A free trade agreement among the United States, Canada, and Mexico could open opportunities expanding banking powers in the United States, according to a senior Canadian economist.
Joshua L. Mendelsohn. senior vice president and chief economist for Toronto-based Canadian Imperial Bank of Commerce, said any expansion in banking powers in the United States as a result of the agreement would probably come about as a tradeoff among the three countries.
Congress is due to vote Wednesday on the pact, known as the North American Free Trade Agreement.
Three-Way Review
If approved, the agreement would allow U.S. and Canadian banks to set up Mexican banking subsidiaries as of January and acquire a limited share of the Mexican banking market.
Canada allows foreign banks into its market but requires them to operate as separately capitalized subsidiaries.
Mexico bars foreign banks from coming into its market.
Any increase in foreign banks' market share in Mexico, or change in Canadian regulations, however, will depend on a process of tripartite review among the U.S. Treasury, Canadian Department of Finance, and Mexican finance ministry.
Mr. Mendelsohn suggested that if U.S. banks seek to modify the agreement to expand their markets in Mexico, Mexico and Canada will probably press the United States to allow banks to engage in a broader range of activities, including insurance and investment banking.
Banks in Canada and Mexico can engage in such activities. However, U.S. banks are barred from doing so.
Mr. Mendelsohn noted that Canadian banks were disappointed that the existing U.S.-Canada free trade agreement does not permit Canadian banks to expand their operations in the United States.
He added that Canada's banks now hope to use the free trade agreement with Mexico as a springboard for enlarging the scope of their U.S. activities.
Senior Mexican bankers have also emphasized they will oppose any expansion in the market share of foreign banks under Nafta if the United States fails to allow Mexican banks to engage in investment banking in the United States.
"We hope that one benefit of the agreement is that it would put pressure on the United States to open its financial system." Mr. Mendelsohn said.
The Canadian banker stressed, however, that there is no formal commitment to further changes included in the North American free trade agreement.
He added that the lengthy transition period for phasing in agreement between next year and 2007 also makes it unlikely that a review will soon be held.
However, any pressure on Mexico to allow foreign banks to do more business would "generate moves by the two other players," Mr. Mendelsohn said.
"Mexican banks have the same argument we do," the banker said.
"Glass-Steagall is still there, U.S. regional banking pacts don't allow for full nationwide banking, and banks in the U.S. still can't engage in underwriting and insurance," he said.
"We find that there are a host of restrictions in the U.S.," he added.
"The bottom line is how balanced really is national treatment and how do we deal with some of the less clearly defined impediments to doing business in the United States."
Financial Services
Provisions Under Nafta
Would allow U>S. and Canadian banks to set up separately capitalized bank subsidiaries in Mexico
Would allow U.S. banks to hold 8% of the total capital of the Mexican banking system p to 2000, up to 15% by 2003, and up to 25% thereafter
Would allow U.S. securities firms to initially acquire up to 10% of market and up to 20% by 2000 and 30% by 2004. All restrictions would be eliminated thereafter.
Would allow U.S. and Canadian insurance joint ventures to acquire 100% ownership of Mexican insurance firms by 1996. After 1998, foreign insurance companies would be able to acquire majority stakes in Mexican insurance firms.
