Mexico: Guarantees of bank deposits

Author: | Published: 1 Oct 2009
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Before the nineties, the banks in Mexico were owned by the government and banking deposits, as well as any liabilities arising from them, were fully and unlimitedly guaranteed. In 1991 and 1992, the Mexican government initiated the privatisation process of the Mexican banking institutions. As a result of the Mexican Government's intent on attracting potential buyers for the banks, there was a lack of due oversight of the banks' transactions by the financial authorities, which allowed unlimited insurance of deposits These were guaranteed by the Mexican Government through the Banking Deposits Savings Protection Trust (Fondo Bancario de Protección al Ahorro), a government owned trust specifically formed for such purposes.

However, the disastrous implications of the 1994 banking crisis – caused, in part, as a result of the government's lax regulation and poor supervision of the banks – forced the Mexican government to implement extreme economic measures. They wanted to prevent the total demise of the banking sector and avoid systemic risk. Hence, important amendments to the regulatory framework governing the banking and financial sectors were enacted.

The Banking Deposits and Savings Protection Act (Ley de Protección al Ahorro Bancario or LPAB) was published in the Official Gazette of the Federation on January 19 1999, becoming effective the next day. The LPAB regulates, among other matters, the insurance coverage of insured deposits maintained in banks by individuals and entities, as well as the financial support granted to banks aimed to protecting depositors' savings.

Since the enactment of the LPAB, funds placed in banks are mandatorily insured and guaranteed, on a limited basis, by an independent agency of the Mexican Government, the Mexican Institute for the Protection of Savings and Banking Deposits (Instituto para la Protección al Ahorro Bancario or IPAB). The IPAB has the authority to (i) provide Depositary Insured Institutions with limited Deposit Insurance in favor of banking depositors, and (ii) suggest and oversee any capital restoration plans (programas de saneamiento financiero) to financially assist banks for the benefit of depositors.

In addition to the limited deposit coverage granted by the IPAB, during 2004 certain regulations specifically intended to early identify financial problems of banks were enacted. This regulation is based on a 'prompt corrective actions system based on the capitalisation index of the Banks.

As a result of the foregoing, banking deposits' coverage is comprised of two main elements: (i) the Prompt Corrective Regulation, as a preventive mechanism, and (ii) the limited deposit insurance provided and managed by the IPAB.

Limited deposit insurance

Deposit insurance

Quote of the insured depositary institutions. The IPAB manages a trust fund to which State-insured Depositary Institutions contribute for the constitution of deposit insurance. Each Bank usually contributes, on a monthly basis, an amount equal to 0.4% of its total liabilities.

Insured and uninsured deposits

Not all banking deposits are insured or covered by the deposit insurance. In accordance with article 6 of the LPAB, only funds deposited on saving accounts, checking accounts, deposit certificates, promissory notes accruing interest payable at maturity, and credits derived from credit and debit cards are guaranteed by the deposit insurance. The insurance does not cover any investments in insurance companies, stock brokerage firms, development banks, investment companies, savings entibies and savings and lending companies.

Automatic deposit insurance coverage

Insured deposits of banking depositors are automatically insured by the deposit insurance, so there is no need for any such depositor to apply it.

Limited protection of the deposit insurance

Upon creation of the IPAB, a seven stage transition program was instituted, allowing for a gradual decrease of the deposit insurance coverage. Limitations on this insurance were imposed not only on the total amount of insured deposits, but also on the kind of the deposits to be protected, as stated above. Therefore, starting in 2005 and as per the provisions of article 11 of the LPAB, deposit insurance coverage of insured deposits is limited to a maximum of 400,000 investment units or udis (unidades de inversión), per bank, and per depositor (the deposit insurance limit). In light of this, any amount in charge of an insured depositary institution in excess of the deposit insurance limit will depend on the financial ability of the corresponding Bank to honour such liability.

Prompt corrective action regulation

The IPAB has authority to intervene an insured depositary institution as a protection mechanism of depositors' interests. In that regard, the IPAB, together with the CNBV, are constantly monitoring the financial standing of each Mexican banking institution. They base their supervision on the Prompt Corrective Action Regulation enacted in 2004. Furthermore, the Mexican Banking Institutions Act (Ley de Instituciones de Crédito) was amended in 2004 to allow the CNBV to identify, during the supervision process, any problem evidencing the poor financial health of insured depositary institutions. It also provides the authority to preventively and promptly take any actions deemed necessary for the benefit of depositors.

As a consequence of the Prompt Corrective Action Regulation, the CNBV is entitled to classify each insured depositary institution in accordance with its fulfillment of the mandatory capital requirements. The CNBV may classify banks within any of five levels, which classification is determined in consideration of the banks' capitalisation standard (índice de capitalización or ICAP), which is the relevant benchmark for the measurement of said insured depositary institutions' capital.

Conditioned operations regime

Notwithstanding the prompt corrective action regime, in the event insured depositary institutions are in extreme financial distress, resulting from their failure to achieve the necessary capital standards, the financial authorities are entitled to perform certain actions. These result in either allowing banks to operate under a conditioned regime, pursuant to article 29-Bis-2 of the Banking Act, or even to liquidate the insured depositary institution concerned.

In July 2006, the Banking Act was further amended in order to facilitate financial authorities to promptly implement the aforementioned corrective actions in the event that a bank's capital standard is below 8%, in line with the provisions of article 28 of the Banking Act. In such a case, a bank will be allowed to continue operating as on-going business, but will be subject to the regime. Under the conditioned regime, the operations of the insured depositary institution will be closely monitored by the financial authorities.

In that scenario, the bank shall be bound to comply with capital restoration plans that will be periodically reviewed by the authorities. Any restrictions imposed and applicable requirements to the undercapitalised insured deposit institution will also be periodically reviewed in order to determine whether the plan, restrictions and requirements are resulting in an increase of the capital standard. The conditioned regime also allows shareholders to recapitalise the bank without risking their ownership interests.

Receivership and liquidation of the bank

When an insured depositary institution fails to exercise its right to operate under the conditioned regime or its capital standard is less than 8% but greater than 4%, the CNBV must carry out immediate actions to intervene the operations of the bank. In accordance with article 138 of the Banking Act, if the CNBV determines that intervention is necessary, the IPAB shall appoint a receiver to act as the sole administrator of the Bank. It will be vested with full powers and authority otherwise granted to the shareholders' meeting and the board of directors, to perform all of the bank's operations. The receiver may be assisted by an advisory board.

The advisory board shall be constituted by three to five members and appointed by the IPAB. The role of the receiver is to preventively manage the bank. The receiver must explain in detail every action taken during the performance of its duty, determine the actual assets and liabilities of the bank, and prepare an inventory. It must provide the IPAB with a report on the financial, accounting, legal, economic and administrative status of the insured depositary institution, in order for the IPAB to determine whether or not the bank should be liquidated.

If the capitalisation standard falls below 4%, the bank will be automatically liquidated. When an insured depositary institution has a negative capital standard, it becomes essential to protect the interests of the depositors. It is important to bear in mind that the current Mexican Bankruptcy Act (the Concursos Law) provides special regulations in the event an insured depositary institution is declared insolvent.

Insolvency matters

On May 12 2000, the Concursos Law replaced the previous Mexican Bankruptcy and Suspension of Payments Law. Under the Concursos Law there is a single insolvency proceeding known as Concurso Mercantil (Concurso procedure). The Concurso Procedure consists of two main stages; the conciliation stage, and the bankruptcy stage. Both of these stages are supervised by the Federal Institute of Specialists in Concurso Procedures (IFECOM).

The Concursos Law forms part of the Federal commercial legislation of Mexico. It requires certain jurisdictional prerequisites. Jurisdiction over a commercial insolvency case lies in the Federal District Court of debtor's corporate domicile, or its principal place of business, as the case may be. The Concursos Law further provides that all claims against debtor must be brought before the court hearing the case, in order to avoid different courts hearing claims against the estate in a piecemeal fashion.

Involuntary or voluntary proceeding

As a first step, a creditor is required to establish a valid claim for payment of an obligation against debtor. If appropriate, the creditor would proceed to serve official notice to debtor through a notary public or court officer, requesting payment of a debt. At such stage, the creditor would request the notary public or court officer to attest to the inactivity of debtor or its inability to perform its payment obligations. The purpose of this request would be to establish that debtor is in a condition where it can no longer perform its obligations, giving rise to a valid cause for commencing a Concurso procedure. Having established a valid cause, creditor could then file a petition with the court requesting the commercial bankruptcy of debtor. The debtor itself, any creditor, the district attorney, a court (if the situation ever actually arises), and tax authorities in their capacity as creditors, may file insolvency claims.

A debtor may be declared insolvent if it has generally failed to comply with its obligations. For purposes of the Concursos Law, an individual or entity has failed to comply with its obligations if it has failed to repay its due obligations to two or more different creditors. The obligations of the debtor must have been due for at least 30 days and represent at least 35% or more of all the debtor's obligations on the date on which the demand or insolvency petition is filed.

Failure to comply is also indicated if the debtor does not have any of the following assets in an amount sufficient to repay at least 80% of its obligations due on the date on which the demand or insolvency petition is filed:

  • cash and demand deposits;
  • term deposits and investments becoming exercisable or due in a term no longer than 90 calendar days following the date on which the demand or insolvency petition was filed before the Court;
  • customer receivables with a maturity date not exceeding 90 calendar days after the date on which the demand or insolvency petition was filed before the Court;
  • securities or negotiable instruments available at the relevant markets which may be sold within a term of 30 business days, with a known value on the date on which the demand or insolvency petition was filed at the Court.

The debtor itself, any creditor, the district attorney, a judge, and tax authorities in their capacity as creditors, may file insolvency petitions.

With the involuntary petition filed by creditors, or the voluntary insolvency petition filed by the company, a guarantee must be posted to secure the examiner's fee payment.

The court will rule against the creditor that filed the involuntary petition, or the company that filed the insolvency voluntary petition, to pay attorney's fees and expenses (the amount is regulated by statute), including the examiner's fees, if any dismissal judgment is issued declaring that the company is not in insolvency status.

Preliminary stage

Immediately after the insolvency petition is filed and accepted by the court, it must request the IFECOM for the appointment of an examiner. Once the examiner has been appointed, it must report to the court, within the following 15 to 30 days, whether the debtor is in fact insolvent andi f it is in one or more of the hypothesis contemplated by the Concursos Law to be declared in Concurso. The debtor and, in cases where the insolvency petition is filed by creditors (involuntary procedure), such creditors, may challenge the examiner's report. The Court must resolve as to the solvency or insolvency of the debtor within the 15 days following the date of its receipt of the examiner's report. If the court resolves that the debtor is solvent, the Concurso procedure ends. If the court resolves that the debtor is in fact legally insolvent, it must so declare and the conciliation stage shall begin.

The declaration of insolvency must establish that the debtor has incurred a general default of its payment obligations, and must include a provisional list of creditors identified in the debtor's accounting records. This list does not exhaust the proceeding for recognition, ranking and determination of the priority of creditors' claims.

Pursuant to the Concursos Law, the declaratory of insolvency will include the look-back date (the date to which the effects of the Concurso Procedure will be applied retroactively – 270 days hardening period). It also includes a declaration that the conciliation stage has commenced and instructions to the IFECOM to appoint a professional conciliador. There is also an order to the debtor to immediately provide to the conciliator debtor's books, records and all other documents, and allow the Conciliator and interveners, if any, to carry out the activities necessary to accomplish their duties, and to suspend the payment of debts.

The declaration of Concurso will also include an order to register the resolution with the Public Registry of Commerce corresponding to debtor's domicile. It also provides for the Publishing of an abstract in the Official Gazette and in one of the newspapers of largest circulation in the domicile where the procedure is taking place. Finally, there is an order to the Conciliator to begin the proceeding of acknowledgement or recognition of creditors, and to notice creditors to request the recognition of claims.

Stages

Conciliation stage

The first stage of a Concurso Procedure is the conciliation stage, which is purported to encourage a binding reorganisation agreement among the debtor and its creditors. This is a plan to avoid the debtor's bankruptcy or liquidation. The conciliation stage may not last more than 185 calendar days unless extended for up to two additional consecutive periods of 90 calendar days each. However, the Conciliation stage cannot last more than 365 calendar days.

Once the commercial insolvency of the debtor has been declared, the conciliation stage will initiate and attempts to find formula to allow the debtor and creditors to come to an agreement will begin. A conciliator, who initially acts as an intermediary between the company and its creditors, must direct this attempt. The roll of the examiner and of the conciliator may be performed by the same person.

Pursuant to the purposes of the Concursos Law, the idea is for the conciliator to act as an amicable intermediary between the parties. One of the functions or powers of conciliator is to recognise claims based on the debtor's accounting records in order to make the claim recognition process faster. The conciliator will also collaborate in the decision on whether the business will continue to be operated by debtor's restructuring the debt, or whether it is necessary to remove existing management from the operation of the company.

The objective of the conciliation stage is to preserve the operation of the debtor's business. The conciliator is responsible for publishing the deadline for creditors to submit proofs of claims, processing proofs of claims, serving as a mediator among the debtor and creditors, and proposing to the court a plan of reorganisation.

Bankruptcy stage

The second stage of a Concurso Procedure is the bankruptcy stage. The debtor may be declared bankrupt if: (i) the conciliation stage finishes without having reached a creditors' agreement; (ii) the debtor fails to comply with the creditors' agreement; or (iii) the debtor requests its bankruptcy, or the conciliator requests the debtor's bankruptcy and the court agrees to grant it.

In addition to the effects attributed to the declaration of insolvency, the bankruptcy judgment:

(i) suspends the ability of the debtor to perform legal acts;

(ii) causes the appointment of a receiver, with full authority, to replace the debtor or the conciliator in the management of the debtor's business;

(iii) orders the debtor and any third party having possession of the debtors' assets to deliver all such assets to the receiver;

(iv) requires that payments to the debtor only be made with the receiver's authorisation (failure to obtain such authorisation causes double payment);

(v) invalidates any acts performed by the debtor or its representatives after the bankruptcy judgment without the receiver's authorisation; and

(vi) invalidates any payments made by the debtor after the bankruptcy judgment.

Special rules for insured depositary institutions

Under the Concursos Law, special rules are provided for the Concurso procedure of insured depositary institutions. It provides that only the IPAB or the CNBV may request the Concurso of an insured depositary institution. From the date on which a petition for the Concurso Procedure of a insured depositary institutions is filed, such insured depositary institutions shall shut down all the offices that provide service to the public. It must also suspend any type of borrowing, lending and service transactions. The court may adopt such preventive remedies as may be necessary for the protection of the workers, premises and assets of the institution. Moreover, it provides that when the Concurso of an insured depositary institution is declared, the procedure will be commenced in all instances with the bankruptcy stage.

About the author

Alejandro Sainz is the co-managing partner of the firm, Chairman of the insolvency & restructurings practice group and co-chair of the mergers & acquisitions practice group. He represents national and multinational clients in a broad range of transactional matters, providing legal advice in the areas of corporate, finance and commercial law. This work includes reorganisations, restructurings, work-outs, bankruptcy and cross-border insolvency procedures, project and corporate finance, M&A, foreign investment, joint ventures, infrastructure, real estate, gaming and telecommunications transactions.

In the restructuring and insolvency arena, he represented: (i) the ad-hoc committee of foreign secured creditors in the $800 million cross-border restructuring of the debt of Satmex; (ii) Grupo Iusacell in its $650 million cross-border restructuring of its debt, and; (iii) the ad-hoc committee of creditors in the Mexican legal aspects of the US insolvency procedure of Tower Automotive.

Among other restructuring and insolvency matters, Mr. Sainz is representing: (i) the ad-hoc committee of noteholders in the cross-border insolvency procedure of Corporacion Durango; (ii) the ad-hoc committee of noteholders in the cross-border insolvency procedure of Comercial Mexicana; (iii) Grupo Iusacell Celular in the cross-border restructuring procedure of its new debt; (iv) an important creditor in the bankruptcy procedure of the Mexican airline Alma, and; (v) certain creditors in the cross-border insolvency procedure of Majapara, a Mexican foreign exchange broker.
Contact information

Alejandro Sainz
Cervantes Aguilar-Alvarez y Sainz

Torre del Bosque
Blvd. M. Ávila Camacho 24 – 6° Piso
Lomas de Chapultepec
Deleg. Miguel Hidalgo
11000 Mexico, D.F.
Tel: +52 55 9178-5040
Fax: +52 55 5540-3433
Email: asainz@caays.com

About the author

Diego Martínez Rueda-Chapital, partner at Cervantes Aguilar-Alvarez y Sainz, practises in the areas of banking, corporate, capital markets and securities. This includes structured financings, secured and unsecured lending transactions, restructurings and work-outs, private and public offerings of debt and equity, securitisation, derivative and asset-backed finance transactions, project finance and financial regulatory matters. He is also very active in real estate transactions representing either landlords, developers, landlords and lenders. He is a specialist in corporate governance matters.

Previously he was founder of Riveroll y Martínez-Rueda and senior associate at Jáuregui Navarrete y Nader. He was also the manager of banking projects at the National Banking and Securities Commission.

While a government official he was in charge of the working group who prepared the amendments to several financial laws, including the Mexican Banking Act and the Stock Exchange Act. Additionally, he developed the Code of Best Practices of Corporate Governance for Mexico (issued by the CCE in a Joint effort with the CNBV). He worked also in the preparation of the current Banking and Savings Deposits Insurance Act (LPAB). Finally, he was also involved in the process by which the Mexican Insolvency Law was enacted as well in the creation of the Savings and Public Credit Act. Currently, he is legal counsel of several banking clients and publicly held companies. Additionally, he regularly advises real estate developers.

He has a masters degree from Georgetown University Law Center where he focused his studies on banking and securities. He obtained his law degree from Universidad Panamericana, Licenciado en Derecho.
Contact information

Diego Martínez Rueda-Chapital
Cervantes Aguilar-Alvarez y Sainz

Torre del Bosque
Blvd. M. Ávila Camacho 24 – 6° Piso
Lomas de Chapultepec
Deleg. Miguel Hidalgo
11000 Mexico, D.F.
Tel: +52 55 9178-5040
Fax: +52 55 5540-3433