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Cablegate: Financial Sector Reforms in the Pipeline in Mexico

VZCZCXRO7431
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #5567/01 2962211
ZNR UUUUU ZZH
P 232211Z OCT 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 9300
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 005567

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITA (ISRALY ECHEGARAY)
TREASURY FOR IA (ALICE FAIBISHENKO, ANNA JEWEL)
TREASURY FOR OCC/IBF (SUSAN QUILL)
TREASURY FOR IBSMO (WILBUR MONROE, BILL FOSTER)
CFTC FOR OIA (WARREN GORLICK)
NSC FOR RICHARD MILES, DAN FISK
SEC FOR OIA (SHAUNA STEELE)
STATE PASS TO USTR (EISSENSTAT/MELLE/SHIGETOMI)
STATE PASS TO FEDERAL RESERVE (ANDREA RAFFO/ANN MISBACK)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: FINANCIAL SECTOR REFORMS IN THE PIPELINE IN MEXICO


1. (SBU) SUMMARY: The Finance Secretariat (Hacienda) sent a
reform initiative to Congress that would allow banks to apply
for bank licenses based on the operations they intend to
pursue. Banks would only be required to comply with the
regulations for the specific activities they perform, and
minimum capital requirements would be lowered accordingly.
The reform package also proposes a redistribution of power to
the Banking and Securities Commission. Separately, Hacienda
is working on a bank bankruptcy proposal that it would like
to submit to Congress during the legislative session that
ends in mid-December. Hacienda is also working on changes to
the financial groups law. In a meeting with USG officials,
Hacienda showed no willingness to consider foreign bank
branching into Mexico. The officials say Mexico will be in
compliance with Basel II by January 1, 2008. END SUMMARY.

-----------------------------
New Banking Reform Initiative
-----------------------------

2. (U) The Secretariat of Finance and Public Credit
(Hacienda) submitted a banking sector reform package to the
Chamber of Deputies (lower house) in late August that
addresses a variety of issues, including: differential bank
licensing, the redistribution of powers to the Banking and
Securities Commission (CNBV), banking fees and charges, and
additional loan loss reserves rules.

3. (SBU) Currently, Mexico only has one type of bank license,
a universal license with uniform regulations and capital
requirements for all banks. Proposed amendments to the Law
of Credit Institutions (LIC) would allow banks to apply for
licenses according to the operations they intend to carry
out. Hacienda officials told econoff that the idea of this
proposal is to "bridge the gap" between "cajas"
(cooperatives/credit unions) and full fledged banks. Banks
presently are required to comply with all banking
regulations, even if they only perform a subset of the
activities allowed under the universal license. With the new
limited licenses, banks would only be required to comply with
the regulations for the specific operations they perform.
Requirements would vary in such areas as: corporate
governance, IT infrastructure, and financial information
reporting. Banks currently file up to 108 reports to the
CNBV and Hacienda per year. Capital adequacy requirements,
credit processes, and internal control requirements would
remain the same. The different categories of allowable
activities have not yet been set. CNBV will establish them
through separate regulations.

4. (SBU) The existing law requires all licensed banks to keep
paid capital equal to 0.12% of the system's net capital.
This amount is calculated and published by the CNBV annually.
The reform would establish a minimum capital requirement of
90 million UDIS (inflation-indexed units; approximately USD30
million) for banks with full operating licenses. The CNBV
will issue rules to determine the minimum capital
requirements for banks with limited licenses. While these
rules are currently undetermined, the CNBV stated that they
will not allow for less than 40% of the required capital for
a fully licensed bank (approximately USD12 million).

5. (SBU) Hacienda told econoff and visiting Treasury
officials that while it is possible the reform package will
be reviewed by the end of the year, it will most likely be
reviewed in 2008. Local press reports, however, say that
Hacienda would like the legislation passed during the current
legislative session, which ends on December 12. The reform
would not be enforced until approximately one year after it
is passed by Congress. This time would be used to issue the
needed supplementary regulations. Hacienda officials have
been working on the reform for two years and consider it one

MEXICO 00005567 002 OF 003


of their top priorities. They believe Congress will approve
the initiative, adding that the large banks support it. This
legislation has already been approved by the Federal
Regulatory Improvement Commission (Cofemer).

6. (SBU) Hacienda noted that sofoles (limited purpose
financial companies), sofomes (multiple purpose financial
companies), and the larger cajas have expressed interest in
the proposal -- even some institutions that have complied
with the Popular Savings and Credit Law (LACP). Hacienda
said that the new licenses would allow these institutions to
enter other service sectors. (Comment: Separately, the
Hacienda officials noted that they are currently working on
measures that would make it easier for the government to
apply the LACP and for cajas to comply with the law,
particularly smaller ones. They did not give any detail, but
remarked that the idea is to differentiate requirements based
on the size of financial institutions similar to how
regulatory requirements for the new "niche banks" will depend
on the operations the institution carries out. End Comment.)


7. (SBU) The reform package also proposes a redistribution of
power from other financial authorities to the CNBV.
Currently Hacienda issues banking licenses, the CNBV
regulates, and the Bank of Mexico oversees operations and
payment systems. The proposal assigns full responsibility in
capital adequacy, credit provisioning, and all bank-related
authorizations to the CNBV. The goal is to enable a single
authority to supervise and regulate any given institution
from its inception to its end. The intent is to have the
CNBV be the regulator and Hacienda the policymaker. While
this is a positive step forward, the proposal does not
request budgetary autonomy for the CNBV, which was one of the
only IOSCO (International Organization of Securities
Commissions) principles not to have been fully implemented.

8. (SBU) The CNBV also submitted a new set of rules dealing
with the regulation and supervision of financial contracts,
bank advertising and bank statements to better protect
consumers from excessively high banking fees and charges.
Additional loan loss reserve rules were also proposed.
Current rules require additional loan provisions when banks
fail to produce evidence of a prior inquiry to a credit
bureau. The CNBV is presently updating the rule to favor
banks that take into account default conducts and the ratio
of default amount to total loans.

--------------------------------------
Bank Solvency and Financial Groups Law
--------------------------------------

9. (SBU) Separately, Hacienda is working on a banking sector
specific reform of the bankruptcy law. The reform will
propose systematic bankruptcy procedures that protect
depositors, creditors, and other financial institutions. It
reduces the amount of time the bankruptcy process takes,
improves asset collection and/or sale, and gives the
Institute for the Protection of Bank Savings (IPAB) the power
to manage the bankruptcy process (though IPAB will have to
create a specialized committee). While most of the reforms
can be accomplished through regulations, some may require
legislation. This reform is the third of a three-part reform
initiative on bank solvency. The first part, prompt
corrective action, was passed in 2004, and the second part,
banking resolution, was passed in 2006. The bank bankruptcy
proposal is currently being analyzed by Cofemer. Hacienda
would like to submit the initiative to Congress during the
current legislative session, which ends on December 12.

10. (SBU) In addition, Hacienda is working on changes to the
financial groups (conglomerates) law. It will address such

MEXICO 00005567 003 OF 003


issues as risk management and internal controls at the
corporate level, intra-group transactions, and capital
adequacy at the group level. The Hacienda officials said
they have a draft prepared, but they are still discussing a
few topics with the Bank of Mexico and the CNBV.

----------------------
Foreign Bank Branching
----------------------

11. (SBU) In a meeting with U.S. Treasury officials and
econoff, Hacienda officials showed no willingness to consider
foreign bank branching into Mexico. They said the
differential licensing model is like offering bank branching
in that it provides flexible options to financial
intermediaries and ensures that depositors are protected. The
officials claimed that they have not received many requests
from overseas banks to allow branching and noted that
Mexicans do not like the word "branch." They said they are
willing to meet with U.S. banking industry representatives
and with the Federal Reserve and Treasury's Office of the
Comptroller of the Currency to hear their perspectives.

--------
Basel II
--------

12. (SBU) Cofemer earlier this month issued the final draft
of the Rules for Banking Capitalization Requirements.
Hacienda officials told econoff that they will publish the
rules in the Official Gazette in time for Mexico to be in
compliance with Basel II by January 1, 2008.

-------------------------------------------
CNBV's Challenges and Regulatory Priorities
-------------------------------------------

13. (SBU) The CNBV considers the following its key challenges
moving forward: 1) redistribution of powers to the CNBV, 2)
bankruptcy reform, 3) financial groups regulation, 4)
accounting harmonization, and 5) international
recommendations. Regarding the fourth point, CNBV aims to
develop a harmonized set of accounting standards for
financial institutions. The effort will be crucial in their
drive for a prudential framework for financial groups and for
the establishment of a consolidated supervision approach
across the financial system. With respect to the fifth
point, CNBV will continue to address recommendations from
international entities. The IMF/World Bank Financial Sector
Assessment Program (FSAP) has pushed for the CNBV's
independence from Hacienda. The World Bank Report on the
Observance of Standards and Codes (ROSC) has urged for the
development of a "Mexican PCAOB" (Public Company Accounting
Oversight Board). CNBV is working on these recommendations.

14. (SBU) The CNBV ranked their main regulatory priorities in
the banking sector as follows: 1) Basel II, 2) Banking sector
reform package, 3) Regulatory burden for loans to small- and
medium-sized enterprises (SME) (credit provisioning, credit
granting and file keeping), 4) Bankruptcy procedures, 5)
Consumer protection and transparency (regulation of
contracts, advertisement and bank statements, review of
credit bureau law), and 6) Corporate governance throughout
the financial system. CNBV officials said that all, except
the corporate governance and possibly the bankruptcy
procedures, should be addressed within one year.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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