In 2001, the International Monetary Fund (IMF) released its findings on Mexico's compliance with the Basel Core Principles (BCPs) for Banking Supervision, in which it identified several significant shortcomings in the country's regulatory framework. However, subsequently, several laws were amended and substantial changes were made resulting in stronger banking supervision as reported by the IMF in its 2007 Financial Sector Assessment Program (FSAP) Update. The 2007 IMF report concludes that Mexico is now compliant with 19 BCPs, largely compliant with 5, and is non-compliant with 1. Prudential regulations, on-going banking supervision, information requirements, remedial measures and cross-border banking are all being adeptly handled by the supervisory authorities per the IMF assessors. The problem, according to the 2007 FSAP Update, is in the lack of clear regulatory powers for the primary banking sector regulator, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), rendering the CNBV less independent and autonomous than as required by the BCPs. According to the IMF assessors, the CNBV lacks the power to control the activities of banks fully, from inception to demise. Instead, the Secretartiat of Finance and Public Credit (Secretaría de Hacienda y de Crédito Público, or SHCP) is given the authority to set regulatory policy and license banks in the country and as such holds precedence over the CNBV in regulatory policy-making. However, the authorities recognize this dichotomy in functions and the problems it pose, and accordingly, have started to gradually transfer some of SHCP's regulatory powers to the CNBV.

General Overview

The International Monetary Fund (IMF) and the World Bank conducted a Financial Sector Assessment Program of Mexico in 2006, the details of which were released by the IMF in 2007. The 2007 IMF report notes that, since its assessment of Mexico in 2001, the country has made rapid strides and has become compliant with far more Basel Core Principles (BCPs) than previously identified. As the IMF notes "this improvement is due to the overall coordinated effort of all the regulatory authorities in formulating and pushing through for enactment a series of laws and regulations to improve banking supervision and regulation" (p. 7). Of the 25 BCPs, Mexico complies with 19, largely complies with 5, and is not compliant with 1. However, the main concern is that Mexico is non-compliant with BCP 1, which the IMF report states is due to "the lack of an autonomous supervisory agency that has the power to control all the activities from the inception through the demise of a financial institution including all its nonbank subsidiaries" (pp. 7-8).

A 2006 Financial System Stability Assessment (FSSA) Update of Mexico published by the IMF notes that there are several regulatory bodies performing various supervisory tasks over financial institutions. Although the Secretartiat of Finance and Public Credit (Secretaría de Hacienda y de Crédito Público, or SHCP) sets regulatory policy for the financial system, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) is the primary banking regulator. The Central Bank of Mexico (Banco de México, or BdM) also has limited regulatory responsibility of the banking sector. The extensive division of responsibilities between different supervisory agencies is identified by the 2007 IMF assessment as the main drawback with Mexico's financial supervision architecture. This prevents a clear distinction of responsibilities and gives the SHCP supervisory precedence over the CNBV. Therefore the 2007 IMF assessment rates Mexico as non-compliant with BCP 1, which relates to the objectives, autonomy, powers, and resources of the supervisory, which for all practical purposes is the CNBV. However the IMF assessors acknowledge that the Mexican authorities are aware of this shortcoming, and the 2006 FSSA Update does note that the SCHP has started to transfer, albeit gradually, some of its regulatory powers to the CNBV.

The main law governing banking supervision in Mexico is the Law of Credit Institutions (Ley de Instituciones de Crédito, or LIC). According to the 2007 IMF assessment, "a new Article (134) in the LIC established the basis of the CNBV's system of Prompt Corrective Actions (PCA) in line with best international practices" (p. 18). The CNBV has, over the years, issued several regulations and circulars on prudential regulations, accounting standards, and cross-border banking that allow the CNBV to effectively supervise the banking sector. In May 2007, the BdM's 2007 "Financial System Report" notes that the Congress approved a new Law for the Transparency and Regulation of Financial Services (Ley para la Transparencia y Ordenamiento de los Servicios Financieros, LTOSF), which replaced the old law of December 2003. The LTOSF enhances the BdM's powers to regulate the commissions and fees charged for bank services.

The banking crisis of 1995 resulted in the consolidation of the Mexican banking system and, according to the IMF's 2007 report, the three largest institutions account for close to 60 percent of the banking sector's assets. Similarly, foreign ownership also increased significantly, from 20 percent in 1997 to more than 80 percent in 2005 per a 2006 report by the Bank for International Settlements (BIS). Since the 1995 crisis, several regulatory changes were also introduced so as to improve transparency and the general preconditions for banking supervision. For example, the bankruptcy law was amended in 2000 (Ley de Concursos Mercantiles) to establish the Federal Institute of Business Reorganization Specialists (Instituto Federal de Especialistas de Concursos Mercantiles, or IFECOM), which manages all bankruptcy claims. Further, the amendments to the bankruptcy law also entail setting a timeframe to process all insolvencies and thus reduce the overall time it takes to address this issue.

Based on information provided in a 2007 report by the BdM, commercial banks are the dominant players in the Mexican financial market, although the report notes that recently commercial banks have been 'losing ground' to pension funds (AFORES) and mutual funds. The 2007 BdM report states that "as of December 2006, there were 40 commercial banks in Mexico, managing over half of the funds intermediated in the financial system" (p. 49) and in 2006 the SHCP granted charters to twelve new banks. Commercial banks, according to the 2007 BdM report, posted operating profits of 99.8 billion pesos in 2006. According to the same report, this rise in profitability is attributable to: "an improvement in their balance mix, an increase in credit to households, and the population's greater use of banking services" (pp. 51-52). The 2007 IMF report notes that the capital standards are in line with Basel I and the authorities are preparing a new capital adequacy regulation that will incorporate Basel II. As of December 2006, per the BdM's 2007 report, the average capital adequacy index for the six largest banks was 15.2 percent.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

NC

The IMF in its 2007 assessment concludes that Mexico is non-compliant with this principle. In its 2001 assessment the IMF pointed to several weaknesses that Mexico exhibited in regards to this principle, most important of which was the lack of the CNBV's ability to effectively supervise and regulate banks since the SHCP had more power in these areas. Other issues related to: (1) clearer responsibilities for the supervisory agencies; (2) the lack of effective corrective measures; and (3) the setting up of "Quality Assurance" function within the CNBV. Per the 2007 IMF report, these issues have yet to be remedied, and "at present, the CNBV still does not have all the core responsibilities nor the operational independence to exercise effective supervision [and] the financial system continues to be overseen by multiple regulators" (p. 17). Nonetheless, according to the same report, the authorities are aware of these shortcomings and are in the process of addressing some of the issues.

1.(2) Operational independence and adequate resources.

CP

Mexico is largely compliant with this principle, according to the 2007 IMF report. The report notes that the CNBV has indicated that it presently has adequate resources for its proper functioning, but the "the ability of the SHCP to restrict the CNBV budget creates a potential for future limitations to be imposed on resources" (p. 18).

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

Mexico is compliant with this principle as noted in the 2007 IMF assessment. The report notes that while the SHCP has the legal responsibility for licensing banks, the SHCP differs to the CNBV's opinion on the matter.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

FC

According to the 2007 IMF report, Mexico is compliant with this principle and "a new article (134) in the LIC established the basis of the CNBV's system of PCA in line with best international practices" (p. 19). Further the report notes that in December 2004, the CNBV issued a set of rules (Reglas de Carácter General a que se refiere el Artículo 134 Bis de la ley de Instituciones de Crédito), which provide the general framework for the PCA.

1.(5) Legal protection for supervisors.

FC

Mexico is compliant with this principle, as noted by the IMF in its 2007 report. As of 2005, a new article (Article 21) was added to the CNBV's law regarding assistance and legal protection to CNBV officers when performing their supervisory duties according to their responsibilities. This law, according to the 2007 IMF report, "addressed the problem of legal protection and assistance to CNBV supervisors in the performance of their supervisory duties" (p. 20).

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

FC

The 2007 IMF report concluded that Mexico is non-compliant with this principle. The IMF report notes that Mexico has no formalized means of cooperation between its regulatory agencies; however 'in practice' there is an effective sharing of information between the respective organizations.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

Mexico is compliant with this principle, as stated in the 2007 IMF report: "Article 105 of the Law of Credit Institutions defines and restricts the use of the word "bank" in any language to banking entities only. Article 2 and Article 46 of the LIC define permissible activities for licensed banks in Mexico" (p. 20).

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

FC

Mexico is compliant with this principle as noted by the IMF in its 2007 report. The report also indicates that, legally, the SHCP is the licensing authority and sets out the requirements for bank licenses in terms of structure, capital base, fit and proper test for the directors, organization and internal control policies, and operating plan. However, the report notes that the CNBV's opinion is consulted on licensing issues and there are plans to transfer the licensing authority for banking institutions to the CNBV in the near future.

4. Authority to review and reject transfer of ownership.

FC

According to the 2007 IMF report, Mexico is compliant with the principle. Similar to the authority to license banks, the report notes that the SHCP is the authority that approves transfer of ownership as well. Nonetheless, the CNBV must be consulted in the process.

5. Authority to review major acquisitions and investments.

FC

Mexico is largely compliant with this principle according to the 2007 IMF report. As was the case at the time of the 2001 assessment, the authority to review major acquisitions and investments rests with the SHCP. The IMF had recommended that Mexican authorities transfer this authority to the CNBV. In its 2007 report, the IMF notes that although this authority has not yet been transferred to the CNBV, the CNBV "has currently a definitive voice by delivering its opinion to the SHCP on each individual applicant" (p. 22).

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

FC

As noted in the 2007 IMF report, Mexico is compliant with this principle and has set adequate capital requirements that are in accordance with the 1988 Basel Capital Accord. Further, the report indicates that banks in Mexico are adequately positioned to comply with Basel II requirements on credit and operational risk.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

FC

According to the 2007 IMF report, Mexico is compliant with the principle. The IMF in its 2007 report also notes that "the CNBV at each examination reviews the type of credit [and], its underwriting methodology, and follows up on deficiencies" (p. 24).

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

FC

CNBV's provisioning rules are in line with international best practices, according to 2007 IMF report. Therefore, the assessors rate Mexico as compliant with this principle. These provisioning rules are put forth in the Circular Única de Bancos.

9. Prudential limits and management information system on concentration of exposure.

FC

Mexico is largely compliant with this principle, as observed by the IMF in its 2007 report. In 2005, the CNBV improved its regulation on concentration of exposure to set limits on the concentration of credit risk (12 percent) to either individuals or groups of individuals, as a share of Tier 1 capital.

10. Arm's length rule and monitoring for connected lending.

FC

The IMF's 2007 report indicates that, since the last assessment (2001), amendments to the LIC have resulted in a revised framework for connected lending whereby the total credit to related parties cannot exceed 75 percent of a bank's Tier 1 capital and all related lending has to be approved by the banks' Board of Directors. Therefore, the IMF rated Mexico as largely compliant with this principle.

11. Policies and procedures for country risk and transfer risk.

FC

Mexico is compliant with this principle, as observed by the IMF in its 2007 report. According to the 2007 IMF report "although regulation and supervisory guidelines are very limited to country and transfer risk, the CNBV's opinion is that these risks are not material and do not deserve special attention" (p. 11).

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

FC

The 2007 IMF report concludes that Mexico is compliant with this principle. According to the same report "the Circular Única de Bancos [Circular on Banks] ... establishes minimum criteria to identify and control risks, including market risks" (p. 27). The CNBV, per the 2007 IMF report, has proper models and systems in place to calculate value at risk, as stipulated in the BCPs.

13. Comprehensive risk management processes.

FC

The 2007 IMF report states that Mexico is compliant with this principle, and banks are required by law to have in place a comprehensive risk-management processes, including appropriate Board of Directors and senior management oversight.

14. Adequate internal controls.

FC

According to the 2007 IMF report, Mexico is compliant with this principle. The report also notes that the Circular Única de Bancos provides a comprehensive regulatory framework for internal controls as well as for internal auditing of banks.

15. Strict "know-your-customer" rules and high ethical and professional standards.

FC

Mexico is compliant with this principle and has strict "know-your-customer" rules which are enforced by the CNBV through routine inspections, per the IMF's 2007 report. Mexico passed its anti-money laundering law in 1997 and has subsequently made several amendments. The law requires all financial institutions to report suspicious transactions for amounts greater than US $10,000.

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

The IMF, in its 2007 assessment, concludes that Mexico is complaint with this principle and notes that the CNBV's on-site supervisory practices have significantly improved since the IMF's 2001 assessment. On-site supervision of banks is generally conducted annually, but is done quarterly for the big banks.

17. Regular contact with bank management and understanding of bank's operations.

FC

Mexico is compliant with this principle, and the CNBV dedicates sufficient resources to assess the quality of bank management and maintains regular contact with bank management, per the findings of the 2007 IMF report.

18. Analytical reports and statistical returns on solo and consolidated basis.

FC

This principle is being complied with by Mexico, as noted by the IMF in its 2007 assessment. The same report also states that, "the offsite supervision is conducted by the CNBV and the BdM through quarterly reports where financial information from the banks is ultimately reported. These financial reports are later validated by on site inspections [and] the system utilized by both of these supervisors allows offsite supervision on a solo basis by each entity" (pp. 31-32). The IMF also mentions that consolidated supervision is conducted through close coordination with other supervisors.

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

According to the 2007 IMF report, Mexico is compliant with this principle, and the CNBV's regulations relating to external auditors are set forth in the Circular Única de Bancos. Moreover, the "the CNBV is also actively involved in the creation of an oversight framework for external auditors in Mexico" (p. 32).

20. Ability to supervise on a consolidated basis.

CP

With regard to consolidated supervision, per the 2007 IMF report, Mexico is rated as being largely compliant. The shortcomings identified by the IMF assessors are that, at present, the regulatory framework does not adequately address all the requirements for financial groups, such as capital adequacy and inspections. However, the 2007 IMF report does indicate that the authorities are considering legislation so as to ensure a more comprehensive supervision on a consolidated basis.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

FC

According to the 2007 IMF report, Mexico is compliant with this principle. Per the same report "the CNBV developed regulatory accounting standards in accordance with international accounting standards; for instance, to prepare consolidated financial statements banks have to include all subsidiaries, whether they are financial entities or not" (p. 14).

22. Adequate supervisory measures to ensure timely corrective action.

CP

The 2007 IMF report notes that an early warning system was established through recent provisions in the Circular Única de Bancos, and the "prompt corrective regime is consonant with international best practices" (p. 36).Despite these positive changes, the 2007 IMF assessment still identified certain shortcomings, and rated Mexico as only largely compliant with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

CP

According to the 2007 IMF report, Mexico is largely compliant with this principle and "Mexican banks are performing data processing functions for foreign subsidiaries and the CNBV has authority to review the process. However, outsourcing to entities outside of Mexico may cause problems for the CNBV in the future" (p. 37).

24. International exchange of information with other supervisors.

FC

Mexico is compliant with this principle, per the 2007 IMF report: "the CNBV is permitted by Article 117 of the LIC to sign MOUs [memoranda of understanding] with home country supervisors where the parent organization of the Mexican bank resides" (p. 37).

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

FC

The 2007 IMF report notes that Mexico complies with this principle and has signed bilateral MoUs with 12 foreign bank regulatory agencies and is in talks with eight more.