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 -------------- Summary -------------- ¶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. -------------- Key Components of the Reform Package -------------- ¶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. -------------- Niche Bank Option Attracts Interest -------------- ¶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, MEXICO 00006256 002 OF 003 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. -------------- Reaction to the Reforms -------------- ¶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.) -------------- Comment -------------- ¶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 MEXICO 00006256 003 OF 003 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. 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 / BASSETT