Edward C. Skelton

Robert V. Bubel

English

Research Papers in Economics

in the world where such an overwhelm-
ing majority of commercial bank assets
—almost 80 percent—are controlled by
foreign financial institutions. As such,
Mexico provides a fertile testing ground
for assessing the merits of the arguments
for and against financial globalization.
While this new chapter in Mexico’s mod-
ern history is only just beginning, the
early evidence strongly favors an open
policy toward global banking.
A Little History
Prior to NAFTA, individual foreign
banks could hold no more than a 5 per-
cent stake in a Mexican bank, and total
foreign ownership in any single bank was
limited to 30 percent. The only exception
was granted to a U.S. institution, Citigroup,
whose presence dates back to 1929, when
it opened a branch bank in Mexico. This
branch was allowed to continue operat-
ing, albeit under substantial regulatory
restrictions.
NAFTA opened the Mexican banking
system to foreign banks by permitting
entry through the establishment of newly
chartered subsidiaries. In 1994, Citigroup
converted its branch into a separate legal
subsidiary, and Banco Santander Central
Hispano (BSCH) of Spain established a
presence in Mexico. In 1995, 13 other
U.S., European and Japanese banks
entered the Mexican market through the
establishment of new charters. Most of
these banks formed a holding company,
or  grupo financiero, which held their
banking interests in addition to other
financial subsidiaries, such as leasing
companies and broker–dealers.
Near the end of 1994, the Mexican
peso was devalued, highlighting the
growing strain in the banking system,
which was damaged severely in the 
economic crisis that ensued. To attract
much-needed capital, the Mexican Con-
gress passed financial reform permitting
foreign investors to acquire all or part of
Beyond the Border
hile international capital mar-
kets have been developing
for some time, direct foreign
entry into the domestic banking sector 
of many countries has occurred only
recently. Similarly, while consolidation
of the financial services industry is not
new, it is now beginning to transcend
national borders in a more substantial
way. These changes have occurred as a
growing number of countries have con-
siderably loosened long-standing restric-
tions on the foreign ownership of banks,
thereby allowing financial globalization
to advance on an unprecedented scale.
Most significant policy changes have
their advocates and opponents, and the
recent liberalization allowing global bank-
ing services is no exception. Advocates
say global banking promotes improved
practices and financial stability. But oppo-
nents claim foreign banks may lack com-
mitment to the host country or be inordi-
nately competitive with domestic banks,
resulting in risk too great for domestic
bank supervisors to control.
1 As global
banking grows, the debate continues.
The situation in Mexico may shed
light on this debate. The globalization of
Mexican banking began in early 1994 with
the North American Free Trade Agree-
ment (NAFTA), which represented a sig-
nificant step away from the country’s 
history of a closed banking system. The
peso devaluation of December 1994 sub-
sequently put Mexico’s banks on the
brink of failure. Since then, however,
Mexico has made numerous moves to
stabilize both its economy and financial
system, including further liberalization of
foreign banking restrictions.
This process of deregulation, coupled
with technological and economic factors
propelling a general trend toward global-
ization, recently culminated in the foreign
acquisition of the three largest Mexican
banks, all within less than 18 months. As
a result, Mexico is the largest economy
most existing banks. Still, foreign acqui-
sition of the three largest banks was
effectively prohibited. These reforms led
to the acquisition of medium-sized com-
mercial banks (between $5 billion and
$10 billion) by Banco Bilbao Vizcaya
Argentaria (BBVA) of Spain in 1996 and
BSCH in 1997.
2 In addition, Citigroup
expanded through the acquisition of
Banca Confia, a medium-sized bank, in
1998. Each acquisition involved some
form of financial assistance from the
Mexican government. The government,
meanwhile, took management control of
14 additional troubled banks.
By year-end 1998, Mexico already
had more foreign than domestic banks.
However, foreign banks controlled only
20 percent of banking system assets.
3
BBVA, BSCH and Citigroup controlled 7,
6 and 5 percent of total commercial bank
assets, respectively. None of the other
foreign banks had a market share greater
than 1 percent.
Legislation removed all remaining
market-share limitations on foreign own-
ership in December 1998 and created a
deposit insurance and asset-resolution
agency, Instituto para la Protección al
Ahorro Bancario (IPAB), with stronger
and well-defined powers, unlike its pre-
decessor.
4 Subject to overview by the
Mexican Congress, IPAB immediately
began resolving government-intervened
banks through the auction of bank assets
and, in some cases, entire banks, to
domestic and foreign buyers.
Catalysts for Globalization
In addition to deregulation, other
forces in Mexico and around the world
have propelled the country toward greater
integration with the international com-
munity.
The economic fundamentals Mexico
currently enjoys, especially in comparison
with those of many other developing
markets, have further increased the bank-
W
Financial Globalization: Manna or Menace?
The Case of Mexican Banking
17 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002ing system’s attractiveness to foreign suit-
ors. In addition to comprehensive finan-
cial system reform and modernization,
Mexico has implemented and maintained
strict monetary and fiscal discipline. Mexico
has successfully hit inflation targets in
recent years and anticipates an inflation
rate of about 3 percent by 2003, com-
pared with 52 percent in 1995. The presi-
dent and Congress have exhibited a com-
mitment to reining in public spending, as
evidenced by a shrinking budget deficit,
and the political system itself has proven
to be stable.
Common currencies, economic com-
munities and trading blocs are elimi-
nating obstacles to global expansion, a
primary example being the European
Community and the euro, which have
facilitated merger activity among Euro-
pean banks. In this regard, while Mexico
has a local currency, almost one-third of
its bank assets and liabilities are denom-
inated in U.S. dollars, and the Mexican
peso has been relatively stable in recent
years. Moreover, trade with the United
States has flourished under NAFTA.
Additionally, technological innova-
tions have changed bank products and
revolutionized delivery systems. Advances
in telecommunications and the Internet
have especially benefited global expan-
sion by enabling financial transactions
and managerial control to easily traverse
geographic boundaries. Such develop-
ments have reduced the information bar-
rier traditionally associated with the dis-
tance between an organization’s head
office and its subsidiaries.
Large-Scale Foreign Entry
Spurred by these developments, a
rapid-fire sequence occurred in which
foreign banks acquired Mexico’s three
largest banks in less than a year and a
half.
5 In May 1999 IPAB took control of
Grupo Financiero Serfín, and in May 2000
this financial group was auctioned to
BSCH. Immediately following this trans-
action, BBVA acquired a controlling in-
terest in Mexico’s second-largest financial
group, Grupo Financiero Bancomer. The
transaction was consummated in August
2000, dramatically increasing BBVA’s stake
in Mexico and making the newly formed
Grupo Financiero BBVA Bancomer the
country’s largest banking group. This
acquisition was the first significant for-
eign acquisition completed without finan-
cial assistance from the Mexican govern-
ment. In the second quarter of 2001, Citi-
group announced it would buy Grupo
Financiero Banacci Accival (Banacci),
which owns Banco Nacional de México
(Banamex). The transaction was com-
pleted in September 2001.
Reflecting these acquisitions, the Mexi-
can commercial banking system cur-
rently consists of 11 domestic and 19 for-
eign organizations.
6 The foreign banks
include nine U.S. institutions, two Span-
ish banks, six other European banks,
one Canadian bank and one Japanese
bank. Foreign banks now hold nearly 79
percent of total commercial bank assets
(Chart1). Together, BBVA, Citigroup and
BSCH hold 66 percent of these assets.
Mexico is not alone in these devel-
opments. Latin American banks in gen-
eral have often been targets for foreign
acquisition in recent years. As shown in
Table 1, foreign banks now maintain a
substantial presence in most Latin Amer-
ican countries. However, Mexico stands
out in terms of the extent of foreign
banking, especially given the large size
of its economy.
Benefits for Mexico
Insufficient time has elapsed to com-
prehensively assess any differences in
overall banking system performance
resulting from foreign institutions’ promi-
nence in the Mexican banking system.
Nevertheless, the trends have been posi-
tive. Each of the acquired banks has
reported success in cutting costs, result-
ing in improved earnings and increased
pressure on domestic banks to rationalize
their own operations in order to remain
competitive. As the cost synergies associ-
ated with recent acquisitions are fully
realized, further operating-expense reduc-
tions are expected. More important, the
capital adequacy of the three largest banks
has improved, in some cases through
capital injections provided by the new
foreign parent companies.
In broader terms, the institutional
changes since Mexico opened its bank-
18 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002
Market Share of Foreign-Owned
Banks in Mexico
Percent
Chart 1
SOURCE: Comisión Nacional Bancaria y de Valores.
0
10
20
30
40
50
60
70
80
’01 ’00 ’99 ’98 ’97 ’96 ’95 ’94 ’93
Foreign Bank Presence in Latin America
2000 GDP Foreign Bank Market Share
(billions of U.S. dollars) (percent)
Brazil 1,194 24.0
Mexico 875 78.8
Argentina 403 54.7
Colombia 291 24.1
Chile 219 47.0
Venezuela 205 49.7
Peru 133 67.9
Ecuador 59 8.7
Dominican Republic 53 7.0
Uruguay 33 39.2
Bolivia 27 7.1
Panama 23 54.7
El Salvador 20 13.0
Jamaica 10 59.0
NOTES: The Mexican market share is as of June 30, 2001, and reflects the pro forma Citigroup–Banamex combination. All other market shares
are as of year-end 2000, but the Jamaican market share reflects the pro forma foreign acquisition of the country’s third-largest
commercial bank in 2001.
SOURCES: GDP data are from the International Monetary Fund; market share data were compiled by various Federal Reserve Banks, through
public information available from central banks and other supervisory agencies in individual countries.
Table 1ing sector to direct foreign entry corre-
spond to the benefits claimed by the 
proponents of global banking in terms 
of improved practices and financial sta-
bility. A full analysis of the benefits of
financial globalization must consider this
process as a whole, rather than narrowly
focus on the behavior of the foreign
banks. In conjunction with the opening
of its banking sector, the Mexican gov-
ernment has concentrated on stabiliza-
tion, modernization, transparency and a
drive toward internationally comparable
standards and objectives.
A look at some related industry de-
velopments clearly shows that Mexico’s
financial system has been much im-
proved and strengthened. The supervi-
sory authorities have implemented a
new bank monitoring and rating system,
and accounting principles have contin-
ued to evolve closer to international
standards. Furthermore, supervisors have
moved quickly to promulgate new risk-
management policies and processes for
credit administration. For example, asset–
liability management policies have been
improved to better assess value at risk
and mitigate liquidity and interest rate
mismatches. While markets have gener-
ally stabilized over the past few years,
the effects of these improvements in
asset–liability management are reflected
in less volatile market-related gains and
losses. Moreover, the corporate commu-
nity and governing authorities have en-
hanced the disclosure of financial infor-
mation and established new corporate
governance laws that strengthen the
accountability of bank directors and 
increase the rights of minority share-
holders.
These are the types of advances
globalization advocates have contended
would result from international banks’
direct entry into a domestic market. A
strong foreign presence brings world-
class banking practices, heightened com-
petitiveness, and the need for institu-
tional and policy arrangements fully
supportive of modern financial services.
This process of change in Mexico un-
doubtedly began even before the onset
of direct foreign ownership, as interna-
tional players had already been compet-
ing with domestic institutions to serve
Mexico’s largest and most sought-after
corporate borrowers.
Globalization Concerns
Misguided
The path of progress has admittedly
been a rough one for Mexico, as evi-
denced by the 1994 peso devaluation.
But from a longer term perspective, even
the peso crisis and its associated banking
problems proved to be positive in that
they helped spur the improvements and
modernization subsequently undertaken
by governing authorities and Mexican
banks.
Opponents often emphasize the per-
ceived weaknesses of an open financial
system by referring to examples, such as
Mexico’s, of financial liberalization fol-
lowed by financial crisis. But this ignores
the underlying institutional and policy
problems that typically have accompa-
nied financial crises. A more thorough
assessment would consider the possibil-
ity that adverse financial developments
in the context of a deregulated environ-
ment might reflect deeper problems,
rather than being the direct result of
financial liberalization itself.
In Mexico’s case, the 1994 peso cri-
sis highlighted, among other things, the
need to pursue the types of improve-
ments to the financial infrastructure that
Mexico has since successfully undertaken.
Only through these efforts have domestic
banking practices, the supervisory process,
information quality and corporate gover-
nance been made commensurate with
the demands of the global marketplace.
A Positive Direction
Mexico has established a strong
foundation for economic growth and
prosperity. Accompanying the banking
sector’s openness to foreign ownership
and competition has been a large-scale
modernization of regulatory practices
and accounting standards, together with
significantly increased disclosure and cor-
porate governance requirements. In addi-
tion to opening its banking sector, Mex-
ico has signed 10 free trade agreements
in recent years, encompassing 35 coun-
tries that account for more than half of
the world’s GDP.
More time must elapse before the full
effect of these changes on financial and
economic performance can be assessed.
Nevertheless, developments point firmly
in a positive direction, especially in terms
of the banking system’s capital adequacy.
Reflecting Mexico’s financial success, the
peso has remained fairly stable over the
past three years, whereas the currencies
of many other major Latin American
countries have depreciated.
Within less than 18 months, Mexico’s
three largest banks were bought by for-
eign institutions. Cause for concern? We
think not. Rather, Mexico’s policy of open-
ness is likely to result in continuing eco-
nomic benefits far greater than what was
widely expected only a few years ago.
— Robert V. Bubel
Edward C. Skelton
Bubel and Skelton are international
financial analysts in the Financial Industry
Studies Department of the Federal Reserve
Bank of Dallas.
Notes
1 An excellent discussion of these opposing views and related points
can be found in the remarks by Robert W. Ferguson, Jr., before the
International Banking Conference, Federal Financial Institutions Exam-
ination Council, Arlington, Va., July 20, 1998. See www.federalreserve.
gov, under the section titled “Testimony and Speeches.”
2 At the time, BBVA was known as Banco Vizcaya Bilbao and BSCH was
known as Banco Santander.
3 The government does not report the assets of intervened banks, and
therefore these assets are not included in the total. If the assets of
intervened banks were counted, the market share calculated for foreign
banks would be somewhat lower.
4 Entry is still permitted only through a separate, Mexican-chartered
subsidiary. No branches or agencies of foreign banks can be estab-
lished in Mexico.
5 In addition, during 2000, a Canadian bank acquired a medium-sized
Mexican bank it had managed for the government since 1995.
6 The government currently controls 11 intervened banks, including one
small bank that was intervened in 2001. Resolution of the largest inter-
vened banks has been arranged through agreements with local banks.
The remaining intervened banks are essentially shells, as the most
valuable assets and deposits have already been sold. Recently, IPAB
announced that the licenses for seven of these banks will be formally
revoked and the banks fully liquidated.
19 FEDERAL RESERVE BANK OF DALLAS   SOUTHWEST ECONOMY   JANUARY/FEBRUARY 2002

Financial globalization: manna or menace? The case of Mexican banking

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Financial globalization: manna or menace? The case of Mexican banking

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