Author: | Published: 1 Jul 1999
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The Mexican financial industry was dominated throughout 1998 by an extended controversy over the role of FOBAPROA in connection with the Mexican banking crisis which began with the December 1994 devaluation of the Mexican peso. FOBAPROA is the Fondo Bancario para la Protección al Ahorro or Bank Fund for the Protection of Savings, a trust administered by Banco de México (the Mexican central bank) and created initially to protect Mexican bank deposits. Beginning in early 1995 it was also called upon to assume a large volume of doubtful Mexican bank loans and to administer a number of failed banks (in the process assuming control of all of such banks' loans, both good and bad).

FOBAPROA became controversial due to claims (largely unproven) of favouritism to some bankers and debtors and questions raised as to the legal basis for its role. In early 1998 the Zedillo administration introduced legislation to reform the country's banking system, to improve the process of supervising the banks and addressing the problem loan issue, and to convert FOBAPROA notes into full-faith-and-credit obligations of the Mexican federal government. Because of the large total amount of loans for which the Federal Government would become directly liable if FOBAPROA obligations became public debt (then well over $50 billion), the administration's proposed legislation became engulfed in a firestorm of controversy.

The Bank Savings Law

On December 11 1998, after a long struggle between opposing parties in the Mexican Congress, the Ley de Protección al Ahorro Bancario or Bank Savings Protection Law (the Bank Savings Law) was approved by the Congress, and was subsequently approved by the President and published in the Official Gazette on January 19 1999. However, Congress did not approve the conversion of FOBAPROA obligations to public debt; and the new agency established under the law to take over FOBAPROA's functions, the Instituto para la Protección al Ahorro Bancario or Bank Savings Protection Institute (the Institute), remained unable to function for several months because of a dispute over designation of the membership of its Board of Governors. Under the new law, such members required approval by the Senate or its Permanent Commission.

Finally, on May 1 1999, the impasse was resolved by an agreement between representatives on the Permanent Commission of the governing Institutional Revolutionary Party (the Partido de la Revolución Institucional or PRI) and the right-of-centre Party of National Action (the Partido de Acción Nacional or PAN). A previous accord between such parties had assured passage of the Bank Savings Law. Now that its Board has been appointed, the Institute appears ready to begin preparing the bad-loan portfolios of the Mexican banks for sale or other disposition.

The New Deposit Protection System

In place of FOBAPROA, the Institute will protect bank deposits or savings of persons who carry out specified guaranteed transactions. Ordinary bank deposits will immediately become eligible for the protection of the new system, and other categories will be phased in gradually over a period that will end on December 31 2005. The new system guarantees money deposits of any kind, as well as loans and credits in which banks are obligors, with certain specified exceptions. The maximum amount guaranteed by the Institute will be 400,000 UDI's per person and per bank, regardless of the number and type of obligations (UDI's are inflation-adjusted units of account).

Financial Support for Troubled Banks

The Institute may grant financial support to a bank, for the purpose of ensuring its liquidity and soundness, through the subscription of shares and debentures, the granting of credits, the assumption of obligations, the acquisition of real property of the bank or the purchase from the bank of the payment flows with respect to its problem loans. Such support is conditional on (i) an appropriate technical study being submitted; (ii) the Institute determining that the bank should remain in operation rather than be liquidated; (iii) a programme to reestablish the soundness of the bank being prepared; and (iv) the Institute obtaining appropriate collateral security from the bank or its shareholders, including a pledge to the Institute of the outstanding voting shares of the bank.

The Board of the Institute must inform the Executive branch of any emergency that affects a bank's solvency, whereupon financings may be obtained for an amount not greater, during each three-year period, than 6% of the total liabilities of the banking system, as published periodically by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV). The Chamber of Deputies of the Congress must make a specific budgetary allocation of the funds required by the Institute.

Preventive Administration

The law provides for preventive administration, allowing the Institute to take over administration of a bank by replacing its shareholders and board of directors, if its financial support obligations to the Institute are in default. In addition, the Institute may seek the dissolution, liquidation, suspension of payments or bankruptcy of a bank, and may act as its liquidator or receiver. The Institute may acquire, directly or through a trust, any of the real property of a supported bank, and may administer and sell such property, through public auction or such other method as the Board considers to be the best method of achieving the maximum economic result.

Transitional Provisions

The Executive branch and the Chamber of Deputies must ensure that the recently appointed auditors of FOBAPROA conclude their work within six months after the Bank Savings Law becomes effective. Banks may then choose to terminate their contracts with FOBAPROA, return all FOBAPROA instruments and seek to enter into a new arrangement with the Institute. The banks may do this for fear that a gradually disappearing FOBAPROA will not pay its obligations, but they may first wish to ensure that they will qualify for equivalent financial support from the Institute. The Institute will assume the credits granted by the central bank to FOBAPROA and to the Securities Market Support Fund (FAMEVAL). The Institute is to finish the FOBAPROA financial support transactions that have not yet been concluded, presumably meaning that the Institute will assume the administration of intervened banks previously administered by FOBAPROA.

Other Developments

The enactment of the Bank Savings Law was accompanied by amendments to the Credit Institutions Law, Securities Markets Law and Financial Groups Law which eliminate the remaining limitations on foreign investment in Mexican commercial banks, securities firms and financial groups, respectively. The amendments will eliminate the need for such institutions to have class A and B shares; instead each institution will have series O shares which may be freely held by investors located either within or outside of Mexico. A majority of the members of the Board of Directors of each such institution must be either Mexican citizens or residents of Mexico.

Contact Details:

Carlsmith Ball

Sierra Nevada 119

Col. Lomas de Chapultepec

11000 Mexico

DF, Mexico

Tel: +525 520 8514

Fax: +525 540 1545




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