Mexico's Financial System in the Wake of the Crisis
Moderator: Welcome to Research Insights, an occasional podcast from the Federal Reserve Bank of Atlanta. We're talking today with Tapen Sinha, who is the AXA chair professor of risk management at the Instituto Tecnológico Autónomo de México (ITAM) in Mexico City. Professor Sinha is a member of the Mexican Academy of Sciences and is currently a visiting scholar at the Federal Reserve Bank of Atlanta and Georgia State University.
Good to see you, Tapen, and thanks for coming here.
Tapen Sinha: Thank you for inviting me.
Moderator: Today I'm going to be asking you about Mexico's financial system in the wake of the crisis. To start: Mexico's financial system has undergone some very dramatic changes over the past century? Can you give us a sense of what has gone on?
Sinha: Yes, Mexico has had a history of painful changes in the past century. Banks were private at the beginning of the twentieth century. In 1907, there was a bank panic in the U.S. that eventually led to the birth of the Federal Reserve System in 1913. One direct consequence of that is mentioned less often: the depression of 1908-09 in Mexico and the consequent Mexican Revolution. Most foreign banks had left Mexico after the Mexican Revolution. The creation of the Mexican Central Bank (Banco de México) in 1925 saw the births of a number of private banks in Mexico. In 1941 Mexico formally barred foreign bank with one exception—the Citibank. In 1982, with the first big economic crisis, Mexican government went one step further: It nationalized all the banks with one exception—the Citibank. In 1992 it reversed the rules in anticipation of the passage of the North American Free Trade Agreement (NAFTA) and reprivatized all the banks.
Moderator: So, what has NAFTA meant for Mexico's financial system?
Sinha: The North American Free Trade Agreement stipulated gradual lifting of restrictions of foreign ownership of banks and insurance companies starting in 1994 and ending in 2000. So, by 2000, banks and insurance companies from the U.S. and Canada were free to buy up to 100 percent of their counterparts in Mexico. And they did. For example, Citibank acquired Banamex. And there were five other big acquisitions: Citibank-Banamex, as I mentioned; BBVA-Bancomer; HSBC-Bital; Santander-Serfin; and Scotiabank-Inverlat. So 80 percent of Mexican banking capital came under foreign control. This kind of foreign domination is uncommon in the OECD countries with the exception of New Zealand.
Moderator: It was expected that, with NAFTA, the financial sector reform would result in the implementation of best practices and greater efficiencies. Has that been the case?
Sinha: Two sets of benefits were touted as a consequence of foreign ownership of financial institutions in Mexico. First, these changes were supposed to bring in greater efficiency. Second, it was supposed to bring in foreign capital in the time of financial stress. There are a couple of studies on the issue of efficiency. One is by Rodolfo Guerrero and Jose Negrin of Banco de México. They showed that the efficiency of the banks decreased between 1997 and 2001 and then increased between 2001 and 2004. Overall result shows no net increase in efficiency. Another study conducted by yours truly with a thesis student Erick Villareal shows that there was no increase in efficiency of large insurance companies that were bought up by foreign owners. The only ones with efficiency gains were the smaller domestic insurers. Instead of Mexico being helped by foreign capital during crisis, Mexico is providing capital to the U.S. system in the form of profits during the current crisis. For example, in 2009, the only profitable subsidiary of Citibank was Banamex.
Moderator: In the United States and Europe, the financial crisis had a major impact on the structure of the financial system. Was this also true in Mexico?
Sinha: Short answer: no. Mexico had already gone through several crises before 2008 in the past three decades. That has made banks and insurance companies very cautious. For example, to get a loan to buy a house in Mexico, you have to make a substantial down payment—typically in the order of 20 to 30 percent of the assessed value. And the assessed value is typically no more than 80 percent of what the market price is. Thus, banks are typically exposed to no more than 50 percent of the market value of the real estate. The concept of subprime loans simply doesn't exist in Mexico. Until recently, it was not possible to even get a fixed-interest mortgage loan for homes. In the last five years, the biggest advance in Mexico has been the availability of a fifteen-year fixed-rate mortgage. Mexico has also been quietly implementing Basel II agreement required for banks and insurance companies. That means the companies are in a better footing confronting capital adequacy problems.
Moderator: What new trends are emerging in Mexico's financial system?
Sinha: In Mexico, less than 25 percent of the population has bank accounts. There is a great potential for growth of banking in Mexico. Similarly, the penetration of insurance is low in Mexico compared with other countries in the region. Mexican insurance market is no bigger than the insurance market of Iowa. Since 1994 large retail companies like Elektra and Coppel got charters to operate as banks. Elektra had success in selling home appliances on credit. In October 2009, Walmex (the Mexican Wal-Mart) received approval of "corresponding license" that enabled third parties to take deposits and cash paychecks in 1,400 branches across Mexico. In the U.S., Walmart sales account for 2.8 percent of the GDP; in Mexico, it is 2.1 percent of Mexican GDP. Twelve million Mexicans living in the U.S. sent $21 billion to Mexico in 2009 alone. Walmex will be open for business for sixteen hours a day, seven days a week, and 360 days a year. In comparison, banks are open for six to seven hours a day and around 250 days a year. Thus, it's clear that companies like Walmex will have a big impact on retail banking services. For other kinds of services, it's not very clear.
Moderator: Thanks, Tapen.
Sinha: Thanks for having me.
Moderator: Again, we've been speaking with Tapen Sinha, the the AXA chair professor of risk management at the Instituto Tecnológico Autónomo de México in Mexico City. This concludes our Research Insights podcast on the financial system in Mexico. Thanks for listening, and please return for more podcasts.
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