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. 
 
 
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http://www.state.sgov.gov/p/wha/mexicocity and the North American 
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