Copyright 1996

InterAm Database

National Law Center for Inter-American Free Trade

OVERVIEW OF THE REGULATION OF BANKS IN MEXICO.

By: Lic. José Demetrio Guerra-Sánchez.

Introduction:

The following pages attempt to provide an overview of the legal functions assigned to the principal authorities engaged in the regulation and control of financial services in Mexico. Although the scope of their legal responsibilities exceeds in much of what has actually been described, the focus of the mentioned authorities in this paper will be exclusively limited to banking operations and transactions.

One of the keys to a better understanding of the legal characteristics of banking transactions in Mexico is that, unlike the US system, states do not have jurisdiction over banking corporations. Accordingly, all of the following authorities which are involved in the supervision and regulation of banking activities belong to the federal government.

I. Secretaría de Hacienda y Crédito Público (Mexican Department of the Treasury).

The SHCP (Secretaría de Hacienda y Crédito Público) is a federal public administrative organ and the highest regulator of the Mexican financial system. Its functions are broad although generally focused on matters regarding taxation and income of the federal government. However, it is also the primary regulator of all national and international banking transactions, particularly the planning, coordination, evaluation, and inspection of all public and private banking entities. The SHCP is also assigned the supervisory authority for bankholding companies.

The SHCP conducts the official consultation for financial operations and is the only authority with legal powers to interpret financial laws. Principal functions include: the imposition of limits upon which credit institutions grant loans; the determination of the composition of capital in all banking corporations; providing the legal basis to calculate the specific amounts of money available for loans and to diversify the risks in all active operations of credit institutions; and the assessment of the different degrees to measure financial risks in order to provide safety and soundness to all credit transactions.

The SHCP grants, denies or cancels the initial approval to all corporations that intend to function as national banks or as bankholding companies; and determines, by the issuance of the corresponding certificate of authority, whether a proposed fusion of two or more financial entities has met the legal basis to operate under the Credit Institutions Act (Ley de Instituciones de Crédito) or the Law on Bankholdings and Financial Entities (Ley para Regular las Agrupaciones Financieras).

This authority is also involved in: the issuance of permits regarding the solicitation of business persons, corporations, and other banks, for the acquisition or sale of shares in financial entities or bankholding companies; the determination of the paid-in capital reserves that banks must preserve to back up their transactions, particularly when performing investments; and provides for the basic rules that financial corporations must follow regarding their basic security.

The SHCP may also supervise and authorize the establishment, relocation and operation overseas of branches of Mexican banks. This authority may even permit the performance of financial activities which have not been included in Mexican legislation, if necessitated by market conditions of the host country. Similarly, this authority determines whether offices of foreign banks or financial entities will be granted permission to operate within the Mexican territory, enacts the rules upon which they are to conduct business, and determines the capital that will be kept in their reserves.

Another important function of the SHCP is to initiate criminal actions by reporting falsities and frauds committed against all credit institutions by individuals in search of favorable credit conditions, or by banking employees and directors, when their knowing violation of the law might lead the corporation to patrimonial losses. Finally, the SHCP enforces the civil money penalties assessed to financial entities, other than banking corporations, by the National Banking and Securities Commission.

II. Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission).

The CNBV (Comisión Nacional Bancaria y de Valores), a deconcentrated agency of the SHCP, carries out the supervisory, remedial, and regulatory functions regarding the operation of all financial entities. This authority is also responsible for the general examination and inspection of banking transactions. The CNBV is composed of six members (Board of Governors, Presidency, Vice-presidency, Internal Comptroller, General Directors and Administrative Unities) and is headed by the SHCP-appointed President of the Commission. The following paragraphs provide a brief description of the CNBV functions.

Under its supervisory authority, the CNBV conducts liquidity and solvency examinations to evaluate the possible risks to which banking corporations' transactions are subject. Examinations are based on the repayment experience of the borrower, administration of his enterprise, financial situation of the applicant, market conditions, collateral guarantees, borrower's labor conditions, and other relevant factors. This examination assigns a uniform rating based on five given risk degrees, using lettered scales, where "A" indicates the lowest degree of risk, and "E" the highest affected. On the other hand, the inspection powers of the CNBV are conducted through the analysis of all economical and financial information of banking corporations, with the goal of measuring the possible effects that it might eventually have over both, financial entities and the financial system, in general. The CNBV is also permitted to perform periodic visits to the bank to verify the automatic equipment and the operation of electronic devices available for public use.

Given these powers to prevent and correct transactions that are deemed to exceed the normal scope of financial entities, the CNBV establishes operative programs to reduce existing irregularities that may affect the liquidity and solvency in banking corporations.

To carry out its functions, the Comisión Nacional Bancaria y de Valores may assess administrative penalties against banking corporations, ranking from 100 to 100,000 minimum wages or 5% of the bank's assets value, whichever is less. In addition, it may in cases where a serious or repeated violation to the banking laws is held, decree for the general suspension of the financial entity's charter, without filing an action in federal courts. Additionally, the CNBV may determine or recommend the removal from office any director or employee of a credit institution if the safety and soundness of said institution have been jeopardized.

Furthermore, the CNBV may operate as the administrative receiver for banking corporations, if their safety or solvency results are jeopardized by present irregularities. Such function does not require a court decision and may last until its operations are normalized or until bankruptcy proceedings are initiated. This agency may, in addition, provide financial consultations when requested from foreign supervisory and regulatory authorities. It performs the proper investigation when the usage of privileged information by financial entities might result in violation of the financial laws, and has also the exclusive authority to rule on the following matters:

a) registration of financial intermediaries and securities specialists;

b) periodic disclosure of information regarding the activities of financial entities;

c) operations against mercantile usage and practices of financial markets,

d) conditions for the release of privileged financial information in the possession of financial entities, and

e) security transactions in banking corporations.

III. Banco de México (Central Bank of Mexico).

The BM (Banco de México), is essentially composed of two members: the Governor, who is appointed by the President of Mexico for a 6-year term; and the Governor-presided Board of Governors, integrated by four sub-governors and the BM Governor. The BM is the authority in charge of conserving the international reserves of the Mexican government to stabilize the national currency, and also represents Mexico before the IMF (International Monetary Fund) and other international banking organizations.

The BM has supervisory authority over all active and passive transactions of banking corporations. It can issue the general provisions to regulate the financial entities' operations with foreign currency, silver and gold. However, its principal responsibility with respect to credit corporations is acting as their depository, lending institution, and clearing house regulator. It also carries general powers as the nation's banking reserve authority and performs all monetary transactions with foreign financial entities. In addition, the BM determines the section of the credit corporation's passives which is to be converted in cash deposits or securities, the percentage of their income assigned for investment purposes, and the legal proceedings to perform fund transfers.

Furthermore, the BM has the authority to support or dissent from the economic policies issued by the SHCP, which are to be observed by all banking corporations. It also has the exclusive power to discount the credit portfolio of credit institutions, to rule on banking interest rates, commissions, general characteristics of their passive and active operations, to control the currency, and to protect the public economic interests.

The enforcement powers of the BM against credit corporations and financial intermediaries include the assessment of civil monetary penalties at the own BM's consideration, upon violation of financial laws and the imposition of limits on the passive and active transactions as performed by financial intermediaries, when their activities constitute a serious risk to the safety, soundness or stability of market conditions.

The BM is also responsible for the execution of civil monetary penalties imposed against banking corporations by the CNBV. For affecting this function, the BM may charge the individual accounts of the liable credit corporations as requested by the CNBV.

IV. Conclusion.

During the last six years the Mexican financial system has experienced important changes. Legislative initiatives are currently being enacted to open and deregulate commercial activities, in general, and to adopt the international proposals for banking transactions.

Despite the vast extension of financial services, the regulatory authorities involved in controlling the activities and operations of credit corporations and organizations are usually the same, both for banks and for non-banking entities.