Mexican Bank Owners May Create Loan Boom

With fewer than half the government’s 18 commercial banks sold, their new private owners are already forcing dramatic changes in Mexico’s financial system that could lead to a lending boom in a nation where credit has been excruciatingly tight for a decade.

The effects of those changes have been resounding through the financial markets this week, as depositors and investors adjust to the structure that emerged from the new bankers’ first showdown with central bank officials.

Perhaps the most dramatic change was the government’s agreement to wipe out the legal reserve requirement on new banking deposits.

Relieved of a mandate to invest 30% of their funds either in short-term government bonds or in the central bank, the privatized banks are expected to make more money available for lending at a time when demand for credit is growing.

For years, tight credit has made mortgages virtually unavailable to the middle class and forced small businesses to rely on such mechanisms as accounts-receivable financing. Car loans could only be obtained from dealerships. Banks have supplied only about one-third of the nation’s credit, compared to over half in the United States.

Loosening reserve requirements should reduce interest rates, which now run about 38% annually for unsecured personal loans. And the banks--now free to lend businesses and consumers money that previously was invested in low-earning government bonds--probably will become more profitable.

By confining the government to a regulatory role, with control of banking assets completely in the hands of bankers, the change also leaves the financial system more vulnerable to economic downturns, analysts say. That’s because a larger portion of the banks’ portfolio is likely to be channeled into loans rather than more secure government bonds.

“This was the definitive step in deregulating the financial system,” financial columnist Enrique Aranda Pedroza said.

The ricocheting effects of such fundamental reform have quickly become apparent.

The government cut back its borrowing, offering a sharply reduced volume of Treasury bonds in this week’s auction as the central bank tried to restore liquidity to a strained system. Nevertheless, interest rates remained higher than expected, with the base rate--the average interest that banks pay for funds--rising 1.17 points to 21.72%.

“This is a reflection of uncertainty caused by the changes,” said Franciso Padilla, an economic analyst at Macro Asesoria Economica, a Mexico City consulting firm. “For the next month or two, there will be a period of instability, with things that are difficult to understand and more difficult to predict. However, in three or four months, this will allow interest rates to fall.”

Government officials say eliminating the reserve requirement will help Mexican banks prepare for international competition that is expected as a result of the North American free-trade agreement being negotiated with the United States and Canada. Mexico’s high reserve requirement--compared to rates of 10% or less in industrialized countries--was considered a significant handicap for the country’s banks.

The change is a boost for the seven groups that have already bought banks and could drive up the prices for the 11 state-controlled banks that are left to be sold.

Under the old system, the banks bid in weekly auctions for Treasury bonds equal to 30% of their deposits.

Now banks must invest 25% of their deposits, as of Aug. 31, in three- and 10-year government development bonds. New deposits will be completely exempt from reserve requirements, leaving banks with more money to lend.

The change benefits the government, as well. It gets longer terms on about one-third of its domestic debt as well as greater freedom in structuring the nation’s borrowing.

“Before, they had to auction a certain amount of Treasury bonds, because the banks needed to buy them,” Padilla explained. “Now, the type and amount of debt will depend on the government’s needs.”

The central bank’s decision to curtail the reserve requirement stemmed from a credit crunch at the end of August that left government officials and bankers pointing accusing fingers at each other.

Banks had cut back on Treasury bond purchases at the beginning of the month so they could increase lending. But to meet the old reserve requirement, they had to scramble to borrow money to buy Treasury bonds at the end of August.

As a result, money market rates soared as Treasury bond rates plummeted. The resulting convulsion in the financial markets was estimated to have cost banks $67 million in two days.

A central bank statement implied that bankers behaved irresponsibly by over-lending in early August; government officials said privately that the director of the central bank had decided to teach them a lesson.

The bankers responded that the government was to blame. The high money market rates, they argued, were partly caused by the central bank’s failure to respond quickly enough when the buyers of Mexico’s largest bank pulled $1.5 billion out of circulation to make a payment to the government.

In rolling back the reserve requirement, central bank officials said the crisis simply pointed out the need for changes they had planned to implement--eventually.

In any event, the reserve requirement--which had been as high as 90% during the 1980s--is no longer needed to underwrite the government, because the federal deficit is negligible, and other financing is available.

The money markets, moreover, are liquid enough to permit banks to rapidly obtain funds to meet their obligations.

“The reserve requirement,” a central bank statement said, “had lost its reason for being.”

The High Cost of Mexican Loans

Even taking into account Mexico’s double-digit inflation, interest rates are high and bank loan criteria are strict. Auto loans, for example, are available only through new car dealers, and all rates are adjustable monthly. A sampling of current rates:

Type of loan Interest rate Personal loan 38% Auto loan 18.15% Home mortgage* 35% Bank credit card 51.1%

* New this year and not available in all banks. Terms are 15-year mortgage with 30% to 50% down payment.

Source: Loan officers, car dealers and consumers.