dr. roberto j. santillán s. egade the mexican banking sector from 1995 through 1998 roberto j....

Dr. Roberto J. Santillán S.EGADE

The Mexican Banking Sector from 1995 through 1998

Roberto J. Santillán-Salgado, Ph.D.

EGADE


• After implementing a successful “shock” plan to control the hyperinflation observed in 1987, Mexico’s economy initiated a stable recovery.

• Important deregulation measures in the financial sector (1989-1990) and the privatization of the banking system (1991-1992) propelled an active credit market that supported both increased consumption and investment.


• Additional market-oriented policies were implemented: other important privatizations, along with the signature of NAFTA favored a significant inflow of direct and portfolio foreign investments.


• The capital account surplus financed and increasing current account deficit, which at the time was considered justified as a signal that important productive investments were taking place.


• Even while the objective to curve down inflation was achieved year after year (inflation for 1994 was close to 6%, the lowest rate in 25 years), the use of a semi-fixed exchange rate as a nominal anchor for prices and an evident, politically motivated, reluctance to adjust to a more realistic level resulted in a significantly overvaluation of the Mexican currency.


• During 1994 several unexpected and tragic events took place (Colossio’s and Ruiz Massieu’s assesinations and the upsurge of the guerrilla movement in the southwestern state of Chiapas).

• Capital flight ensued and was propelled by the hike in the United States interest rates, putting additional pressure on the foreign currency reserves of the country.


• By December of that year, shortly after President Zedillo took office, the exchange rate was initially devalued by 15%, and free floated next day.

• Among other problems that resulted from the peso devaluation one of the most dramatic was the Tesobonos crisis.


• Tesobonos were dollar-denominated and government-backed medium term bonds issued since several years before, but with more frequency during 1994 as a measure to reduce a large scale capital flight, as the above described political events took place.


• However, the same phenomenon they were intended to avoid made them a difficult problem for the new government.

• A total of 30 billion US dollars in Tesobonos had maturities of six months or less.


• Capital flight had depleted foreign currency reserves to a low of six billion dollars by December of 1994 and the government’s guarantee was at stake.

• An emergency rescue package was negotiated “overnight” to reduce the additional uncertainty that the Tesobonos represented.


• The United States, along with Canada, Japan and several European countries put together a 50 billion US dollars loan to overcome the Tesobonos crisis and reduce the risk perception of foreign investors.

• That loan was repayed much sooner than anticipated thanks to the fast recovery of the Mexican economy during the following years.


• From a domestic economy perspective, the most affected sector by the peso devaluation was the banking sector.


• Very high prices were paid through an auction process that put the banks into the highest bidder’s hands.

• However, more often than not the new bankers lacked experience in that activity.


• Both factors account for a relatively careless loan authorization policy.

• While the economy was growing, bad credit decisions were not obvious (similar to what happened in Southern Asia countries in 1997).


• However, the December 1994 devaluation took its toll in the form of exceptionally high interest rates (to retain capitals within the contry), immediate inflationary pressures (as a result of the large imported component of domestic consumption and investment) and an inminent reduction of economic activity (that year the country’s GDP expereinced a negative growth rate of -7%).


• Numerous companies that were partially indebted in dollars and saw their liabilities increase in a dramatic fashion also experienced significant reductions in their sales and income.

• Many were forced to delay the service of their financial commitments with local banks and several others went bankrupt and failed on their loans.


• In addition to the credit crunch, most banks had significant dollar denominated liabilities and the devaluation represented significant exchange losses for them.

• Several banks became insolvent and others went bankrupt.


• The Federal Banking Deposits Insurance, FOBAPROA did not have enough resources to cover all the losses so additional goverment backed debt had to be issued.


• However, the urgency with which that operation had to be implemented overlooked the regular legal process of requesting an authorization to Congress and, while the resources were obtained and the banking system was safely driven ashore, that measure opened a whole new political fight between the government and the opposition parties.


• Eventually, the FOBAPROA issue was settled and a new organism, the IPAB was created to perform the same functions than the late FOBAPROA, but with a limited liabilities responsability.


Cuadro 1

Costos fiscales estimados de crisis bancarias

País Período Costo (% delPIB)

Indonesia 1997 - 98 40

Corea 1997 - 98 27

Chile 1981 - 86 33

Japón (1) 1997 - 98 30

Filipinas 1981 - 87 13

Venezuela 1994 - 98 17

España 1977 - 85 15

México 1995 - 98 14.4

Suecia 1990 - 93 4.3

E.U.A. 1980 - 92 2.4


• As a result of the banking crisis, there has been an active process of mergers and acquisitions in the sector that, along with an increased participation of foreign banks in the domestic market, has reshaped the Mexican banking system.


From 1995 through 1998, eleven banks were intervened by the National Commission of Banks and Securities Markets:

• Cremi, Unión, Banpaís, Interestatal, Sureste, Capital, Centro, Industrial, Confía, Anáhuac and Banco Industrial.

• In every case irregular transactions or a sharp deterioration of the loans portfolio was observed.


Some of the most relevant operations that have reshaped the Mexican Banking System during the 1995-1998 period are:

• The acquisition of 16% of the stock of Bancomer, the second largest bank in the country, by the Bank of Montreal (Canada).


• The acquisition of 19.9% of the stock of Banca Serfin, the third largest bank in the country, by HSBC Latin America BV (HSBC); additional investments in convertible bonds and the use of swaps of Brady bonds to pay for the operation totaled an investment of 174 millions of US dollars.


• After a turbulent period of accounting audits that revealed illegal operations of management and resulted in the imprisonment of its previous CEO and owner, Banca Confia, a Nuevo Leon based bank with national coverage, was 100% acquired by Citibank (USA).


• The amount paid for Confia was in the order of 600 million pesos, roughly equivalent to 75 million US dollars.

• Bank of America (USA) opened two subsidiaries, Bank of America México and Arrendadora Bank of America 1995


• 10% of Banco Inverlat, S.A.’s equity was acquired by the Bank of Nova Scotia and currently holds convertible stock representing 6% of Inverlat’s equity plus subordinate obligations convertible in stock representing 39% of equity with maturities during next year (2000).


• Banco Bilbao Vizcaya-Mexico, S.A. (Spain) purchased part of the offices of Banca Cremi, Banco de Oriente and Promex to attain a leading role in the recent evolution of the Mexican banking sector.

• Banco Santander (Spain) acquired 70% of the controlling interest in Banco Mexicano, S.A.


• 51% of Banco Industrial’s equity was purchased by the Far East National Bank for an amount of 60 millon USDs to be paid during a period of three years.


Other important bank mergers, acquisitions and liquidations during the 1995-1998 period were:

• 99% of the equity of Banco del Centro’s equity was acquired by Grupo Financiero Banorte, S.A. de C.V. for 729’966,810 Mexican pesos, roughly equivalent to 100 million US dollars.


• Banco del Atlántico, S.A. took control of the network of Banco Interestatal S.A. after the former assumed the liabilities of the later.

• Banco del Atlántico, S.A. was mergered with Banco Internacional, both national-coverage banks, creating another “mammoth” institution with national coverage and more than a thousand offices.


Smaller Banks Transactions:

• Banca Promex S.A absorved Banco Union.

• Banca Afirme acquired Banco Obrero, S.A.


The Banking System restructuring process:

• As a result of an intense restructuring, including mergers and new foreign participants:– 27 new banks have entered the market– 10 of those are Mexican and 17 foreign

based– Ten of them have national operations

and the rest operate on a regional base


New Mechanisms and Regulatory Changes to Strengthen the Banking System:

• January 1995: Access to foreign currency fresh resources

• March 1995: Increased Balance Sheet reserve requirements

• March 1995: Temporary Capitalization Program

• May 1995: Selective purchase of problematic loans by the government


1998 New Financial Sector “Package” Sent to Congress

• Authorization for 100% foreign ownership of banks.

• Increased autonomy of the "Comisión Nacional Bancaria y de Valores", the official supervisory agency for banking activities.


1998 New Financial Sector “Package” Sent to Congress:

• The Central Bank has received additional authority to manage the foreign exchange rate.

• A limit of $100,000 US deposit insurance will increase the general public’s awareness on the quality of different banks.


Mexican Banks Key Market Data

• Each banking office has a potential customer base of 14,900 people

• There are only 24 checking, savings or other accounts for every 100 persons; i.e., approximately 0.24 accounts per Mexican!

• High concentration of banking activity in Mexico City– 58.8% of total deposits– 59.2% of total loans


Mexican Banks Key Market Data

• In the rest of the country there is only one banking office for every 1000 Sq. Kms. To give attention to 21,750 people

• The efficiency measure for those provincial offices is of only 14 accounts for every 100 people

dr. roberto j. santillán s. egade the mexican banking sector from 1995 through 1998 roberto j....

Documents

egade slide

egade tesobonos

egade capital flight

tesobonos crisis

foreign currency reserves

year inflation

mexican currency

capital account surplus