credit activities, increasing access of low-income sectors and small enterprises to the formal financial sector; established the conditions to foster the development of a popular savings and credit system; created the Bank of National Savings and Financial Services, which offers training and consulting services to popular savings and credit entities, and promotes cost reduction through centralized provision of services subject to economies of scale. - Organic Law of the Financiera Rural. Aimed at supporting the development of agriculture, forestry, fishing and other rural activities. The New Financiera Rural replaced the former Rural Credit Bank (BANRURAL). Financiera Rural does not take deposits from or issue debt to the public, it is financed by the government through the budget with all appropriations, allocations, financing and guarantees properly and explicitly accounted for in the budget and approved by congress. - Amendments to the Securities Market Law (2001). Aimed at promoting the development of the securities market by making it more transparent, efficient and accessible. The 2001 amendments enhanced information, disclosure, minority stockholders rights; improved corporate governance practices; introduced a new versatile instrument (certificado bursatil), a security note that can be issued by private and public debtors; incorporated the central counterparty (lender and borrower rights and obligations in securities transactions) to the market structure, reducing systemic risk in the securities market; introduced a consolidated regime applicable to public companies; redefined the functions and responsibilities within the corporate structure; introduced audit and corporate governance committees with independent Board members; included clear mandates and fiduciary duties for Board members, managers and external auditors, and further improved minority shareholder rights. It also it promoted access to abroad securities market to small- and medium-size firms through new corporate vehicles. - Mutual Fund Law. Aimed at facilitating access to the stock and debt market by a wider range of investors. It improved mutual funds corporate governance practices; allowed for a mutual fund to change from one mutual fund operator to another, to promote competition and to reduce investment manipulations not associated to maximizing the investors’ returns; allowed for a more flexible investment regime; and prohibited banks and investment banks to act as mutual fund operators but allowed them to carry out this function by establishing a subsidiary. - Amendments to the Law of Mutual Insurance Institutions and Associations and the Federal Sureties Institutions Law. Aimed at strengthening the institutional and regulatory framework for the activities of insurance institutions; increasing the efficiency of insurance institutions’ operations; consolidating the insurance sector’s legal framework with that in place for the financial sector; and developing best corporate practices among intermediaries. Recently, a new amendment introduced the Mortgage Credit Insurance (Seguros de Crédito a la Vivienda) and Financial Warranty Insurance (Seguros de Garantía Financiera). - Modernization of the legal framework that applies for Sofoles, leasing and factoring companies. Aimed at enhancing competition in the credit market, reducing administrative costs, and fostering the legal framework that applies to financial leasing, factoring and credit. This reform included the deregulation of leasing and factoring activities. - Amendments to the Income Tax Law. Established a fiscal regime that allows for the development of two investment vehicles, the FIBRAS (Fideicomiso de Infraestructura y Bienes Raíces), a vehicle similar to the Real Estate Investment Trusts in the U.S., and private equity vehicles. - Amendments and Additions to the Retirement Savings System Law. Opened the possibility for more workers to access the benefits of the New Pension System, including workers not registered in the social security institute (workers affiliated with the social security system for public sector employees, state and municipal governments, and public universities or working independently); allowed complementary contributions for retirement for all workers; and allowed investing, up to a limit of 20 percent, in foreign securities. - Payment System Reforms. Revamped the legal framework by enacting a Payment Systems Law, in order to ensure payment finality and improve the execution of collateral and the oversight powers of the BOM; eliminated remaining credit risks in the large value payment systems, in line with the BIS CPSIPS; improved the quality of collateral associated with BOM’s credit; and consolidated the intraday credit into one payment system (from the previous three systems). - New Securities Market Law (2005). Established a regulatory framework in line with international standards covering several aspects of the market, such as disclosure of information to investors, minority rights and sound corporate governance. This framework supports the access of mid-sized corporations into the securities market, consolidates the rules applicable to issuers, in order to improve their organization and operations, through modern corporate structures and revamped liabilities. The new law updates the legal framework applicable to securities firms and those financial entities that participate in this sector, such as securities depository entities and central counterparties, among others. The law also seeks to update the regime of criminal offences and redefine the powers of financial authorities in order to make their functioning more efficient. The CNBV is enabled to inform to the general public the existence of inquiries and sanctions imposed. ### Detailed FSAP update recommendations — Short Term (selected) - Financial stability and derivatives markets - Strengthen monitoring of credit risks associated with consumer and mortgage lending. - Continue to strengthen the monitoring of banks’ liquidity and contagion risks. - Better coordinate the design of stress scenarios within the BOM, between the CNBV and the SHCP, and among supervisors and banks, to improve the analysis of financial system-macro shocks linkages. - Develop continuity plans in conjunction with the private sector. - Publish the BOM’s stability report. - Allow other institutions to borrow securities from the BOM and allow pension funds and mutual funds to loan securities to make repo markets more liquid. - Continue attracting participants to MexDer, including by allowing insurance companies to access OTC derivatives market, for hedging purposes, having in place an appropriate regulatory framework for their use to ensure that risks arising from these transactions are acceptable. - Financing of the private sector and competition in credit markets - Include in the credit bureau the performance record of SMEs whose loans are currently recorded as invoice discounting with large corporations in bank balance sheets. - To avoid conflict of interest, credit bureaus should not be owned by users of their services (e.g., commercial banks). - Promote greater competition across different credit providers through the development and disclosure of standardized interest rate indicators by type of loan product and by provider. - Evaluate the effectiveness of development bank lending and partial guarantee programs for SMEs. - Development and competition in retail payments systems - Promote access of households to the banking sector by enlarging the scope of present payroll schemes, improving the possibilities of bill payment services, and promoting competition on fees and services. - Foster consumer mobility by enlarging employee freedom to choose banks and removing present limitation under existing payroll schemes. - Promote the use of common products (e.g., direct debits and payroll schemes) via CECOBAN. - Ensure interoperability and promote economies of scale. - Organizational arrangements for financial system policy, regulation, and supervision - Realign regulatory functions by shifting most regulatory powers from the SHCP to the Commissions, following the precedent established for securities regulation by the New Securities Markets Law. - Further strengthen coordination among regulatory agencies through strong memoranda of understanding that set out clear responsibilities and accountabilities. - Pensions - Individualize ranking of funds in individual statements on the basis of absolute peso amount of yearly fees and the amount of fees the worker would have paid had he/she been in another AFORE. - Gradually move to promoting competition on net returns. - Consider further centralizing in the PROCESAR those AFORE functions (e.g., record keeping and back-office account maintenance and management) that are subject to economies of scale. - Further discourage the use of fees on contributions and shift focus towards promoting competition on net (risk-adjusted) returns. - Disability insurance - Enhance transparency in choosing benefits under the old and new system by putting in place a comprehensive election system for disabled workers. - Clarify the IMSS’ solvency concerns in the line of disability insurance and ensure that the IMSS be indifferent to whether disabled workers choose benefits under the old or the new system. - Development banks - Establish a subsidy and guarantee bureau. - Further rationalize operations of development banks. - Housing finance - Establish plans for orderly consolidation of mortgage Sofoles once the SHF stops second-tier lending. - Maintain the 2009 sunset date for SHF second-tier lending to fund middle- and high-income housing. - Encourage FOVISSSTE to follow INFONAVIT by voluntarily accepting CNBV supervision. - Implement an integrated, centralized subsidy policy. - Foster the reduction of costs that hamper secondary housing markets. - IPAB issues - Seek a suitable formula to alleviate the financial condition of IPAB, including the transferring of IPAB’s debt to the federal government. - Consider market-discipline supporting measures for deposit insurance such as a reduction in coverage and the charging of risk-based premiums. - Establish an effective framework for the liquidation of banks and enable partial deposit transfers under P&As. - Introduce interagency contingency planning and develop internal protocols regarding emergency liquidity assistance. ### Detailed FSAP update recommendations — Medium to Long Term (selected) - Financing of the private sector and competition in credit markets - Set up the preconditions (especially improved information) for a local credit derivatives market. - Explore potential simplifications of the regulatory environment related to SME lending without undermining prudence. - Improve information collection to facilitate the analysis of private sector financing and competition in credit markets (identification and quantification of unofficial domestic financing sources, more detailed information on bank revenues by loan product, and analysis of the relationship between developments in the real sector and financing patterns). - Strengthen state registries of commerce and property and reduce their user cost (notaries). - Strengthen and harmonize the enforcement of creditor rights across different legal jurisdictions. - Pensions - Continue to reform governance and ownership of PROCESAR and then further concentrate in it those AFORE functions that are subject to economies of scale while promoting competition among AFOREs in the retail function of asset management. - Consider transferring the contributions to INFONAVIT to the RCV account. - As the market for annuities grows, consider issuing zero coupon CPI-indexed government bonds as well as longevity bonds to facilitate asset-liability matching of companies of life insurance companies. - Allow specialized annuity providers to use OTC derivatives to hedge risks, subject to appropriate risk management standards. - Consider modifying duration matching requirements for annuity providers by introducing key rate duration metrics (to enable hedging against nonparallel shifts in the yield curve). - Consider relaxing the inflation matching requirements for short term liabilities. - Streamline regulations in order to minimize inconsistencies and barriers to innovation and competition. - Development banks - Further consolidate the system of development banks. - Redefine mandates of development banks, where needed, and continue with reforms to gradually convert development banks into development agencies. - Develop and implement indicators to better measure and reward performance of development banks in line with the redefinition of mandates and emergence of new instruments. - Organizational arrangements for financial system policy, regulation, and supervision - Establish full consolidated supervision of financial conglomerates. - Achieve political and budgetary autonomy of regulatory commissions. - Consider possible consolidation of regulatory commissions. ### Stress analysis for commercial banks — liquidity, contagion, and credit risk - Liquidity management and contagion analysis - The BOM classifies assets and liabilities by remaining maturity and computes each bank’s liquidity gap at the 8- and 30-day time intervals. - Under “a normal scenario,” the BOM assumes that the withdrawal of deposits each bank faces in a month is equal to the maximum drop in deposits it has experienced during the last nine years, while (based on internal analysis of the stability of each bank deposits) the rest of the deposits are assumed to be fairly stable. - The stress scenario focuses on an idiosyncratic run of large depositors (i.e., those with balances exceeding the insured limit). Specifically, under a stress scenario, all large demand deposits are assumed to be withdrawn within 30 days, while time deposits are assumed to be held to maturity. - The BOM’s estimates suggest an adequate and stable liquidity buffer, even under the noted stress scenario (Figure 9). - Financial soundness indicators show the proportion of liquid assets to total assets, and to short-term liabilities continues to be at high levels and stable. - The BOM carries out contagion analysis regularly by constructing a matrix of bilateral daily bank exposures (net loans, securities, credit lines, foreign exchange transactions and net positions in OTC forwards) and tracing the impact of a hypothetical failure of each bank on the rest of the system, assuming different recovery rates. - A bank failure is seen as leading to contagion when it triggers the fall in the capital adequacy ratio (CAR) of one or more institutions below 4 percent. - Based on daily data for 2005, the degree of contagion in the banking sector did not appear systemic given that a relatively small number of institutions, representing a small share of the sector’s assets, would end up with a CAR below 4 percent. - Supplementary information on stress tests for commercial banks — credit risk - The assessment of credit risk by BOM was based on a forward-looking methodology developed in house. - The analysis focused on shocks to default rates of the corporate sector across activities: agriculture; commerce; construction; communications and transportation; services; and industrial activity. - Relying on data from Servicio Nacional de Información de Créditos Bancarios (SENICREB), default rates for these sectors were estimated for December 2005. - These default rates were stressed proportionally, based on the default rates observed during the 1994–96 crisis, for all economic sectors and within each bank in a cumulative fashion for 18 consecutive months. - The stressed corporate default rates were used to estimate default probabilities and pair-wise correlations for all economic sectors within a bank. - A one-month horizon credit VAR was then calculated for each of these eighteen months. - Assuming the portfolio loss distribution can be characterized by its mean and its variance and that the vector of default probabilities and the default co-variance matrix are given exogenously, the value at risk of the loan portfolio delivers the expected and unexpected losses. - Analysis of the CAR computed considering the six month cumulative expected losses (to match the peak of the 1994 crisis) shows that at the peak of the stress event (six months after the initial stress trigger), two small banks could see their CAR falling under the regulatory 8 percent. - For these stress tests, no specific assumptions are made regarding exchange rate, interest rates or stock market value changes; the focus is on replicating proportional probabilities of default. *Source: IMF FSAP Update text as provided in the content unit.* ### 123. Additional stress tests confirm that the system is resilient to market risk shocks. ### 123. Additional stress tests confirm that the system is resilient to market risk shocks. ### Market-risk stress testing: peer scenario and results - Peer scenario design: - Shocks combined from historical volatility of peer countries (Bulgaria, Croatia, Malaysia, Poland, South Africa, and Tunisia) with similar S&P sovereign debt ratings (BBB-, BBB and BBB+). - Shocks included: - a 180 EMBI+ spread, - a 30 percent depreciation in the exchange rate, - an increase of 600 bp in the short term (Cete 28) interest rate, - a drop in the U.S. dollar-peso exchange rate by 30 percent. - Objective: assess sensitivity of banking sector trading books to valuation changes from simultaneous shocks and track resulting impact on the system’s CAR. - Key result: - Under the peer scenario, the system’s CAR would go down to about 12.9 percent. - Table 7 (selected figures): - Commercial banks: CAR Dec 2005 = 14.31; “Peer” scenario = 12.89. - Banca Múltiple I: CAR Dec 2005 = 14.16; “Peer” scenario = 12.56. - Banca Múltiple II: CAR Dec 2005 = 14.35; “Peer” scenario = 13.87. ### Recommendations to strengthen stability analysis - Improve coordination: - Increase coordination between the research and credit risk units of BOM. - Increase coordination between the CNBV and the treasury’s macro unit in the design of top-down approaches. - Cross-check stress-test results of BOM and CNBV by coordinating with commercial banks on a specific set of shocks and scenarios and requesting banks’ results using their own methodologies. - Expand credit-risk analysis: - Although corporate credit risk analysis is well developed, enhance analysis of credit risk from consumer and mortgage lending. - Context and rationale: - Consumer and mortgage credit represent on average around 15 percent of commercial banks’ assets. - Household indebtedness to household disposable income = 17 percent. - Despite current moderate shares, recent fast growth in these credit categories warrants closer analysis. ### Insurance sector stress testing and outcomes - CNSF tests and scenarios: - Forward-looking dynamic solvency testing models were used. - Individual shocks/scenarios included: - No premium growth in nominal terms (premium shock). - Interest rate drop by 190 basis points in peso rates, reductions of 114 basis points in UDI rates and 114 basis points in the reference foreign interest rate. - Premiums shock plus loss rate increases. - Premium shock plus interest rate shock plus loss rate shock (combined scenario). - Key results: - Under the combined scenario, the number of insurance institutions with a solvency ratio below 1 percent increases from four as of December 2005 to 11. - These 11 institutions represent only about 7 percent of the market solvency requirement. - Table 10 (selected figures): - Solvency ratio as of December 2005: number of companies with solvency ratio of more than 1.5 = 43. - Solvency ratio after shocks (combined scenario): number of companies below 1 = 11. - Percentage of insurance companies below solvency ratio of 1: baseline and shocks = 6.7, 13.3, 15, 16.7, 18.3. - Capital insufficiency as percentage of market solvency requirement: 1.3, 2.7, 3.4, 5.7, 7.3. - Notes on scenario definitions: - Premiums shock: No premium growth in nominal terms. - Interest rate shock: Premiums shock + Interest rate fall to Mexican pesos (5.5 percent), foreign currency (4.0 percent), and indexed currency (3.5 percent). - Loss rate shock: Premiums shock + Loss rate increases (Life 10 percent; Accidents and Health 13 percent; Property & Casualty 20 percent; Automobile 5 percent; Catastrophic risks 10 percent). - Combined scenario: Premiums shock + Interest rate shock + Loss rate shock. ### Derivatives exchange stress testing and contingency arrangements (MexDer / ASIGNA) - MexDer stress scenario: - Depreciation of the peso-U.S. dollar exchange rate of 100 percent. - Drop in the IPC of 15 percent. - Increase in Cete 91 by 360 basis points. - Increase in the TIIE of 270 basis points. - MexDer’s finding: - Assuming different levels of default on this loss, resources in each clearing trust in default and those belonging to the same financial group would have sufficed to stem the problem without ASIGNA having to mutualize any of the losses or to use its own equity. - Conclusion: MexDer’s five-step contingency plan appears adequate. - MexDer / ASIGNA contingency plan steps in case of default: - (a) drawing from the resources of each of the clearing trusts in default; - (b) drawing on the resources of other clearing trusts; - (c) ASIGNA using the resources of the clearing fund; - (d) ASIGNA requiring the mutualization of the loss using the resources of the rest of the clearing trusts and their minimum equity; - (e) ASIGNA contributing from its own equity, if necessary. ### Payments and securities settlement: institutional changes and progress - Legal and institutional reforms: - Payment System Law implemented in December 2002. - Law regulates: (a) finality of payments in systemically important payment and settlement systems; (b) protection of netting schemes and collateral arrangements to ensure timely settlement and facilitate liquidity management; (c) oversight power of the BOM. - BOM issued regulations supporting check truncation, the use of electronic signatures, and development/implementation of new payment instruments. - Retail payments infrastructure: - Clearing and settlement of checks and EFTs with deferred value date centralized in CECOBAN (ACH owned by banking sector). - Check centralization enabled by imaging and check truncation is completed; CECOBAN expanding EFT activities, especially credit transfers. - Checks remain the most used noncash payment instrument with a market share of 50 percent. - Debit and credit card transactions are growing rapidly from a relatively low level; most debit cards are used only to withdraw cash from ATMs. - Card payments and interbank ATM withdrawals are cleared and settled via two switches: e-GLOBAL (owned by the two largest banks) and PROSA (owned by most other banks). - Overall observation: banking sector reaches only a relatively small part of the household sector and retail payment infrastructure remains underdeveloped compared with regional peers. - Large-value payment systems: - SPEI replaced SPEUA in 2005. - SPEUA used mutual credit lines and had an explicit BOM guarantee to settle clearing results at end of day in SIAC, even if that resulted in uncollateralized overdrafts. - SPEI: no credit lines are granted by other participants or BOM; no overdrafts allowed. Participant banks must manage liquidity by transferring sufficient liquidity from BOM accounts at opening or during the day via an efficient liquidity bridge between SIAC and SPEI. - SPEI combines features of a real time gross settlement system with liquidity savings from multilateral netting; central for settlement of large-value and urgent client-to-client payments. - SIAC mainly used for monetary policy transactions, intraday repos for liquidity management, withdrawal of banknotes, and government payments. - Securities settlement and clearing: - Central Counterparty (CCP) established for Stock Exchange equity transactions; CCP settles in SIDV. - MexDer derivatives cleared and settled via ASIGNA, which acts as CCP. - A redesign of the SIDV is envisaged to enlarge operational reliability. - Progress on CPSIPS deficiencies identified in 2001: - Main deficiencies in 2001 FSAP were related to the legal basis and management of credit and liquidity risks. - The 2006 update focused on measures taken to address previous recommendations; the authorities provided a note explaining follow-up on 2001 FSAP recommendations. *Source: _cr06350 - 123. Additional stress tests confirm that the system is resilient to market risk shocks.* ### 138. Finality of payments. Since December 2002, finality of payments in a systemically ### _cr06350 - 138. Finality of payments. Since December 2002, finality of payments in a systemically ### Finality of payments - Since December 2002, finality of payments in a systemically important payment system (SIPS) is regulated in chapter II of the Payment System Law. - All payments in SIPS are final and payment orders accepted by the systems are irreversible. - Resolutions from judicial or administrative authorities (including those derived from the application of the Bankruptcy Law) to prohibit, suspend, or limit payments through a SIPS will only become effective one day after the SIPS administrator has been notified. - Payment orders sent in on the day the notification is received will be executed normally as long as there is sufficient liquidity in the account of the involved participant. - In case of fraud or unfair preferential treatment of certain creditors, payments during the suspect period can be claimed back, but only outside the system; within this context the judicial authorities cannot unwind payments settled in a SIPS. - Bank accounts at the BOM cannot be seized by judicial or administrative authorities. - Note on prior practice: In SPEUA, in case the participant was not able to redeem the uncollateralized overdraft three days in a row, the BOM could reclaim some of the losses from the surviving participants in proportion to the bilateral credit lines granted to the defaulted participant. However, the loss sharing in SPEUA did not foresee multiple defaults; in that case the risk had to be borne solely by the BOM. ### Legal basis for collateral arrangements - The BOM has improved its collateral arrangements substantially. - The BOM now uses two instruments to grant overnight or intraday liquidity: pledge of DRMs and repos. - Overdrafts in current accounts or overnight credit are only allowed to banks that have pledged enough DRMs to cover both the principal amount and interest on the credit. - The pledge of both DRMs and repos to collateralize loans is fully recognized under Mexican laws. - In case of a default the BOM is allowed to compensate immediately its claim with the DRM obligation that has been pledged to secure the loan. - In repos, BOM is allowed to sell the underlying securities that have not been redeemed timely or not been rolled-over in a new repo operation. - Only DRMs can be used as collateral on BOM’s credit lines. - Improvements in collateral risk management include: - (a) using repos as the main instrument to collateralize the credit granted; - (b) renewing the list of eligible assets that could be used as collateral; - (c) setting adequate margins. - The new list of eligible collateral for repos contains only liquid paper; in the past explicitly non-marketable and illiquid paper was used by banks. - The use of repos has eliminated problems where liquidation of collateral could be cumbersome and time consuming. ### Legal basis for electronic signature and new payment instruments - Electronic transfers and the use of electronic signature are fully recognized under Mexican laws. - Check truncation and new payment instruments such as direct debits are fully endorsed under Mexican laws. ### Oversight responsibilities of the BOM - The Payment System Law of 2002 grants the BOM the power to oversee all systemically important payment and securities settlement systems. - The BOM designates each year which systems are systemically important. - At present the systems operated by the BOM itself (SIAC and SPEI) and SIDV, the system owned and operated by INDEVAL, are designated and fall within the scope of the oversight policy of the BOM. - The Payment Law grants the BOM instruments to carry out the oversight task, including the power to approve the internal rules of the designated systems, request information, and impose adjustment programs or sanction the system provider. ### Risk management, prior exposures, and reforms - The 2001 FSAP noted that the BOM was exposed to credit risks resulting from: - the explicit settlement guarantee in SPEUA; - the policy to allow uncollateralized overdrafts in the framework of credit auctions, the buying of government securities in the primary market, the withdrawal of banknotes and the payment of fees and commissions to the BOM; - inadequately collateralized credit lines. - Reforms implemented: - Settlement guarantees and uncollateralized credit lines: - The explicit settlement guarantee was eliminated with the replacement of SPEUA by SPEI. - No overdrafts are allowed in SPEI; participants needing liquidity to settle payment obligations must conduct an intraday repo with the BOM and transfer obtained funds via existing liquidity bridges to their accounts in SPEI. - Credit lines in SIDV were eliminated and overdrafts are no longer allowed in the context of credit auctions and the issuing of government bonds. - Improvement of collateral risk management (see prior section). - Remaining exposures: - Some less significant credit exposure still exists in the schemes for determining the interbank reference rates (TIIE, Tasa de Interés Interbancaria de Equilibrio) and the cash withdrawal process, because not all uncollateralized overdrafts are eliminated. - Modifications to have full collateralization in these schemes will come into effect by mid-2006. ### Key factual points and dates - December 2002: Finality of payments in SIPS regulated in chapter II of the Payment System Law. - One day: Delay after notification to SIPS administrator before judicial/administrative resolutions become effective. - Three days: In SPEUA, failure to redeem uncollateralized overdraft three days in a row triggered potential loss-recovery from surviving participants. - 2001 FSAP: Identified BOM’s credit risk exposures. - Payment System Law of 2002: Grants BOM oversight powers. - mid-2006: Target for modifications to achieve full collateralization in remaining schemes. *Source: _cr06350 - 138. Finality of payments. Since December 2002, finality of payments in a systemically (IMF document).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06350.pdf_