Mexico’s financial system proved resilient during the first wave of the global financial crisis, but authorities will need to remain vigilant given the risk of spillovers from global shocks, the International Monetary Fund (IMF) said in a new report. Although the country was hit hard by the crisis, with economic activity falling sharply in 2009 and financial markets experiencing severe stress, the broader system reacted well and spillovers were contained. In general, Mexico’s banks are profitable and well capitalized. Mexican authorities should take advantage of the economic recovery now underway to consolidate recent gains in the scope of financial sector supervision by establishing a fixed term for the President of the Comision Nacional Bancaria y de Valores (CNBV) and adjusting the composition of its Board, the IMF said in its latest Financial Sector Assessment Program (FSAP) of Mexico, which was published today. The FSAP was conducted in cooperation with the World Bank.

“Overall, our assessment of Mexico’s financial system is very positive,” said Fernando Montes-Negret, a Senior Financial Sector Expert in the Monetary and Capital Markets Department and head of the IMF team that conducted the FSAP update. “The country has better tools for systemic crisis management and competent supervision. However, there have been episodes of international distress in recent years and, given Mexico’s significant linkages to the global economy and to Spanish banks, the authorities need to monitor closely and respond quickly to emerging international and domestic risks.”

The first FSAP was conducted in Mexico in 2001, and an update was carried out in 2006. The 2011 assessment is part of a series of big-country FSAPs the IMF currently has in its pipeline. After completing evaluations in China, Russia, and Germany, among others, in 2011, the IMF expects to evaluate some 18 countries within the next two years, including Argentina, Brazil, France, Japan, and Spain. Mexico is also one of 25 systemically important countries that have agreed to mandatory assessments at least once every five years.

Capital buffers

According to the IMF, Mexico made good use of sound policy responses and a rebound in demand to contain spillovers to its broader economy from the failure of unregulated housing financing companies and the bursting of a consumer lending boom. Following economic recovery in 2010, stress tests conducted by the IMF suggest the Mexican banking system is able to withstand severe shocks. Indeed, the strength of capital buffers has made it possible for the authorities to aim to complete the introduction of the new Basel III capital requirements in 2012, well ahead of other countries.

Concentration

The high level of concentration and conglomeration in Mexico’s financial system, as well as foreign ownership, poses important challenges, the FSAP noted. The seven largest financial groups managed about three-quarters of total financial assets of over US$ 600 billion at end-June 2011. Concentrated loan portfolios increase credit and contagion risks, which are currently not sufficiently monitored and addressed by current regulations and supervisory practices. Given the relatively small size of the Mexican financial system, there is significant scope for further deepening as financial inclusion progresses and capital markets develop.

Supervisory architecture

The report suggests some institutional improvements Mexico could implement. Financial supervision would benefit from a stronger institutional framework, including a fixed term for the President of the Banking and Securities Commission and a rebalancing of its Board. In addition, a new supervisory architecture, by separating prudential and market-conduct roles, would help reduce overlaps of responsibilities and improve the ability to cope with an ever more integrated and complex financial sector. Macro-financial oversight and crisis management have been strengthened already with the establishment of the Financial System Stability Committee (FSSC), a substantial upgrade following the last stability assessment by the IMF in 2006.

About the FSAP

The Financial Sector Assessment Program, established in 1999, is an in-depth analysis of a country’s financial sector. The IMF conducts mandatory FSAP Updates for the 25 jurisdictions with systemically important financial sectors, and for any member countries that request it. Assessments in developing and emerging market countries are conducted jointly with the World Bank. FSAPs include two components: a financial stability assessment, which is the responsibility of the Fund; and, in developing and emerging market countries, a financial development assessment conducted by the World Bank.

To assess the stability of the financial sector, IMF teams examine the soundness of the banking and other financial sub-sectors; rate the quality of bank, insurance, payments, and capital market supervision against accepted international standards; and evaluate the ability of supervisors, policymakers, and financial safety nets to respond effectively to a systemic crisis. While FSAPs do not evaluate the health of individual financial institutions and cannot predict or prevent financial crises, they identify the main vulnerabilities that could trigger one.

In September 2010, the IMF made financial stability assessments every five years under the FSAP a mandatory part of IMF surveillance for jurisdictions deemed systemically important, based on the size of the financial sector and their global interconnectedness. These countries are: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Japan, India, Ireland, Italy, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States.

Useful Links:

IMF Expanding Surveillance to Require Mandatory Financial Stability Assessments of Countries with Systemically Important Financial Sectors

Big Financial Sectors Under Review in 2012 By IMF

Factsheet: The Financial Sector Assessment Program (FSAP)

Link to the FSSA-document

FSSA Country Reports