NEW FINANCIAL SECTOR REFORMS IN MEXICO: A SMALL,

UNCLAS SECTION 01 OF 03 MEXICO 006256

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
EXIM FOR MICHELE WILKINS
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: NEW FINANCIAL SECTOR REFORMS IN MEXICO: A SMALL,
BUT IMPORTANT STEP FORWARD

REF: MEXICO 5567

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Summary
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1. (SBU) Mexico's Congress this month approved a series of
financial sector reforms, which include creating specialized,
"niche" banks and transferring some responsibilities from the
Finance Secretariat to the Banking and Securities Commission
(CNBV). The reforms have been generally well received.
While microfinance institutions were not the principal target
of this reform package, the niche bank license is likely to
be an attractive option for a number of them. This should
have the effect of encouraging more microfinance institutions
to become regulated and offer savings, which should have a
positive effect on competition in the financial sector, and
on increasing access to safe savings services for low-income
populations. End Summary.

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Key Components of the Reform Package
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2. (SBU) Mexico's Congress this month approved a series of
amendments to laws that govern the financial sector. Perhaps
the most important change is the creation of so-called
"niche" banks -- banks that specialize in a particular
operation or region of the country -- via the introduction of
a differential bank license. These institutions will only be
required to comply with the regulations for the specific
activities they perform, and minimum capital requirements
will be lowered accordingly (see reftel for more
information). The reform package also transfers certain
powers from the Secretariat of Finance (Hacienda) to the
Banking and Securities Commission (CNBV). Specifically, it
transfers responsibilities regarding capital adequacy, credit
provisioning, and all bank-related authorizations to the
CNBV. In addition, the CNBV gains the authority to issue
some secondary regulations that had been Hacienda's
responsibility; supervise outsourcing and, if needed, order
the suspension of the services; and inspect and supervise
external bank auditors.


3. (SBU) The reform package also includes new rules regarding
outsourcing and mergers and divisions; improves the corporate
governance of banks; and specifies what activities or
contracts businesses and people "related" to a bank can
perform. (Comment: the latter is particularly important
because it was discovered during the bank bailout in the
mid-1990s that banks had made loans that were never repaid to
their owners, board members, and other people somehow related
to the bank. End Comment.) The reform initiative also
includes new and stricter requirements for those interested
in operating a bank (including criminal record checks) and
more transparent rules for development banks' boards of
directors. The reforms still have to be published in the
Official Gazette to become law.

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Niche Bank Option Attracts Interest
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4. (SBU) The reform package offers a new alternative to
small- and medium-sized microfinance institutions
(institutions that offer financial services to small-scale
business owners and lower-income families) that wish to
become regulated and offer savings products. Currently,

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non-bank microfinance institutions -- which are registered as
either non-profit A.C.s (non-profit associations) or as
for-profit SOFOLs or SOFOMs (limited purpose financial
companies and multiple purpose financial companies,
respectively) -- have two choices: either continue with
their current status, under which they are not authorized to
collect savings from their clients; or transform to a
"popular finance society" (SOFIPO) that is so authorized.
Conversations with several of these institutions show that
the niche bank license is seen as an attractive third option,
allowing savings mobilization but avoiding the complications
associated with becoming a SOFIPO. As an example, SOFIPOs
are required to participate in and pay for an "auxiliary
supervision" scheme.


5. (SBU) The niche bank option seems to be most attractive to
those institutions that are large enough to meet the minimum
capital requirement for the niche bank, but too small to
qualify for a universal bank license. Smaller institutions
will either remain non-profit A.C.s, or decide to become
SOFIPOs (given the lower minimum capital requirements).
Larger institutions will opt for full banking licenses --
such as Banco Compartamos, a microfinance institution with
more than 600,000 clients that obtained its full banking
license in 2006.

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Reaction to the Reforms
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6. (SBU) Response to the reform package has been generally
positive. A BBVA Bancomer executive told econoff and
visiting Treasury officials that his bank supports the new
banking sector reforms. He believes the differential bank
license will foster more open competition in the sector.
Banking experts at Moody's de Mexico agreed that the reforms
were positive, noting that they will lead to more lending to
small- and medium-sized enterprises (SMEs) -- something that
is much needed in Mexico.


7. (SBU) The BBVA Bancomer official, however, added that both
Bancomer and the Mexican Banking Association want to make
sure that the reforms do not create an unfair competitive
advantage for the new banks. They are particularly concerned
with banks associated with retail stores, such as Wal-Mart.
(Note: Wal-Mart does not have a differential banking license,
rather a full license. End note.) The Bancomer official
added that the retailers would have a significant competitive
advantage if regulators allow them to accept deposits at cash
registers, due to their large network of stores throughout
Mexico. Bancomer noted that it costs them around USD 10
million to establish a branch with only five or six tellers.
In addition, Bancomer stated that it is important that
regulators do not let the potentially poor lending practices
of niche banks affect the banking system at large. (Comment:
Moody's said that the Bank of Mexico will not allow Wal-Mart
to have cashiers accept deposits. Instead, Wal-Mart will
open bank branches inside existing stores. End comment.)

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Comment
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8. (SBU) While microfinance institutions were not the
principal target of this reform package, the niche bank
license is likely to be an attractive option for a number of
them. This should have the effect of encouraging more
microfinance institutions to become regulated and offer

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savings, which should have a positive effect on competition
in the financial sector, and on increasing access to safe
savings services for low-income populations. Measures that
increase penetration of the banking sector are welcome.
Financial intermediation levels are extremely low in Mexico,
even by Latin American standards. Banks have successfully
banked the top strata of the pyramid, but now need to move
downstream to service the lower income segments of the
population. End Comment.


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