Mexico’s Banks: Still Wobbly

An independent audit of President Ernesto Zedillo’s rescue of Mexican banks since the mid-1990s uncovered evidence that billions of dollars were lost in highly irregular or downright illegal loans.

Although not officially released, the report is already stirring political passions and undoubtedly will serve as ammunition for opposition candidates with presidential ambitions in next year’s election. The document shows supervision of Mexican banks inadequate to uncover serious irregularities and potentially illegal loans amounting to $7.7 billion. Perhaps more important, the report shows Mexico’s banking system today still stands on wobbly legs, jeopardizing the health of the economy. Without a well-run, well-supervised banking system, Mexico’s economic sector cannot grow.

These latest banking woes began with privatization in the early 1990s that put the undercapitalized banks in the hands of inexperienced management. The decision of the government not to sell banks to tainted bank officials was commendable. But the result was no less disastrous. The new bankers proved just as untrustworthy, looting the coffers by making huge, inadequately secured loans to themselves, their friends and families. Furthermore, some 130 individuals and three banks came under a U.S. indictment for laundering drug money.

The fledgling bankers were helped by the government’s failure to impose adequate capital safeguards and keep a close eye on how the banks were operated. As a result, the system was open to fraud and insider lending.

The audit report, compiled by Canadian accountant Michael Mackey after nine months of investigation, found some $640 million in illegal loans within the banking system. Mexico ended up with an inefficient system laden with poor quality loans and unable to cope with the peso meltdown of 1995. The price of bailing out the banks now totals an estimated $71 billion, which will be paid out of taxpayers’ pockets for years.

To his credit, Zedillo has recognized Mexico’s economy will not prosper without a sound banking system. New norms were introduced to improve the quality of loans and banks have been put under new disclosure and accounting requirements. The improved transparency of the banks’ dealings should help regulators assess the prudence of their lending practices.

Nevertheless changes are slow in coming and the banks remain the weakest link in Mexico’s economy. Moody’s Investor Service rates Mexico 69th among 73 international banking markets it has surveyed.

Rebuilding the banking structure is critical, and it should start by bolstering the central bank’s independence from the finance ministry. The top financial regulator, the Comision Nacional Bancaria y de Valores, also must operate independently from government, insulated from the intrigues plaguing Mexican politics.

Strengthening of the banks’ integrity will bring new capital and help ease Mexico’s credit crunch. Zedillo hasn’t much time left.