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Recent reforms in Mexican banking regulations: safeguarding Mexican bank deposits

Mexican law anticipates the possibility of commercial banks being unable to meet its financial obligations with a system to guarantee payment of a bank's obligations to its depositors and certain creditors. Enacted to shore up gaps in the government guarantee, the new Law to Protect Bank Savings (the LPAB) promotes financial stability in Mexico through greater consumer confidence in the private banking system.

Regulatory safeguards under prior law

Just as the banking industry was making the adjustment to re-privatization, the intervening financial crisis that began at the end of 1994 threatened to undermine confidence in the banking system. To handle the sudden spate of non-performing loans resulting from inflation and the surge in interest rates, many Mexican banks relied upon the Banking Fund for Protection of Savings (Fondo Bancario de Protección al Ahorro or FOBAPROA), a trust established to preserve overall financial stability by supporting commercial banks having financial problems. Administered under the aegis of the central bank (Banco de México) and funded by regular assessments imposed on all commercial banks, FOBAPROA served to stave off bank failures, but it proved an imperfect, stop-gap mechanism for safeguarding deposits and preserving consumer confidence in the long-term health of the banking system.

Institute for the protection of bank savings

In effect since January 20 1999, the LPAB restructures the government safety net, replacing FOBAPROA with the Institute for the Protection of Bank Savings (Instituto para la Protección del Ahorro Bancario or IPAB), which is administered by a seven-member governing board, including the Secretary of Finance and Public Credit, the Governor of Banco de Mexico, and the Chairman of the National Banking and Securities Commission, and four voting members appointed by the President of Mexico subject to approval by the Senate.

Limits on safeguards

Unlike the FOBAPROA program, the LPAB program contemplates maximum per person limits on the amount the IPAB will guarantee on a given deposit or loan in a single depositary. The IPAB will guarantee depositors up to a statutory maximum per person of 400,000 Investment Units (unidades de inversión or UDI's) for a covered Mexican bank account. If, for example, a depositor has the equivalent of 500,000 UDI's in a covered Mexican bank account and the bank becomes insolvent, the depositor will be able to recover the equivalent of 400,000 UDI's from the IPAB, retaining the right to collect the remaining 100,000 UDI's directly from the bank. Both the Mexican peso/US dollar exchange rate and the UDI value in Mexican pesos fluctuate with the market. At an exchange rate of Ps10/$1, the value of 400,000 UDI's is roughly equal to $98,793 as of March 1 1999, but the LPAB guarantee provisions under LPAB articles 6-10 will enter in effect on or before December 31 2005. To provide for federal guarantees of Mexican bank debts during the interim period, the IPAB is expected to publish a schedule in May of this year.

Assistance in sustainable solvency

While the IPAB safety net works to restore consumer confidence in the banking system, IPAB financial assistance works to prevent the occurrence of bank insolvencies. To help an eligible Mexican bank achieve and maintain solvency, the IPAB is authorized to subscribe shares and bonds the bank issues, assume debts of the bank, grant the bank loans, and acquire bank assets.

Among the eligibility requirements for IPAB assistance are: (a) a technical study evidencing the bank's viability and the appropriateness of IPAB assistance; (b) a finding that, based on the technical study, it is advisable that the bank remain in operation because paying the guaranteed debts would be more costly to IPAB; (c) submission of a recovery schedule; (d) IPAB assistance's being guaranteed by voting shares issued by the bank; and (e) a resolution by the IPAB governing board authorizing financial assistance.

If the IPAB grants a bank financial assistance, the IPAB enjoys broad authority under the LPAB to dictate steps to improve the bank's efficiency, including operational standards and personnel changes. The LPAB also provides for the possibility of the IPAB assuming the management of the bank's operations under a guarded administration (administración cautelar). While a bank is under a guarded administration, the IPAB replaces both the bank's shareholders' meeting and its board of directors as the bank's sole administrator.

IPAB funding

IPAB is funded primarily by regular and special assessments on all commercial banks. The IPAB governing board sets the amount of the assessment on each bank between four and eight per million pesos of its annual operational liabilities, depending on the risk level, which the IPAB determines based on the bank's capitalization level and IPAB governing board rulings.

In principle, the IPAB will fund all its financial assistance out of its own resources. However, should an emergency arise that threatens the solvency of one or more banks beyond IPAB's capacity to provide financial assistance directly, the LPAB authorizes IPAB to obtain financing. Moreover, if the President so requests, the Mexican House of Representatives must include IPAB as a separate item on the annual federal budget, so that the federal government may fund guaranteed debts and IPAB financing.

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