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November 27, 2018

IMF published its staff report in the context of the review under the flexible credit line (FCL) arrangement with Mexico. The report highlights that the financial sector remains sound, with the banking sector being well-capitalized and highly profitable. The 2016 Financial Sector Assessment Program (FSAP) and the 2018 Article IV consultation did not highlight significant solvency risks or recapitalization needs.

The assessment reveals that, as of July 2018, the tier 1 capital ratio of the banking sector stood at 14.0% while the non-performing loan (NPL) ratio remained at a near record low of 2.1%. However, the provisioning of NPLs is high at 150.7%. Commercial bank credit to the non-financial corporate sector strengthened by 9.4% (y-o-y) in real terms in September, despite higher borrowing costs, while consumer credit growth slowed down to 1.5%. Additionally, capital in the insurance sector exceeds the minimum requirements while all insurance companies comfortably satisfy the new capital requirements under the Solvency II regime, which was adopted in April 2015. Real estate investment trusts have grown since 2011, but remain small and are financed mostly by equity, with new statutory limits on their leverage. 

The 2012 FSAP had concluded that banking supervision in Mexico was effective while the 2016 FSAP had highlighted the improvements in supervision since 2012. Mexico adopted the Basel III capital rules in 2013, and BCBS assessed it as compliant in 2015. The minimum liquidity coverage ratio (LCR) requirements have been in place since January 2015. The regulation of financial groups was enhanced in January 2014, through the implementation of supervision at the group level. The current administration closely monitors the operations of foreign bank subsidiaries—about 70% of banking system assets—to ensure compliance with regulatory norms. The 2016 FSAP had found that significant progress has been achieved in strengthening financial sector prudential oversight since 2012 and recommended several areas for further progress, especially to strengthen the governance of the supervisory agencies. The 2018 Article IV consultation with Mexico did not raise substantial concerns regarding the supervisory framework.

Related Link: Staff Report

Keywords: Americas, Mexico, Banking, Insurance, NPL, Solvency II, Basel III, LCR, FSAP, Article IV, IMF

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