A group of community banks along Texas' border with Mexico will see years of planning and work pay off on Jan. 1 when the North American Free Trade Agreement goes into effect.
Banks in the border towns of Laredo, El Paso, and Brownsville, where most of the groundbased trade occurs between the United States and Mexico, are already gearing up for expanded loan relationships to the south. One bank in Brownsville is even hoping to open a Mexican subsidiary bank as early as next year.
"There will be lots of different situations to capitalize on," said Graciela Gutierrez, director general of Brownsville's Mercantile Bank. "There are a lot of opportunities."
Loans Will Flow South
Until now, the relationship of most U.S. banks with Mexican business has been primarily trade finance, currency exchange, and deposit services. Lending and other investment flows have been hampered by the closed Mexican banking market and the differences in laws that make collectibility in Mexico potentially difficult for none-Mexican banks. Border bankers say this will be the biggest change.
"The most fundamental change is going to be financial flows from the United States to Mexico," said Robert J. Whetten, chief executive of State National Bank in El Paso.
"Remember that these banks on the U.S side usually have excess liquidity compared to other banking centers, because a lot of deposits come from Mexico that can't be lent out there. In a developing ecomony, and that's what Mexico is, the challenge is resources and fundings. We feel like we can follow our trade business south."
Short-Term Deals
Mr. Whetten said most of his bank's financing with Mexican customers is U.S.-dollar-generating trade business and is short term, thereby reducing the risk of currency fluctuation.
Longer-term financing in Mexico by U.S. banks will evolve now that the trade pact is in place.
"Mexican companies will be willing to take a dollar risk now," he said. "We'll start seeing requests for longer-term financing."
Long-Term Lease
"We already have one transaction that's based on a long-term lease of a Mexican property," said Jonathan Rogers, chief executive of Bank of the West in El Paso.
With Nafta, it will be easier not only to lend to Mexican businesses, but also to establish a physical presence in the country.
While foreign banks will be able to buy stock in Mexican banks, in its first year Nafta will restrict to 8% the percentage of banking capital in Mexico that can be owned by foreign banks. Today, only Citibank among non-Mexican banks has a physical presence in Mexico.Nafta's Effect on U.S. Border Banks Short Term * More trade financing and currency services * More joint ventures with and investments in Mexican banks * More dollar-based lending in Mexico Long term * As may as 25 Mexican bank charters awarded to foreign banks next year, but smaller U.S. banks could be shut out until 2004, when all restrictions are lifted * A slow, steady increase in long-term, dollar-based commercial and real estate lending by U.S. banks to Mexican businesses * An increase in domestic loan demand as border cities expand to meet growing trade needs
Gradual Increments
The formula is this: After Jan. 1 and until 1995, up to 8% of Mexico's total banking capital can be owned by U.S. or Canadian banks. It increases, by one-percentage-point increments each year, to 15% by 2001.
In 2002, it goes up to 25%. By 2004, under the treaty, there is no limit on the amount of total Mexican banking capital that can be owned by foreign interests.
There's also a minimum amount of capital that can be used to capitalize a new subsidiary, a requirement designed to stop a rush of "little" banks opening up south of the border.
Big Banks with Big Plans
Experts say that in 1994, given the minimum amount of capital needed to open a subsidiary, about 25 foreign-owned banks will open in Mexico.
But, there's a catch. If the big banks - Chemical, Bank of American, Chase Manhattan, all of which have indicated they will enter Mexico as fast and as big as they can - take up the allotted &% of the country's banking capital in the first year, it could limit the amount of subsidiaries that smaller border banks, withe their more limited capital resources, can establish there.
In fact, said one expert, there will propably be brisk competition, with the Mexican government being the judge, for new foreign-owned bankd charters in the coming years.
Ironically, the Mexican government has halted all new bank charters from domestic applicants because there are limitations on the number of banks it can effectively regulate.
Connections in Mexico City
Ms. Gutierrez of Mercantile, which is owned by a wealthy and well-connected Mexico City businessman, said Merchantile hopes to be one of the 25 foreign banks to open a subsidiary in Mexico next year
Mr. Rogers of Bank of the West said his bank is seeking out a joint venture with a Mexican bank to market each other's services.
"We're going to look for a partner instead of trying to open a separate subsidiary," Mr. Rogers said. "A Mexican partner would know the law and be able to collect credits much more efficiently than we could."
Mr. Whetten said State National would seek to open a subsidiary in Mexico at the earliest opportunity.
Homegrown Businesses
These bankers are also predictig more homegrown business from Nafta. Mr. Rogers said the transportation and trade services business ("the paperwork professions," he called them) will boom in El Paso, Laredo, and Brownsville. He also expects more vehicle and rail bridges to be built in the next five years.
"I would say our region and all the towns along the border are going to grown much faster economincally than the rest of the country in the next 10 years," said Mr. Whetten.
"There's now a critical mass here," Mr. Rogers said. "We have 1.2 million people living right across the street, literally, in Juarez. Working with a foreign country is the name of the game, and it's something business people down here have been doing for years"
