IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with Mexico. The IMF Directors noted that the financial sector remained sound and emphasized that resilience could be further enhanced by closing gaps in the regulatory and supervisory framework. The staff report highlighted that the nonperforming loans remain low, the banking system is exposed to concentration risk, and the authorities agreed on the need to monitor risks related to financial technology.
The staff report highlighted that the financial sector remains profitable and well-capitalized. As of June, the tier 1 capital ratio of the sector stood at 14.2% and the return on equity was at 20.9%, driven by near record high net interest margins, while the nonperforming loan ratio remained at a near record low of 2.1%. The financial sector is resilient to various shocks, but close monitoring remains crucial. The stress tests by authorities confirmed that, even under adverse scenarios, most banks will remain above the regulatory minimum capital ratios. The banking system remains subject to concentration risk, given that most banks are exposed to a handful of large corporates. The authorities noted that the capital buffers of the financial sector would shield the sector from shocks and that they are closely monitoring concentration risks. Resilience of the financial sector could be boosted by closing regulatory and supervisory gaps. In line with the 2016 Financial Sector Assessment Program, or FSAP, recommendations, the staff advocated the following:
- Increasing operational independence, budget autonomy, and legal protection of the banking and securities supervisor
- Integrating prudential supervision under one authority for all financial institutions
- Enhancing the definition of “common risk” and “related party,” in the area of bank exposures
- Expanding the resolution regime to cover financial holding companies and strengthening the powers of authorities in banking resolution
The authorities noted that the current governance structure has worked well and did not see the need to merge regulators. They noted that they are evaluating the revision of the supervisory regime for financial holding companies and are discussing a draft regulation that will implement Basel standards on large exposures. Staff emphasized that a multi-pronged strategy to boost financial deepening and inclusion should be a policy priority. Staff argued in favor of improving credit reporting systems to facilitate the development of value-added services. The authorities agreed that there is scope for improvements in credit reporting systems. They also noted upcoming fintech regulation for Open Banking that will promote information-sharing among financial institutions and initiatives to improve the banking infrastructure. Furthermore, the staff stressed that secondary regulation for fintech should balance the priorities of promoting competition and improving financial inclusion while strengthening financial stability and consumer protection. The authorities noted that these are the main principles in the fintech law, which are the basis for developing secondary regulation. Moreover, they agreed on the need to monitor fintech related risks.
Keywords: Americas, Mexico, Banking, Article IV, FSAP, Fintech, NPLs, Capital Buffer, Resolution, Large Exposures, Financial Stability, IMF
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