Financial system is the integral mechanism of any state’s economy. Countries rely on banks and finances in performing major financial operations and predicting the future of the state economic development. The paper researches the financial system of Mexico, its structure, principles and functions.
The banking system of Mexico is the basis for the effective economic and financial development of the country. The effectiveness of the banking system is the determinant for the country’s stability on the international market.
In order to understand, how Mexican banks and financial institutions operate, the system should be considered in details.
The Mexican banking system is known for being privately managed and owned. The foreign investments in the country’s banks are allowed, but they take only a minority position and the prevailing amount of investments arrive from NAFTA members. Privatizing the Mexican financial system can be considered one of the major steps in the Mexican financial history.
The measure was implemented by the government and was aimed at making Mexican economy modern, stable, and open. Privatization was closely connected with implementation of changes into the Mexican banking legislation.
Mexican financial system is one of the most developed in Latin America (Graf, 1999). The financial structure of the country comprises institutions of six various types: mortgage banks, public development banks, private commercial banks, public credit institutions, private investment banks, and savings (loan) associations. The system is governed by the central bank of Mexico. It ‘regulates money supply and foreign exchange markets, sets reserve requirements for Mexican banks, and enforces credit controls’ (Krainer, 2000).
The central bank also serves the financial agent of the federal government. The role of the central bank is not only in controlling the operation of the whole country’s financial system, but in issuing national currency, providing discounts for the private commercial banks and supervising the national banking sector. This supervising is performed through the National Banking Commission. The role of this supervision is to provide federal government with sufficient finance required to support national development programs (Krainer, 2000).
The Bank of Mexico is an autonomous financial unit, and it is capable of setting the direction of the country’s monetary policy. The role of the National Banking Commission is ‘adjusting accounting standards for banks, stock brokerage firms and other intermediaries to match internationally accepted principles and standards’ (Yacaman, 2005). The first accounting standards circular were issued in 1995 and became the start for the effective implementation of international accounting principles into the banking system of the country. Since the beginning of 1996, Bank of Mexico has been connected with regulating capital resources, due to the federal concern as for the adequacy of these resources for the national banks (Hanson, 2003). Though other financial institutions (including stock brokerage firms) were not initially subjected to implementing those rules, they also had to adopt the necessary policy changes to regulate the flow of national capital resources.
Mexico is characterized by the presence of financial institutions, which deal with separate sectors of national economy. These are banks in agricultural sector, foreign trade, public sector, transportation, sugar industry. Each of these banks is specialized and is aimed at supporting financial operations within each of the mentioned economic branches. The most important of the mentioned institutions is called Nafinsa (Yacaman, 2005):
Nafinsa provides medium-term financing and equity capital for productive enterprises, promotes Mexican investment companies, oversees the stock market and the issuance of public securities, and serves as the legal depository of government securities. By 1993 Nafinsa had divested itself of some of its interests, but it remained under state ownership. (Yacaman, 2005)
The developing character of the Mexican financial system is supplemented by the fact, that there are more than 200 private banking institutions in the country. Their appearance was caused by the economic needs of the country, and by the necessity to create stable attractive conditions for foreign investments. The 2,500 branches of the private banks in the country are sufficient to provide national population with the highest quality of financial services, and to serve the economic purposes of the country (Yacaman, 2005). The large number of such private financial institutions is caused by the fact, that national Mexican regulations forbid the banks to comprise and fulfill more than two different financial functions. Specialization of financial services is a characteristic feature of the Mexican banking system. The Bank of Commerce and the National Bank of Mexico are the two largest private banks of the country (Hanson, 2003).
Nationalization of the Mexican private banks was decreed in 1982. The decision was caused by the desire to stem the flow of capital; but in 1983 more than a half of banks were returned into private ownership, because the previous banking system had proved to be ineffective. As a result, eleven banks were totally eliminated, and the rest was unified into twenty-nine banking institutions. Those actions were primarily aimed at improving the overall banking system performance. The number of commercial banks was further reduced to 18, by the end of 1985. In 1987 re-privatizing commercial banks took place. By the end of 1991 all eighteen banks were privately owned. The dramatic increase in the number of stock holders within the national commercial banks has become the direct consequence of the commercial banks’ re-privatization (Krainer, 2000).
In 1993 new domestic banks were established to provide even higher efficiency of the national economy. After the 1994 financial crisis, the national banking system has displayed its ability to support the national economic development: interest rates were dramatically increased to protect national currency (peso) from devaluation. However, this step served for even more deepening economic crisis, as higher interest rates prevented private owners from performing effective loan payments; the share of domestic debt was increasing. This has become the cause of the financial growth decline (Krainer, 2000).
The majority of savings and deposit operations are performed by commercial banks. Commercial banks are also known for providing the bigger portion of short-term credit and real estate mortgage operations (Yacaman, 2005). The banking system of Mexico comprises the so-called ‘development banks’. It is a new form of banking in the country, and its institutions are aimed at supporting the development of national industry; however, the major Nacional Financiera development bank has been created to satisfy the financial needs of Mexican export and government procurement (Hanson, 2003).
After the financial crisis of 1995, the importance of maintaining financial stability in Mexico has been emphasized (Graf, 1999). Banking system has once again proved its unchangeable role in preserving healthy rates of economic development in the country. In order for the financial system to operate safely and effectively, a sound legislative framework should be developed. Shareholders should possess sufficient incentives to invest into financial institutions, and as a result, to provide their stability on financial markets. Mexican financial system possesses sound financial and banking institutions, but it is only the initial step in making the state financial system operating. ‘In emerging market economies one source of such disturbances is the risk of contagion from crises occurring anywhere in the world’ (Graf, 1999). Thus, the task of the Mexican financial system is not only in maintaining the country’s economic health, but protecting it from the negative impact of external economic forces. This need is justified by the fact that financial crises in other countries lead to a certain kind of ‘herd’ behavior among international investors (Krainer, 2000). As a result, Mexican emerging economy is extremely vulnerable to this kind of group responses. In order to help the national economy neutralize potential risks from abroad, the Bank of Mexico has introduced special liquidity coefficients in relation to foreign currencies (Yacaman, 2005). ‘Mexican banks nowadays hold more than $10 billion of foreign currency denominated liquid assets’ (Yacaman, 2005). In addition, there are severe limitations put on the banks liabilities in foreign currencies.
Mexican banks today are forced to implement innovative technologies in order to remain competitive and to stabilize their profitability (Hanson, 2003). Banks in Mexico tend towards diversification of their income sources and to the use of advanced technologies in processing information from customers. While the new economic environment significantly increases the risks financial institutions have to face, the borders between banking and technology are gradually erased.
Today, ‘Mexico’s banking system comprises 31 banks, 17 of which belong to financial holding companies. Thirteen of these financial holdings own brokerage houses, nine own insurance companies, nine participate in pension funds and two in telephone companies’ (Yacaman, 2005). Mexican banks and financial institutions are increasingly involved into all sorts of financial and even non-financial deals; in its turn, regulatory framework needs thorough re-consideration and adjustment to correspond to the new financial reality.
The Mexican banking system displays the tendency towards active development according to the contemporary economic requirements. The 1995 financial crisis has become the turning point in the evolution of the banking and financial system in the country, displaying the need for its total re-construction. Despite the fact, that financial system in Mexico tends to serve to the needs of national economy and to support all branches of Mexican industry, there is still much to be done to make the system perfect. There are significant challenges which financial institutions and banks of Mexico have to face in their development, and in the light of implementing advanced technologies and realizing potential external threats, a sound regulatory framework should be designed to enable Mexican financial system effectively work for the benefit of Mexican economy.
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