Mexico - Banking and securities



The Bank of Mexico (established 1925), in which the government owns 51% of the capital stock, is also the central bank and bank of issue. Together with the National Banking and Insurance Commission and the Secretariat of Finance, it supervises commercial, savings, trust, mortgage, capitalization, and investment institutions. National institutions for economic development extend agricultural and long-term industrial credit and finance and develop public works, international trade, cooperatives, and the motion picture industry; they also operate savings accounts. The National Financing Agency (founded in 1934) acts as a financing and investing corporation; it also regulates the Mexican stock market and long-term credits.

There are a number of state development banks, including Nacional Financiera (Nafin, mainly for small and medium-sized businesses), Banco Nacional de Comercio Exterior (Bancomext, foreign trade), Banco Nacional de Obras y Servicios Públicos (Banobras, public works and services), Financiera Azucarera (sugar industry), Banco Nacional de Comercio Interior, and Banco Nacional de Crédito Rural. Nafin and Bancomext are by far the most important.

In September 1982, in order to stop the flight of capital, the government nationalized all 57 private banks; their combined assets were estimated at $48.7 billion. After the inauguration of President de la Madrid in December 1982, it was announced that 34% of the shares of the nationalized banks would be sold to bank workers and users and to federal, state, and municipal agencies. No single shareholder would be allowed to purchase more than 1% of the stock, and the federal government would retain a 66% controlling interest. The government had consolidated the commercial banking system into 19 financial institutions by the end of 1986. In November 1986 the government introduced a plan that would privatize 18 of Mexico's 19 state owned commercial banks. The sale of the banks began in 1987. In 1990 the government began allowing foreigners to buy up to 30% of the state's banks. By July 1992 the banking system was completely private. The only foreign bank permitted to operate within Mexico as of 1993 was Citibank; another 100 foreign banks had representatives in Mexico, however.

The 1990s brought fundamental change to the financial sector. Apart from liberalization of interest rates and credit terms and the elimination of obligatory lending to the public sector, there was the creation of new financial instruments and institutions. At the end of 1994, there were around 50 commercial banks in operation compared with just 19 two years earlier. The newly privatized commercial banks had problems almost from the outset. The principal cause was poor asset quality which manifested itself in an increasingly serious burden of nonperforming loans.

Faced with the prospect of a wholesale banking collapse, the government came up with a succession of different measures to deal with the problem of bad debts. There had been a scheme to enable bank loans to be rescheduled using index-linked Unidades de Inversión (UDIs) and a program of support for bank debtors ( Apoyo a Deudores , ADE) designed to help as many as eight million people reschedule debts of up to $26,000. In May 1996, the government announced a further scheme to help mortgage debtors under which it was to assume 30% of monthly payments due during the year, the proportion falling progressively to 5% over 10 years.

Apart from providing relief for debtors, the government also set up a program to enable banks to meet capital and loan loss provisions ( Programa Temporal de Capitalización Temporal ), as well as a fund ( Fondo Bancario de Protección de Ahorro-Fobaproa ) to take over banks' bad debts in exchange for new capital injections by shareholders. Nevertheless, it has had to step in and take control of a number of institutions. The reserve package cost the government a considerable sum. However, it limited the damage by selling off banks in its control, mainly to foreign investors. Foreign investors also helped to capitalize banks which were in private hands. By 1999, there were $61 billion of unpaid debts that the Mexican government had bought from banks in order to keep them from collapsing, adding to the public debt. These bank loans equaled 20% of GDP in 1999.

In mid-March 1997, after two years of preparation, the government introduced measures to curb money laundering. Anywhere between $4 billion and $30 billion of drug money is laundered in Mexico every year. Starting in 1998, banks, brokerages, and large foreign exchange houses had to report all cash transactions involving $10,000 or more to the central bank. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $56.5 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $138.3 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 12.89%.

The National Securities Commission (founded in 1946) supervises stock transactions. The Stock Exchange of Mexico (Bolsa Mexicana de Valores), the largest stock exchange in Latin America, was organized in its present form in 1933. It lists the stocks of the most important industrial companies, as well as a few mining stocks. Two smaller exchanges at Monterrey and Guadalajara were absorbed in 1976 by the Mexico City exchange. Trading on the exchange increased tenfold between 1976 and 1981, but dropped thereafter with the prolonged recession. It recovered to its 1979 level by 1986 and rose 124% in 1987 despite a spectacular crash in October and November of that year tied to the Wall Street's crash. The greatest part of the trading is in fixed-interest, high-yield bonds and bank deposit paper. Under new rules, which came into force in November 1989, foreigners are allowed to purchase almost any stock through a "neutral" trust, although as of 1997 they still did not have voting rights. In 1992, the market behaved erratically, largely because of sensitivity to the political and economic situation in the US and uncertainty about NAFTA.

In 1996, the recovery in the stock market strengthened as the economy began to pull out of recession, inflation and interest rates fell, and the currency held steady. As confidence grew, so foreign investment flowed back into the market. By mid-year, the total value of foreign investment in the stock exchange was $33.8 billion compared with $27.8 billion at the end of 1995, $34.4 billion at the end of 1994, and $54.6 billion at the end of 1993.

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