Dramatic legislative shift in Mexico is causing banking crises

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Banks are a crucial part of Mexico’s economy. Unlike ordinary companies, they are often considered ‘too big to fail’. Mexico has learned the importance of having a solid banking system through painful lessons – two banking crises – and has historically dealt with said bank failures with the same framework applicable to any other commercial entity: the Bankruptcy Laws of 1942 and 2000.

However, in July 2006, Mexico followed the Supervisory Guidance on Dealing with Weak Banks issued by the Basel Committee in March 2002 and amended the banking law. This amendment introduced, among others, alternatives to insolvency, such as acquisition by a healthy bank, purchase and assumption transaction, and bridge bank techniques; corrective actions, such as the prohibition on profit distribution or other withdrawals by shareholders, removal of directors and managers and limitations on compensation; an operation under probation regime; and limited bailout.

In January 2014, another major amendment of the banking law occurred when Mexico followed the Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board in October 2011. This amendment introduced a new banking resolution regimen, whereby the liquidation of failed banks is conducted through an administrative or court-supervised liquidation procedure and not by an ordinary bankruptcy pursuant to the bankruptcy law.

The current banking law recognizes two bank resolution methods: rehabilitation and liquidation. Although Basel has recommended that the closure of a bank and revocation of its license remains the ultimate sanction,[2] in Mexico, the general rule applied is liquidation. Rehabilitation is the exception. The main objective of the new recovery and resolution framework is ‘to maintain financial stability in crisis and to minimize losses for society without the need to rely on taxpayer support’.[3] Since Mexico entered this ‘new era’ of bank failure regulation, from 2006 to the present, only three banks have failed, compared to the 1990s bank crisis, where most banks technically failed.

Click here to read the complete original article by Francisco José Rodríguez Nepote on Latin Lawyer

Source: Latin Lawyer

The Mexico City Post