FINANCIAL SECTOR REFORMS IN THE PIPELINE IN MEXICO

UNCLAS SECTION 01 OF 03 MEXICO 005567 SIPDIS SENSITIVE SIPDIS STATE FOR A/S SHANNON STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH STATE FOR EB/ESC MCMANUS AND IZZO USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD USDOC FOR ITA (ISRALY ECHEGARAY) TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL) TREASURY FOR OCC/IBF (SUSAN QUILL) TREASURY FOR IBSMO (WILBUR MONROE, BILL FOSTER) CFTC FOR OIA (WARREN GORLICK) NSC FOR RICHARD MILES, DAN FISK SEC FOR OIA (SHAUNA STEELE) STATE PASS TO USTR (EISSENSTAT/MELLE/SHIGETOMI) STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO/ANN MISBACK) E.O. 12958: N/A TAGS: ECON ELAB EFIN PINR PGOV MX SUBJECT: FINANCIAL SECTOR REFORMS IN THE PIPELINE IN MEXICO ¶1. (SBU) SUMMARY: The Finance Secretariat (Hacienda) sent a reform initiative to Congress that would allow banks to apply for bank licenses based on the operations they intend to pursue. Banks would only be required to comply with the regulations for the specific activities they perform, and minimum capital requirements would be lowered accordingly. The reform package also proposes a redistribution of power to the Banking and Securities Commission. Separately, Hacienda is working on a bank bankruptcy proposal that it would like to submit to Congress during the legislative session that ends in mid-December. Hacienda is also working on changes to the financial groups law. In a meeting with USG officials, Hacienda showed no willingness to consider foreign bank branching into Mexico. The officials say Mexico will be in compliance with Basel II by January 1, 2008. END SUMMARY. -------------- New Banking Reform Initiative -------------- ¶2. (U) The Secretariat of Finance and Public Credit (Hacienda) submitted a banking sector reform package to the Chamber of Deputies (lower house) in late August that addresses a variety of issues, including: differential bank licensing, the redistribution of powers to the Banking and Securities Commission (CNBV),banking fees and charges, and additional loan loss reserves rules. ¶3. (SBU) Currently, Mexico only has one type of bank license, a universal license with uniform regulations and capital requirements for all banks. Proposed amendments to the Law of Credit Institutions (LIC) would allow banks to apply for licenses according to the operations they intend to carry out. Hacienda officials told econoff that the idea of this proposal is to "bridge the gap" between "cajas" (cooperatives/credit unions) and full fledged banks. Banks �0A;presently are required to comply with all banking regulations, even if they only perform a subset of the activities allowed under the universal license. With the new limited licenses, banks would only be required to comply with the regulations for the specific operations they perform. Requirements would vary in such areas as: corporate governance, IT infrastructure, and financial information reporting. Banks currently file up to 108 reports to the CNBV and Hacienda per year. Capital adequacy requirements, credit processes, and internal control requirements would remain the same. The different categories of allowable activities have not yet been set. CNBV will establish them through separate regulations. ¶4. (SBU) The existing law requires all licensed banks to keep paid capital equal to 0.12% of the system's net capital. This amount is calculated and published by the CNBV annually. The reform would establish a minimum capital requirement of 90 million UDIS (inflation-indexed units; approximately USD30 million) for banks with full operating licenses. The CNBV will issue rules to determine the minimum capital requirements for banks with limited licenses. While these rules are currently undetermined, the CNBV stated that they will not allow for less than 40% of the required capital for a fully licensed bank (approximately USD12 million). ¶5. (SBU) Hacienda told econoff and visiting Treasury officials that while it is possible the reform package will be reviewed by the end of the year, it will most likely be reviewed in 2008. Local press reports, however, say that Hacienda would like the legislation passed during the current legislative session, which ends on December 12. The reform would not be enforced until approximately one year after it is passed by Congress. This time would be used to issue the needed supplementary regulations. Hacienda officials have been working on the reform for two years and consider it one MEXICO 00005567 002 OF 003 of their top priorities. They believe Congress will approve the initiative, adding that the large banks support it. This legislation has already been approved by the Federal Regulatory Improvement Commission (Cofemer). ¶6. (SBU) Hacienda noted that sofoles (limited purpose financial companies),sofomes (multiple purpose financial companies),and the larger cajas have expressed interest in the proposal -- even some institutions that have complied with the Popular Savings and Credit Law (LACP). Hacienda said that the new licenses would allow these institutions to enter other service sectors. (Comment: Separately, the Hacienda officials noted that they are currently working on measures that would make it easier for the government to apply the LACP and for cajas to comply with the law, particularly smaller ones. They did not give any detail, but remarked that the idea is to differentiate requirements based on the size of financial institutions similar to how regulatory requirements for the new "niche banks" will depend on the operations the institution carries out. End Comment.) ¶7. (SBU) The reform package also proposes a redistribution of power from other financial authorities to the CNBV. Currently Hacienda issues banking licenses, the CNBV regulates, and the Bank of Mexico oversees operations and payment systems. The proposal assigns full responsibility in capital adequacy, credit provisioning, and all bank-related authorizations to the CNBV. The goal is to enable a single authority to supervise and regulate any given institution from its inception to its end. The intent is to have the CNBV be the regulator and Hacienda the policymaker. While this is a positive step forward, the proposal does not request budgetary autonomy for the CNBV, which was one of the only IOSCO (International Organization of Securities Commissions) principles not to have been fully implemented. ¶8. (SBU) The CNBV also submitted a new set of rules dealing with the regulation and supervision of financial contracts, bank advertising and bank statements to better protect consumers from excessively high banking fees and charges. Additional loan loss reserve rules were also proposed. Current rules require additional loan provisions when banks fail to produce evidence of a prior inquiry to a credit bureau. The CNBV is presently updating the rule to favor banks that take into account default conducts and the ratio of default amount to total loans. -------------- Bank Solvency and Financial Groups Law -------------- ¶9. (SBU) Separately, Hacienda is working on a banking sector specific reform of the bankruptcy law. The reform will propose systematic bankruptcy procedures that protect depositors, creditors, and other financial institutions. It reduces the amount of time the bankruptcy process takes, improves asset collection and/or sale, and gives the Institute for the Protection of Bank Savings (IPAB) the power to manage the bankruptcy process (though IPAB will have to create a specialized committee). While most of the reforms can be accomplished through regulations, some may require legislation. This reform is the third of a three-part reform initiative on bank solvency. The first part, prompt corrective action, was passed in 2004, and the second part, banking resolution, was passed in 2006. The bank bankruptcy proposal is currently being analyzed by Cofemer. Hacienda would like to submit the initiative to Congress during the current legislative session, which ends on December 12. ¶10. (SBU) In addition, Hacienda is working on changes to the financial groups (conglomerates) law. It will address such MEXICO 00005567 003 OF 003 issues as risk management and internal controls at the corporate level, intra-group transactions, and capital adequacy at the group level. The Hacienda officials said they have a draft prepared, but they are still discussing a few topics with the Bank of Mexico and the CNBV. -------------- Foreign Bank Branching -------------- ¶11. (SBU) In a meeting with U.S. Treasury officials and econoff, Hacienda officials showed no willingness to consider foreign bank branching into Mexico. They said the differential licensing model is like offering bank branching in that it provides flexible options to financial intermediaries and ensures that depositors are protected. The officials claimed that they have not received many requests from overseas banks to allow branching and noted that Mexicans do not like the word "branch." They said they are willing to meet with U.S. banking industry representatives and with the Federal Reserve and Treasury's Office of the Comptroller of the Currency to hear their perspectives. -------------- Basel II -------------- ¶12. (SBU) Cofemer earlier this month issued the final draft of the Rules for Banking Capitalization Requirements. Hacienda officials told econoff that they will publish the rules in the Official Gazette in time for Mexico to be in compliance with Basel II by January 1, 2008. -------------- CNBV's Challenges and Regulatory Priorities -------------- ¶13. (SBU) The CNBV considers the following its key challenges moving forward: 1) redistribution of powers to the CNBV, 2) bankruptcy reform, 3) financial groups regulation, 4) accounting harmonization, and 5) international recommendations. Regarding the fourth point, CNBV aims to develop a harmonized set of accounting standards for financial institutions. The effort will be crucial in their drive for a prudential framework for financial groups and for the establishment of a consolidated supervision approach across the financial system. With respect to the fifth point, CNBV will continue to address recommendations from international entities. The IMF/World Bank Financial Sector Assessment Program (FSAP) has pushed for the CNBV's independence from Hacienda. The World Bank Report on the Observance of Standards and Codes (ROSC) has urged for the development of a "Mexican PCAOB" (Public Company Accounting Oversight Board). CNBV is working on these recommendations. ¶14. (SBU) The CNBV ranked their main regulatory priorities in the banking sector as follows: 1) Basel II, 2) Banking sector reform package, 3) Regulatory burden for loans to small- and medium-sized enterprises (SME) (credit provisioning, credit granting and file keeping),4) Bankruptcy procedures, 5) Consumer protection and transparency (regulation of contracts, advertisement and bank statements, review of credit bureau law),and 6) Corporate governance throughout the financial system. CNBV officials said that all, except the corporate governance and possibly the bankruptcy procedures, should be addressed within one year. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity and the North American Partnership Blog at http://www.intelink.gov/communities/state/nap / GARZA