November 08, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Mexico. Directors noted that the financial sector remains resilient and welcomed the efforts of authorities to increase financial deepening and regulate the rapidly evolving fintech industry. They encouraged the authorities to close remaining gaps in the regulatory framework to enhance the effectiveness of supervision and to strengthen the resolution and crisis management framework. Further enhancing the AML/CFT framework also remains a priority.

The staff report highlights that the financial sector continues to weather the uncertain domestic and international environment well. The banking sector remains well-capitalized and highly profitable. As of July 2018, the tier 1 capital ratio of the sector stood at 14% and the return on equity at 20.7%, while the non-performing loan (NPL) ratio remained at near record low of 2.1%. Commercial bank credit to the non-financial corporate sector strengthened by 10% (y-o-y) in real terms in August, despite higher borrowing costs. Although the financial sector remains resilient to various risks, close monitoring should continue. Recent stress tests of the banking sector conducted by the regulators have confirmed overall resilience of the banking sector; except for a few very small banks, all banks could absorb a substantial deterioration in credit quality and higher funding cost. The authorities considered that the financial sector’s substantial buffers, given strong levels of capital and loan-loss provisions, have made the sector resilient under an uncertain economic environment. 

Staff welcomed the issuance of regulation based on the new Fintech legislation. It is believed that the National Strategy for Financial Inclusion (NSFI) was a first step to improve financial inclusion by focusing on financial education and consumer protection. Staff advised against setting quantitative lending targets and instead supported changes in development banks’ incentive structures to encourage lending to sectors lacking access to market financing. The incoming administration noted that they expected development banks to play an important role in infrastructure finance and would consider consolidating a few development banks to improve efficiency. Staff reiterated that financial sector resilience could be enhanced by closing gaps in the governance of the regulatory framework. In line with the recommendations of the 2016 Financial Sector Assessment Program (FSAP), staff urged the authorities to increase the operational independence, budget autonomy, and legal protection of the banking and securities supervisor, and to, subsequently, integrate all prudential supervision functions under one prudential authority. The current and the incoming administrations believe that the institutional set up and governance structure of regulators provides sufficient safeguards to preserve the effectiveness of supervision and do not see the need to merge different regulators to one prudential regulator.

Staff also noted that the resolution and crisis management framework needed strengthening. It was recommended that the bank resolution regime should cover financial holding companies to ensure supervisors can adequately manage the true risks of the group and have the power to require banks to improve their resolvability. Moreover, a formal contingency plan for dealing with a systemic crisis should be developed and a process should be put in place to conduct a systemic crisis simulation exercise involving foreign shareholders. The current administration considered that the resolution framework had been strengthened since the legal reform to the bank resolution framework was enacted in 2014. It is believed that an ex-ante simulation exercise to coordinate the resolution process with foreign regulators could be contemplated, but would require significant resources and careful planning. The selected issues report examines labor market challenges in Mexico, constraints to firm investment and growth, and inequality and social policies.

 

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Keywords: Americas, Mexico, Banking, Fintech, FSAP, Resolution Framework, Stress Testing, Article IV, IMF

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