Mexico: Financial Sector Assessment Program-Technical Note on Systemic Liquidity Management
IMF Staff Country Reports, November 10, 2022
Source details
- Canonical URL
- Mexico: Financial Sector Assessment Program-Technical Note on Systemic Liquidity Management
Other formats
Bibliographic details
- Published: November 10, 2022
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798400222733.002
Summary of system-wide liquidity conditions and market structure
- Mexican money markets are well-regulated and function efficiently.
- The repo market dominates system-wide liquidity management.
- Interbank unsecured transactions are at a marginal level.
- Commercial banks have full compliance with the Liquidity Coverage Ratio (LCR).
- Development banks are not subject to liquidity regulation.
- Some development banks have significant reliance on short-term funding and low levels of unencumbered high-quality liquid assets.
- These features could contribute to systemic liquidity risk during periods of extreme market stress in severe tail risk scenarios.
Key risks and vulnerabilities
- Concentration of liquidity management in the repo market implies reliance on collateralized funding conditions.
- Marginal interbank unsecured activity reduces unsecured market resilience in stress episodes.
- Development banks’ exemption from liquidity regulation, combined with explicit sovereign guarantees of their liabilities and sovereign backstops of their capitalization, leaves a residual systemic vulnerability when those institutions rely on short-term funding and hold low unencumbered HQLA.
- Potential amplification of systemic liquidity risk under severe tail events due to development banks’ maturity transformation and funding profiles.
Policy recommendations and supervisory considerations
- Strengthen development banks’ liquidity risk management framework by:
- Improving monitoring of their liquidity.
- Leveraging their internal risk committees to take stock of their risk profile and contribution to systemic risk.
- Making use of Pillar 2 requirements.
- Devising appropriate action(s) to improve these entities’ maturity transformation.
- Consider supervisory or regulatory measures to address development banks’ reliance on short-term funding and low levels of unencumbered high-quality liquid assets to mitigate tail-event systemic liquidity risks.
Content in this bundle
- Executive Summary