Transcript Banking Crisis In Mexico

The objective is to look into the background of the currency
crisis, banking crisis and more important into the
implementation of the FOBAPROA during the banking
crisis and the political and social implications it brought on
the Mexicans.
History of the Banking System
 President Lopez Portillo (1976-1982), Nationalize the banks
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in September 1982.
Miguel de la Madrid (1982-1988), created the FICORCA
(Exchange risk coverage) Financed by a loan to finance the
Fiscal deficit, the external debt and the economy of the
country.
Carlos Salinas de Gortari (1988-1994), July 1, 1990 the
privatization of Mexico’s banking sector under the
Financial Groups Law. In 1990 the FOBAPROA was created.
Ernesto Zedillo (1994-2000), watched over the currency
devaluation and the IPAB was created in 1999.
Vicente Fox (2000-2006).
What is the FOBAPROA?
 The Banking Fund for the Protection of Savings.
 Created in 1990 to attempt to resolve liquidity of the banking
system.
 It was applied during the economic crisis to protect all
Mexicans banks from going bankrupt and thus destroying the
Mexican economy.
 A contingency fund for extraordinary financial problems in
order to prevent similar situations from previous
administrations.
 It would assume outstanding debt and would capitalize banks
in the advent of economic crisis that would prevent liquidity
for these banks.
Financial Sector Background
 Privatized the banking system and allowed foreign investments.
 1991 privatization of the banks in order to reduce government
spending and to liberate the economy.
 The 1990 Financial Groups law adopted a universal-banking
structure as the legal framework for Mexico’s financial sector.
 Financial groups headed by
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By a holding company, bank, or brokerage house with most headed by
brokerage houses.
Each financial group was required to include at least 3 types of financial
intermediaries, e.g., a bank, insurance company leasing company,
foreign exchange house and investment fund service.
In January 1994, the government divested its remaining minority stock
holdings.
Example of a Financial Group
 GF Bancomer Subsidiaries
Bancomer ( comercial banking)
Casa de Bolsa Bancomer ( Securities)
Casa de Cambio Bancomer ( exchange)
Arrendadora Finaciera Monterrey
Almacenadora Bancomer
Factorage Bancomer
Arrendadora Bancomer
Signs of the Banking Crisis
 Post privatization Mexican banks issued large
numbers of credit cards, mortgage and car loans
 In 1991 past due loans increased by 3.5%, 8.5% in March
1994, 7.9 by the year end. An increase from 35% to 97%
of total banking sector book capital.
 1992 nine banks failed to meet the 8% capital
requirement .
 1987-1994 commercial credit expanded by more that
100%, housing 100%, consumption credit by 450%.
Currency Devaluation
 Two thirds of 99 billion inflows were portfolio investments. The Mexican peso
began to appreciate as a result of capital inflow overvalued about 30%.
 Balance of payments deficits were financed by dwindling international
reserves. The Mexican central bank was forced to supply dollar from reserve.
 Capital flight in 1994 estimates from $ 17-20 billion .
 Carlos Salinas de Gortari controls the exchange rate in order to prevent an
electoral turbulence.
 The EZlN uprising the state of Chiapas
 The assassination of a the PRI candidate and
 March- May 1994 in an attempt to defend the peso the central bank spent 10
billion. To entice capital the government began to offer dollar-dominated
treasury bonds known as “tesobonos”.
 By the end of November 12.5 billion were insufficient to cover even half of the
25 billion short public debt 70% denominated in tesobonos. And by December
reserves were at 6 billion and then the government had little choice but to
devaluate the currency.
Banking Crisis
 The bad combination of credit and no capital
 Taking high risk and the competition.
 Overdue loans became a national epidemic after the sharp
currency devaluation on December 20, 1994.
 Borrowers defaulted because high interest rates and the
post devaluation economic decline.
 Interest rates on consumers debt peaked as high as 120%
and the subsidies to about 78% in 1995.
 Bad loans estimated in March , 1996 ranged 15% to 40% of
the banking sector portfolio, with a bailout tag ranging
from 10 billion to 30 billion dollars, or from 5% to 12% of
GDP.
The Bailout
 A priority of the state
 The issue wasn’t just the bailout but the way it was
implemented.
 FOBAPROA the state owned deposit insurance agency
developed a plan to recapitalize banks by purchasing
non-performing loans.
 Non-performing loans
 Banks took advantage of the bailout
 There were some banks that could have survived.
 The government even pay for the bad credits that banks
issued but the government didn’t have money.
Cont…
 Transaction
 September 1995, GF GBM-Atlantic and GF Promex-Finamex sold more than 1.06 billion in
overdue loans to FOBAPROA.
 Banco Mexicano sold 900 million in loans to FOBAPROA.
 Related credits
 Banpais
 Fraud: regulators found that 60% of Banco Interestatal loans were internal loans to bank’s
controlling group
 The total cost
 Estimates at around 100 billion dollars , some other estimates at around 65 billion dollars
 In 1998 Zedillo submitted two initiatives for legislation that required that the
FOBAPROA to become a public debt. One to administer the assets and the debt
FOBAPROA.
 Instead they created the IPAB the public agency in charge of the banking deposit
insurance system in Mexico.
 Objectives to protect savers deposits and contributing to the preservation of the financial
system.
Beneficiaries and Politics
 It is evident that the beneficiaries were bankers, share
holders and the big borrowers.
 Roberto Hernadez, president of BANAMEX sold the
bank for 12 billion to Citi Group and didn’t pay any taxes.
 Hernadez was a big contributor for the political
campaigns of the PRI and PAN.
 PRD opposed to the idea of the public debt.
 PAN posture was that Mexicans were not supposed to
be passed the bill of the bailout.
 PRI didn’t defend the executive.
Final Thoughts