## _cr07167

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---

### Executive Summary — Major findings
- Mexico has made significant strides in increasing transparency and market discipline, and in strengthening the institutional framework for financial oversight since 2001.
- Reforms covered the legal framework, operational arrangements, information systems, transparency, and information disclosure.
- Noted achievements:
  - Significant modernization of the regulatory framework.
  - Improved inter-agency coordination and significant steps toward consolidated supervision.
  - Limitation of the previously unlimited guarantee on bank liabilities significantly boosted market discipline.
  - Regulatory and supervisory agencies are recognized as professional by market participants.
- Remaining shortcomings in the silo-based regulatory framework:
  - Need to strengthen consolidated supervision of financial groups.
  - Need to further clarify and enhance the roles and responsibilities of the Commissions in regulation of financial entities and markets.
  - Need to step up and better formalize inter-agency coordination.
  - Need to further de-link the regulatory and supervisory system from the political cycle.
  - Need to allow for a more agile approval process for new financial products.
  - Need to reduce regulatory compliance costs.
  - Need to enhance preparedness to deal with individual or systemic bank (and financial group) instability.
- Institutional gaps:
  - Need to strengthen SHCP’s role in designing medium and long term development strategies for the financial sector.
  - Assign responsibility for oversight of competition in the financial sector to a specific agency (BOM oversees competition in the payment system).

### Recommended reform strategy (high-level)
- Building block approach:
  - Move progressively toward full autonomy (operational, political, and budgetary) for the Commissions.
  - Strategically define timing and pace of changes consistent with political support and a robust legal framework.
  - Expect change to be managed over a period of at least 5-6 years.
  - Initially emphasize strengthening inter-agency coordination and enforcement capabilities within the existing legal framework.
  - Introduce legal reforms in subsequent phases.
  - Explore and implement opportunities to improve legal protection for regulators and supervisors.
  - Appoint a change champion to steer the process and present organizational change as a planned multi-year process.

### Proposed building blocks (sequenced reforms)
- First building block — improve supervisory operations and inter-agency coordination within the current legal framework:
  - Enhance Commissions’ boards via strategically designed board-level committees to focus on key issues, build trust, and strengthen inter-institutional links.
  - Leverage BOM board members whose tenure is not determined by political cycles.
  - Use MOUs signed by the Commissions to set clear responsibilities, accountabilities, and operational rules covering information exchange and supervisory decision making.
- Second building block — strengthen the Commissions’ operational autonomy with clear powers throughout the life cycle of financial institutions:
  - Legal reform required to realign powers and responsibilities for SHCP, CNBV and CNSF (following the model in place for pensions and securities markets).
  - Maintain Commissions’ status as decentralized agencies of SHCP while improving effectiveness and inter-agency incentive alignment.
- Third building block — move towards full consolidated supervision of financial conglomerates:
  - Reforms to:
    - give the regulator power to presume the existence of a group;
    - set capital requirements for the group in addition to individual entities;
    - define a lead supervisor able to oversee the holding company and individual entities;
    - eliminate barriers to exchange information;
    - allow for joint—rather than simultaneous—inspection visits;
    - simplify the regulatory framework for financial groups.
- Fourth building block — establish full autonomy for the Commissions (operational, political, and budgetary) through legal and constitutional reforms while establishing accountability:
  - Regulators should report directly to the highest political authority and be accountable to congress.
  - Annual reports should state goals, accomplishments and shortfalls, supervisory actions taken, the cost of bank failures (if any), and the financial condition of banks and other financial institutions.
  - A Finance Committee of Congress could analyze reports and summon the supervisor for hearings.

### Contingency planning and preparedness
- Recommend contingency planning exercises (“fire drills”) to prepare for possible failure of an individual institution, a systemically important financial group, or a systemic crisis.
- Proposed participants: a small number of high-level officials from SHCP, BOM, CNBV, CNSF, CONSAR, and IPAB.

---

### I. Overview — Objectives and focus
- Objectives:
  - Assess effectiveness of current organizational arrangement and distribution of functions across agencies in achieving effective prudential supervision and financial sector development.
  - Make recommendations to enhance authorities’ readiness to deal with current and foreseeable challenges.
- Focus:
  - Suitability of organizational arrangements and distribution of functions among policy makers (SHCP and BOM) and supervisors/regulators (CNBV and CNSF).
  - Central issues: autonomy (operational, political and budgetary), powers and functions, enforcement capabilities, and inter-institutional coordination.
- Basis:
  - Findings of the 2006 FSAP Update mission.
- Historical context:
  - 2001 problems: insufficient clarity and duplication of regulatory functions, fragmentation of supervisory powers, lack of formal autonomy of regulatory agencies, weak accountability and credibility, hampered enforcement.
  - CNBV and CNSF lacked budgetary and regulatory autonomy; SHCP held ultimate decision power in several areas.
  - Political interference, budgetary constraints, and need to accelerate risk-focused supervision and boost CNBV credibility after the 1994-1995 banking crisis were noted.
- 2006 update: substantive progress but further reforms needed, especially for consolidated supervision.

### II. Evolving Market Trends — Structure and concentration
- System composition and asset shares:
  - Universal banks account for 49 percent of financial system assets.
  - The three largest banking institutions account for close to 60 percent of the banking sector’s assets.
  - Foreign ownership represented over 80 percent of all banking assets as of May 2006.
  - Development banks, privately managed pension funds (AFOREs) and mutual funds account for 13, 13, and 11 percent, respectively, of financial system assets.
  - Insurance, non-bank banks (Sofoles) and other financial institutions account for the other 14 percent.
- Financial groups and conglomeration:
  - A large and growing portion of assets is managed by financial groups, mostly foreign-owned.
  - Groups increasingly managed by product and business lines rather than by legal entities.
  - Large multinational financial groups participate across banking, insurance, asset and fund management, brokerage, and pension fund administration.
- Sofoles and regulatory changes:
  - Sofoles do not take deposits; were licensed by SHCP (with CNBV opinion and BOM in foreign ownership cases).
  - Legal framework for Sofoles, Leasing Companies (Arrendadoras) and Factoring Houses (Casas de Factoraje) was modified on July 18, 2006: operations deregulated and given a seven-year lifespan.
  - Authorities no longer grant these licenses; activities can be freely carried out.
  - Law provides for non-regulated entities called Sofomes (Sociedad Financiera de Objeto Múltiple) which do not require licensing.
  - Mortgage Sofoles largely financed by SHF; Sofoles have started tapping the private market and some large mortgage Sofoles were acquired by private banks.
  - FIRA and NAFIN played important roles in development of agricultural- and SME-oriented Sofoles.

### III. Current Organizational Arrangements — Institutional roles and system weaknesses
- Institutional roles:
  - SHCP: sets regulatory policy, particularly license granting and removal for banks.
  - CNBV: supervisor and regulator for banks, other credit institutions, and securities markets.
  - BOM: regulatory responsibilities on money, foreign exchange, derivatives markets, payment systems, and financial operations/product characteristics.
  - CONSAR: oversees AFOREs.
  - CNSF: oversees insurance and surety companies.
  - Legal status of CNBV, CNSF and CONSAR: decentralized agencies—órganos desconcentrados—of SHCP.
  - Other institutions involved: AMIB, the Stock Exchange (Bolsa), MEXDER, IPAB, CONDUSEF, PROFECO.
- System weaknesses:
  - Complex, compartmentalized regulatory and supervisory system.
  - CNBV and CNSF responsibilities curtailed by SHCP and BOM powers.
  - Fragmented lines of responsibility across lifecycle functions produce overlaps, gaps, and high compliance costs.
  - Securities market is an exception where CNBV has lifecycle power due to the 2004 Securities Market Law.

### Inter-Agency Coordination — Board composition and limits
- Inter-agency coordination largely relies on inter-locking boards as communication mechanisms.
- CNBV board composition:
  - CNBV board includes the agency’s president (appointed by and reporting to SHCP) and ten board members:
    - five appointed by and serve on behalf of SHCP;
    - three by BOM;
    - one by CNSF;
    - and one by CONSAR.
  - Alternates follow same rules.
- CNSF board composition:
  - Presided by a SHCP appointee; nine board members:
    - four appointed by SHCP who may be CNSF civil servants;
    - two also appointed by SHCP who cannot be part of CNSF staff;
    - one by CNBV;
    - one by BOM;
    - and one by CONSAR.
  - Includes two CNBV Vicepresidents appointed by the President of the agency. Alternates follow same rules.
- CONSAR board composition:
  - Includes the Governor of BOM; the Undersecretary of SHCP; General Directors of IMSS, ISSSTE, and INFONAVIT; Presidents of CNBV and CNSF; two labor representatives; and one representative of the employers.
- Limitations of inter-locking boards:
  - Board members are high-ranking officials with heavy schedules whose primary function is to protect their institution’s interests.
  - Overlapping responsibilities can create conflicts of interest, friction, and inefficiency, especially in problem solving.

---

### 19. Operational coordination between CNBV, CNSF, SHCP and BOM is conducted — Current practices, weaknesses, and recommendations

H3: Operational coordination — current practices and weaknesses
- Coordination is mostly through ad hoc meetings convened by the agency facing the need.
- Responsibility over meeting results is often blurred; follow-up is largely up to the parties with the most pressing urgency.
- Overlapping responsibilities create conflicts of interest at the operational level, hindering information exchange and affecting decision making.
- Informal mechanisms help but make results dependent on personal relationships, trust, and day-to-day politics.
- Coordination between banking and securities regulators improved considerably after the merger between the Banking and Securities Commissions in 1995, reflecting sustained CNBV leadership.

H3: Formal checks and balances — cross-opinion system effects
- A complex system of binding and nonbinding opinions by SHCP, BOM, CNBV, CNSF and CONSAR is legally required for many decisions.
- The cross-opinions system:
  - Intended to provide checks and balances.
  - Has led to adverse consequences and unduly burdens the regulatory process.
  - Even nonbinding opinions can cause major delays.
  - Agencies are not always time bound to issue opinions and there is no general interpretation of administrative silence.
  - The system is cumbersome, dilutes responsibilities, and hinders Commissions’ operational autonomy.

H3: Impact on competition and innovation
- Complex and burdensome approval processes for new products, especially hybrids, hurt innovation.
- All new products require approval by BOM and by the specialized supervisory agency, under detailed and restrictive rules in a compliance-oriented system.
- BOM must approve any new product with perceived transactional implications; BOM concerns over financial stability sometimes further delay decisions.
- Lengthy approval processes reduce innovation and indirectly affect competition through stricter compliance cultures among some foreign-owned players.

H3: Opportunities for regulatory arbitrage
- Persisting regulatory inconsistencies:
  - Capital adequacy requirements applied only at individual entity level, not consolidated group level, creating opportunities for multiple gearing.
  - Different norms for similar financial products (e.g., different margin rules for banks and exchange houses).
  - Derivatives market segmentation:
    - Banks can offer, negotiate, and invest in instruments on and off exchange;
    - Mutual funds excluded from this market;
    - AFOREs allowed to buy and sell derivatives but only on exchange.
  - Insurance savings products regulated differently than bank savings products; mutual fund-like products by insurers may not follow mutual fund segregation rules.
  - Off-shore operations and trusts may facilitate regulatory arbitrage.
- Progress made in leveling the playing field but inconsistencies remain.

H3: Consolidated supervision — limitations and risks
- Civil-code legal framework and home country supervision for multinationals mitigate conglomerate risks by precisely defining permissible activities, creating segmentation that limits conglomerate risks but hinders synergies and innovation.
- Limitations:
  - No agency has legal power to oversee a financial group and its subsidiaries as a whole.
  - Capital adequacy requirements are set only at individual entity level, enabling multiple gearing.
  - Law specifies a holding company will be supervised by the agency supervising the preponderant entity as determined by SHCP, but holding companies often have simple balance sheets and limited financial activity.
  - Supervising agency of the holding company may not have lead responsibility over all entities.
  - Simultaneous inspections are not true joint inspections; confidentiality rules impede information sharing.
  - The figure of lead supervisor does not exist in law.
- Conclusion: Legal reform required to develop an adequate regulatory and supervisory view of the financial group and subsidiaries as a whole.

H3: Cross-border supervisory reliance
- High internationalization of the Mexican financial system increases need for cross-border cooperation.
- Foreign banking groups account for a significant share of systemically important conglomerates.
- Key needs:
  - Assess incentives of foreign shareholders vis-à-vis Mexican operations.
  - Implement effective group-wide cross-border consolidated supervision.
  - Enhance cross-border supervisory cooperation.
  - Ready efficient resolution processes for failure of foreign-owned systemically-important groups.
- CNBV has fully effective and operational MOUs with multiple foreign regulators and conducts cross-border inspections and information requests under these agreements.
- Evolving market trends and risks require enhanced cross-border supervisory reliance and preparedness.

H3: Compliance costs and information coordination
- Progress in simplifying frameworks, but further reductions in compliance costs are possible.
- In 2000, BOM, SHCP, CNBV, IPAB, and CONDUSEF created the Committee for Coordination between Authorities on Financial Information; CONSAR and CNSF joined later.
- Committee objectives:
  - Share information to eliminate duplicative data requirements;
  - Clear additional information requests by members to ensure non-duplication.
- Achievements: reduced information burdens and eliminated many reports.
- Further improvements needed:
  - Avoid reporting to multiple agencies and multiple officials in the same agency.
  - Standardize reporting forms.
  - Minimize multiple and uncoordinated inspections.
  - Improve timeliness in authorization procedures.
  - Streamline sanctions to correct mismatches between violations and sanctions.
- Compliance burdens concentrated in financial groups: must report to or interact with up to 10 regulatory agencies and numerous officials (often more than one in each agency).
- Problems compounded by numerous, detailed secondary regulations carrying significant sanctions.

H3: Recommendations — overarching objectives and organizational reform goals
- Areas for improvement:
  - Clearly define missions of SHCP, CNBV and CNSF; eliminate overlaps to enhance Commissions’ operational, political and budgetary independence.
  - Improve inter-agency coordination at operational and policy levels.
  - Minimize vulnerability to the electoral cycle.
  - Continue to improve information systems to overcome fragmentation and ensure timely, manageable data to decision makers.
  - Enhance consolidated supervision of financial groups; establish capital requirements for groups in addition to individual institutions; implement efficient resolution mechanisms for banks and financial groups.
  - Mitigate inconsistencies between seriousness of violations and intensity of sanctions.
- Organizational reform goals:
  - (i) move towards full autonomy (operational, political, and budgetary) for the Commissions;
  - (ii) streamline functions and responsibilities;
  - (iii) establish effective checks and balances;
  - (iv) enhance enforcement capabilities;
  - (v) strengthen legal protection for regulators and supervisors.

H3: Recommended sequencing — building block approach (summary)
- Avoid a one-step “big bang” move to a single integrated fully independent agency unless critical success factors are met; instead recommend progressive steps:
  - Building Block 1 — improvements within existing legal framework: improve board performance, use MOUs, establish a formal interagency coordination process and leverage BOM board members.
  - Building Block 2 — realign powers and responsibilities: transfer many SHCP regulatory powers to Commissions, set opinion deadlines and an “administrative silence regime”, appoint independent full-time directors; SHCP to focus on financial development policy and BOM on systemic stability and simplification where appropriate.
  - Building Block 3 — consolidated supervision: legal and operational reforms to enable group presumptions, group capital requirements, a lead supervisor, elimination of information barriers, joint inspections, and simplification of group regulatory framework.
  - Building Block 4 — full autonomy and accountability: establish full operational, political, and budgetary autonomy through legal and constitutional reforms while ensuring accountability to Congress via annual reports and Finance Committee oversight.
- Change management:
  - Timing and pace must secure strong political support and a robust legal framework.
  - Successful implementation depends on pre-existing inter-institutional cooperation and consistent change management over at least 5-6 years.
  - A change champion is required to steer the process.

H3: Contingency planning (operational preparedness)
- Conduct contingency planning exercises for failure scenarios: individual institution, systemically important financial group, or systemic crisis.
- Participants: small number of high-level officials from SHCP, BOM, CNBV, CNSF, CONSAR, and IPAB.
- Objectives: solve coordination problems, develop internal emergency liquidity assistance protocols, and identify legal, regulatory, and procedural shortcomings to ensure preparedness.

*Source: _cr07167 - Executive Summary*

### Executive Summary ......................................................................................................

### Executive Summary

### Major findings
- The 2006 FSAP Update mission found Mexico has made significant strides in increasing transparency and market discipline, and in strengthening the institutional framework for financial oversight since 2001.
- Reforms implemented encompassed the legal framework, operational arrangements, and information systems, as well as transparency and information disclosure aspects.
- Significant modernization of the regulatory framework, improved inter-agency coordination, and significant steps toward consolidated supervision were noted.
- Limitation of the previously unlimited guarantee on bank liabilities significantly boosted market discipline.
- The professionalism of the regulatory and supervisory agencies is well recognized in the markets.
- Remaining shortcomings in the silo-based regulatory framework include the need to:
  - strengthen consolidated supervision of financial groups;
  - further clarify and enhance the roles and responsibilities of the Commissions in regulation of financial entities and markets;
  - step up and better formalize inter-agency coordination;
  - further de-link the regulatory and supervisory system from the political cycle;
  - allow for a more agile approval process for new financial products;
  - reduce regulatory compliance costs;
  - enhance preparedness to deal with individual or systemic bank (and financial group) instability.
- Need to strengthen SHCP’s role in designing medium and long term development strategies for the financial sector and to assign responsibility for oversight of competition in the financial sector to a specific agency (BOM oversees competition in the payment system).

### Recommended reform strategy
- A building block approach is recommended:
  - Move progressively toward full autonomy (operational, political, and budgetary) for the Commissions.
  - Strategically define timing and pace of changes in accordance with ability to secure strong political support and to enact a robust legal framework.
  - Expect change to be managed consistently over a period of at least five to six years.
  - Use initial emphasis on strengthening inter-agency coordination and enforcement capabilities within the existing legal framework.
  - Introduce legal reforms in subsequent phases.
  - Explore and implement opportunities to improve legal protection for regulators and supervisors throughout the process.
  - Appoint a change champion to steer the process and convey that organizational change is a planned process rather than a quick fix.

### Proposed building blocks (sequenced reforms)
- First building block: improve supervisory operations and inter-agency coordination within the current legal framework.
  - Enhance contribution of the Commissions’ boards via strategically designed board-level committees where board members and management interact, focus on key issues, build trust, and strengthen inter-institutional links.
  - Leverage BOM board members as their tenure is not determined by political cycles.
  - Use MOUs signed by the Commissions to set clear responsibilities, accountabilities, and operational rules covering information exchange and supervisory decision making.
- Second building block: strengthen the Commissions’ operational autonomy with clear powers throughout the life cycle of financial institutions.
  - Require legal reform to realign powers and responsibilities for SHCP, CNBV and CNSF (following the model in place for pensions and securities markets).
  - Maintain Commissions’ current status as decentralized agencies of SHCP while improving agency effectiveness and inter-agency incentive alignment.
- Third building block: move towards full consolidated supervision of financial conglomerates.
  - Legal and operational reforms to:
    - give the regulator power to presume the existence of a group;
    - set capital requirements for the group in addition to individual entities;
    - define the role and powers of a lead supervisor able to oversee the holding company and individual entities;
    - eliminate barriers to exchange information;
    - allow for joint—rather than simultaneous—inspection visits;
    - simplify the regulatory framework for financial groups.
- Fourth building block: establish full autonomy for the Commissions (operational, political, and budgetary) through legal and constitutional reforms, while establishing accountability.
  - As top-level agencies in the executive branch, regulators should report directly to the highest political authority and be accountable to congress.
  - Propose annual reports stating goals, accomplishments and shortfalls, supervisory actions taken, the cost of bank failures (if any), and the financial condition of banks and other financial institutions.
  - A Finance Committee of Congress could analyze reports and have authority to summon the supervisor for hearings.

### Contingency planning and preparedness
- Recommend contingency planning exercises to prepare for possible failure of an individual institution, a systemically important financial group, or a systemic crisis.
- Proposed participants: a small number of high-level officials from SHCP, BOM, CNBV, CNSF, CONSAR, and IPAB.

---

### I. Overview

- Objectives of the paper:
  - To assess the effectiveness of current organizational arrangement and distribution of functions across agencies in achieving effective prudential supervision and financial sector development.
  - To make recommendations to enhance the readiness of the authorities to deal with current and foreseeable challenges.
- Focus of analysis:
  - Suitability of current organizational arrangements and distribution of functions among policy makers, SHCP and BOM, and CNBV and CNSF as key supervisors and regulators.
  - Central issues: autonomy (operational, political and budgetary), powers and functions, enforcement capabilities, and inter-institutional coordination.
- Basis:
  - Findings of the 2006 FSAP Update mission.
  - Paper does not attempt in-depth alternative implementation analysis nor cover historical evolution beyond relevance to organizational arrangements.
- Historical context and prior FSAP (2001) findings:
  - Problems identified in 2001: insufficient clarity and duplication of regulatory functions, fragmentation of supervisory powers, lack of formal autonomy of regulatory agencies, weak accountability and credibility, hampered enforcement.
  - CNBV lacked adequate autonomy due to regulatory powers outside the agency, chiefly in the hands of SHCP; CNBV lacked budgetary autonomy.
  - CNSF similarly lacked budgetary autonomy and SHCP had ultimate say on licensing and other insurance sector regulations.
  - Political interference in decision-making, politically imposed budgetary constraints, and need to accelerate risk-focused supervision and boost CNBV credibility after the 1994-1995 banking crisis were also noted.
- 2006 update: substantive progress made but further reforms needed to adapt institutional arrangements to new market conditions and to close gaps especially on consolidated supervision.

---

### II. Evolving Market Trends

- Structure and concentration:
  - The Mexican financial system includes commercial banks, insurance companies, pension funds, broker dealers, investment banks, development banks, non-deposit taking credit institutions (Sofoles), and brokerages.
  - Universal banks account for 49 percent of financial system assets.
  - The three largest banking institutions account for close to 60 percent of the banking sector’s assets.
  - Foreign ownership represented over 80 percent of all banking assets as of May 2006.
  - Development banks, privately managed pension funds (AFOREs) and mutual funds account for 13, 13, and 11 percent, respectively, of financial system assets.
  - Insurance, non-bank banks (Sofoles) and other financial institutions account for the other 14 percent.
- Financial groups and conglomeration:
  - A large and growing portion of financial sector assets is now managed by financial groups, mostly foreign-owned.
  - Financial groups are increasingly managed as groups—by product and business lines—rather than by legal entities.
  - Large multinational financial groups are involved in virtually all salient lines of financial business (banking, insurance, asset and fund management, brokerage, pension fund administration, etc.) and dominate the Mexican financial landscape, though not necessarily dominant in every specific sector.
- Sofoles and regulatory changes:
  - Sofoles do not take deposits and were licensed by SHCP (considering opinion from CNBV and, in the case of foreign ownership, also from BOM) to grant credit to specific segments of the economy.
  - The legal framework for Sofoles, Leasing Companies (Arrendadoras) and Factoring Houses (Casas de Factoraje) was modified on July 18, 2006. Their operations were deregulated and they were given a seven-year lifespan.
  - Authorities no longer grant this type of licenses and these activities can be freely carried out.
  - The law also provides for other non-regulated entities called Sofomes (Sociedad Financiera de Objeto Múltiple) which do not require licensing by the financial authorities.
  - The bulk of financing of mortgage Sofoles comes from SHF, a development bank, although Sofoles have started to tap the private market and several large mortgage Sofoles have been acquired by private banks.
  - FIRA and NAFIN have played important roles in development of agricultural- and SME-oriented Sofoles.

---

### III. Current Organizational Arrangements

- Institutional roles:
  - SHCP sets regulatory policy for the financial system, particularly license granting and removal for banks.
  - CNBV is the supervisor and regulator for banks, other credit institutions, and securities markets.
  - BOM has regulatory responsibilities regarding money, foreign exchange, derivatives markets, payment systems, and financial operations and product characteristics.
  - CONSAR oversees AFOREs and CNSF oversees insurance and surety companies.
  - Legal status of CNBV, CNSF and CONSAR: decentralized agencies—órganos desconcentrados—of SHCP.
  - Other institutions involved: AMIB, the Stock Exchange (Bolsa), MEXDER, IPAB, CONDUSEF, and PROFECO.
- System characteristics and weaknesses:
  - The regulatory and supervisory system is complex and compartmentalized.
  - Responsibilities of CNBV and CNSF are curtailed by regulatory powers of SHCP and BOM.
  - Fragmented lines of responsibility across the life cycle of financial institutions (licensing, regulation, ongoing supervision, sanctions, failure resolution) create overlaps, gaps, and high compliance costs.
  - Securities market area is an exception where CNBV has power over the whole life cycle due to the 2004 Securities Market Law.

### A. Inter-Agency Coordination
- Mechanism:
  - Inter-agency coordination rests largely on inter-locking boards that serve as high level communication and coordination mechanisms.
- CNBV board composition:
  - CNBV board includes the agency’s president, appointed by and reporting to SHCP, and ten board members appointed as follows:
    - five are appointed by and serve on behalf of SHCP;
    - three by BOM;
    - one by CNSF;
    - and one by CONSAR.
  - Alternates are appointed following the same rules.
- CNSF board composition:
  - CNSF board is presided over by a SHCP appointee and includes nine board members as follows:
    - four appointed by SHCP who may be CNSF civil servants;
    - two also appointed by SHCP who cannot be part of CNSF staff;
    - one by CNBV;
    - one by BOM;
    - and one by CONSAR.
  - It also includes two CNBV Vicepresidents appointed by the President of the agency. Alternates are appointed following the same rules.
- CONSAR board composition:
  - CONSAR board includes the Governor of BOM; the Undersecretary of SHCP; the General Directors of IMSS, ISSSTE, and INFONAVIT; the Presidents of CNBV and CNSF; two labor representatives and one representative of the employers.
- Limitations of inter-locking boards:
  - Board members are high-ranking officials with heavy schedules whose primary function is to protect the interest of the institution they represent.
  - Overlapping responsibilities may lead to conflicts of interest and frictions, hindering board efficiency, especially in problem solving.

---

### IV. Recommendations (high-level)

- Strengthen consolidated supervision and close regulatory/supervisory gaps, following the building block approach described above.
- Improve inter-agency coordination and enforcement within the existing legal framework as an initial priority.
- Pursue legal reforms in staged phases to:
  - realign powers and responsibilities between SHCP, CNBV, and CNSF;
  - enable consolidated supervision of financial groups;
  - establish full autonomy (operational, political, and budgetary) for the Commissions while ensuring accountability to the highest political authority and to congress.
- Implement MOUs among Commissions to clarify responsibilities, accountabilities, and operational rules for information exchange and supervisory decision making.
- Enhance legal protection for regulators and supervisors.
- Conduct contingency planning exercises with high-level officials from SHCP, BOM, CNBV, CNSF, CONSAR, and IPAB.

*Source: _cr07167 - Executive Summary*

### 19. Operational coordination between CNBV, CNSF, SHCP and BOM is conducted

### 19. Operational coordination between CNBV, CNSF, SHCP and BOM is conducted

### Operational coordination: current practices and weaknesses
- Coordination is conducted mostly through ad hoc meetings convened by the agency facing the need.
- Responsibility over the results of these meetings is often blurred and follow up is largely up to the parties with the most pressing urgency.
- Overlapping responsibilities bring conflicts of interest at the operational level, hindering information exchange and affecting decision making.
- Informal coordination mechanisms often help overcome barriers, but results become overly dependent on personal relationships and trust, and may be influenced by day-to-day politics.
- Coordination between banking and securities regulators improved considerably after the merger between the Banking and Securities Commissions in 1995, reflecting sustained efforts by CNBV leadership.

### Formal checks and balances: effects of cross-opinion system
- Formal checks and balances operate through a complex system of binding and nonbinding opinions to be issued by SHCP, BOM, CNBV, CNSF and CONSAR, as a legal prerequisite for numerous decisions.
- The cross opinions system, while well-intended, has led to adverse consequences and unduly burdens the regulatory process.
- Even where opinions are not binding, differences among agencies can cause major delays in issuance of regulations or clarifications of laws and regulations.
- Agencies are not always time bound to issue opinions and there is no general interpretation of administrative silence.
- The system is unduly cumbersome, tends to dilute responsibilities, and unnecessarily hinders the Commissions’ operational autonomy.

### Impact on competition and innovation
- Complex and burdensome approval processes for new products, especially hybrids, hurt innovation.
- All new products require approval by BOM as well as by the specialized supervisory agency, under detailed and restrictive rules following a compliance-oriented regulatory system.
- BOM must give its stamp of approval to any new product with perceived transactional implications; BOM concerns over financial stability sometimes further delay decisions.
- The lengthy approval process reduces innovation and indirectly affects competition through stricter compliance cultures among some foreign-owned players.

### Opportunities for regulatory arbitrage
- Progress has been made in leveling the playing field, but certain regulatory inconsistencies persist:
  - Capital adequacy requirements are set only at the level of individual entities, not at a consolidated group level, creating opportunities for multiple gearing.
  - Different norms apply to similar financial products (e.g., different rules on margins for banks and exchange houses).
  - Derivatives: banks can offer, negotiate, and invest in these instruments on and off exchange; mutual funds are excluded from this market; AFOREs are allowed to buy and sell derivatives but only on exchange.
  - Insurance products with a savings component are regulated differently than savings products issued by banks; mutual fund-like products offered by insurance companies may not follow segregation rules applicable to mutual funds proper.
  - Off-shore operations and trusts may serve as means for regulatory arbitrage.

### Consolidated supervision: limitations and risks
- Conglomerate risks in Mexico are mitigated by the civil-code legal framework and home country supervision for multinational groups; the civil-code framework precisely defines permissible activities for each financial entity, creating segmentation that limits conglomerate risks but hinders synergies and innovation.
- Despite steps toward consolidated supervision, no agency has the power to oversee a financial group and its subsidiaries as a whole.
- Capital adequacy requirements are set only at the individual entity level, not at a consolidated group level, creating opportunities for multiple gearing.
- The law specifies a holding company will be supervised by the agency supervising the preponderant entity as determined by the SHCP, but holding companies have simple balance sheets and limited financial activity.
- The agency supervising the holding company may not have lead responsibility over all group entities.
- Simultaneous inspections fall short of joint inspections because each specialized agency may access only institutions within its competence and confidentiality regulations impede information sharing.
- The figure of lead supervisor does not exist in the law.
- A legal reform is required to develop an adequate regulatory and supervisory view of the financial group and its subsidiaries as a whole.

### Cross-border supervisory reliance
- The high degree of internationalization of the Mexican financial system emphasizes the need for cross-border cooperation among regulators and supervisors.
- Foreign banking groups account for a significant share of systemically important conglomerates in Mexico.
- Key supervisory needs: assess incentives of foreign shareholders vis-à-vis the Mexican operation; implement effective group-wide cross-border consolidated supervision; enhance cross-border supervisory cooperation; ready efficient resolution processes for failure of foreign-owned systemically-important groups.
- CNBV maintains fully effective and operational MOUs with multiple foreign regulators and conducts cross-border inspection visits and information requests under these agreements.
- Evolving market trends and emerging risks point to the need to enhance cross-border supervisory reliance and preparedness.

### Compliance costs and information coordination
- Progress has been made in simplifying the regulatory and supervisory framework, but further reductions in regulatory compliance costs are possible.
- In 2000, BOM, SHCP, CNBV, IPAB, and CONDUSEF created the Committee for Coordination between Authorities on Financial Information; CONSAR and CNSF joined more recently.
- Committee objectives: share information to eliminate duplications in data requirements; clear additional information requests by members to ensure non-duplication.
- The Committee succeeded in reducing information burdens and eliminated many reports.
- Further improvements needed:
  - (1) avoiding reporting requirements to multiple agencies and multiple officials in the same agency;
  - (2) standardizing reporting forms;
  - (3) minimizing multiple and uncoordinated inspections;
  - (4) improving timeliness in authorization procedures;
  - (5) streamlining sanctions across the system to correct mismatches between violations and sanctions.
- Compliance costs are especially high in financial groups: they must report to or interact with up to 10 regulatory agencies and numerous government officials (often, more than one in each agency).
- Problems are compounded by numerous, detailed secondary regulations carrying significant sanctions for non-compliance.

### Recommendations: overarching objectives
- Areas for improvement include:
  - Clearly defining the mission of each agency involved in financial sector supervision and regulation, especially SHCP, CNBV and CNSF, and eliminating overlaps to enhance operational, political and budgetary independence of the Commissions.
  - Improving inter-agency coordination at operational and policy levels.
  - Minimizing vulnerability to the electoral cycle.
  - Continuing efforts to improve information systems to overcome fragmentation, inconsistencies, and gaps, and ensure timely, manageable data to decision makers.
  - Enhancing consolidated supervision of financial groups; establishing capital requirements for financial groups in addition to individual institutions; implementing an efficient resolution mechanism for banks and financial groups.
  - Mitigating inconsistencies between the seriousness of violations and the intensity of sanctions.

### Recommendations: organizational reform goals
- Goals of organizational reform:
  - (i) moving towards full autonomy (operational, political, and budgetary) for the Commissions;
  - (ii) streamlining functions and responsibilities;
  - (iii) establishing effective checks and balances;
  - (iv) enhancing enforcement capabilities;
  - (v) strengthening legal protection for regulators and supervisors.

### A building block approach to reform (recommended)
- A one-step move to a single integrated fully independent agency is not advisable; critical success factors for a “big bang” approach include strong political footing, a robust legal framework, pre-existing culture of inter-institutional cooperation, and consistent change management over at least 5-6 years.
- A building block approach is recommended: progressively move toward full autonomy for the Commissions, enhance governance by including independent directors whose terms do not coincide with the political cycle, strengthen accountability, and eventually merge CNBV and CNSF.
- Establishing full regulatory and supervisory autonomy implies separation from SHCP and a reinforced SHCP leadership in financial development policy; BOM would enhance its role on systemic stability.
- Opportunities to improve legal protection for regulators and supervisors should be explored and implemented.

### Building block 1 — improvements within the existing legal framework
- Focus on operational improvements and more effective inter-agency coordination:
  - (i) improving board performance at the Commissions through strategic board committees where board members and management interact, develop common vision, and build trust;
  - (ii) strengthening coordination between CNBV, CNSF, and CONSAR through MOUs that set clear responsibilities, accountabilities, operational rules for information exchange and supervisory decision making, and coordinated responses to problems.
- Coordination could be further enhanced via a formal interagency coordination process conducted through a high-level working group that meets periodically, follows an agenda, and has strong technical support.
- Board members representing the BOM play a critical role, as their tenure is not determined by electoral cycles.

### Building block 2 — realigning powers and responsibilities
- Aim: establish the Commissions’ operational autonomy while maintaining their status as decentralized agencies of SHCP.
- Legal reforms required include at least:
  - (1) transferring many regulatory powers currently held by the SHCP to the Commissions (as done for securities markets under the new Securities Markets Law) to minimize opinion burdens and give Commissions broad powers over the life cycle of financial institutions;
  - (2) making remaining opinions more agile by setting deadlines and establishing an “administrative silence regime” conducive to action;
  - (3) appointing independent full time directors to the boards of the Commissions.
- SHCP and BOM would focus on financial sector development and financial stability policy, respectively.
- BOM would assess opportunities to discontinue issuing prudential regulation in areas where CNBV has its own regulations and continue simplifying regulations it must issue by law.

### Building block 3 — consolidated supervision of financial conglomerates
- Aim: implement consolidated supervision via legal and operational reforms.
- Key legal reforms include:
  - giving the regulator the power to presume the existence of a group;
  - setting capital requirements for the group in addition to individual entities;
  - setting the role and powers of a lead supervisor for the group capable of overseeing the holding company and individual entities;
  - eliminating barriers to exchange of information;
  - allowing for joint—rather than simultaneous—inspection visits.
- Legal reform would also aim at simplifying the complex regulatory framework for financial groups and enable clearer coordination between CNBV, CNSF, and CONSAR.

### Building block 4 — full autonomy and accountability
- Aim: establish full autonomy (operational, political, and budgetary) for the Commissions through legal and constitutional reforms while establishing accountability.
- Proposals:
  - Establish regulators and supervisors at the appropriate level in the Mexican institutional hierarchy and make them accountable to Congress.
  - Submit annual reports stating the agency’s goals, accomplishments and shortfalls, supervisory actions taken, the cost of bank failures (if any), and the financial condition of banks and other financial institutions to a Finance Committee of Congress with authority to summon the supervisor for hearings.
  - Use transparency to establish accountability.

### Contingency planning
- Conduct contingency planning exercises (fire drills) for possible failure of an individual institution, a systemically important financial group, or a systemic crisis.
- Include a small number of high-level officials from SHCP, BOM, CNBV, CNSF, CONSAR, and IPAB to solve coordination problems, develop internal emergency liquidity assistance protocols, and identify legal, regulatory, and procedural shortcomings.
- These exercises are key to ensure preparedness to deal with individual or systemic bank instability.

### Change management
- Timing and pace of changes must secure strong political support and a robust legal framework.
- Successful implementation depends on pre-existing culture of inter-institutional cooperation and consistent management of change over at least 5-6 years to build resilience against electoral cycles.
- A change champion is required to steer the process.

*Source: _cr07167 - 19. Operational coordination between CNBV, CNSF, SHCP and BOM is conducted*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07167.pdf_