MEXICO CITY -- Staking out its position for upcoming free-trade talks with U.S. and Canadian officials, Mexico says it is prepared to let foreign banks set up subsidiaries - but not branches.

The subsidiaries would have to be capitalized separately. Branches do not require additional capital.

Mexico's stance, a senior Mexican official said, will be put forth in the first round of talks on the proposed North American Free Trade AGreement scheduled to start today in Ottawa. U.S., Mexican, and Canadian treasury officials plan to meet there to exchange texts for the draft section on financial services.

Breathing Room for Banks

Guillermo Ortiz, Mexico's under secretary for finance and public credit, said Mexico would be unable to offer greater concessions because the country's banks need time to adjust to market deregulation and to reorganize following recent privatizations.

U.S. banks, including money-center, regional, and Texas institutions in Texas, are seeking to open branches in Mexico to assist their multinational corporate customers, facilitate cross-border payments, and expand into the potentially lucrative Mexican retail banking market.

U.S. officials and bankers said they would seek to obtain authorization for U.S. banks to branch in Mexico despite the Mexican position.

"Our banking system wants it, and we're trying to get an agreement that satisfies our financial sector," said a senior U.S. Treasury official who asked not to be identified. "I'm sure there will be lots of differences, but we plan to push branching."

Branching to Be Pushed

Thomas L. Farmer, general counsel at the Washington-based Bankers Association for Foreign Trade, expressed disappointment at the stand taken by Mexico but said he assumed that it would not be the final Mexican position.

Requiring foreign banks to set up Mexican subsidiaries is "shortsighted and cumbersone," Mr. Farmer said.

Value of Competition

"They need a modern financial structure for their own economic development and one of the ways to develop is to bring in competition," he said.

Mexico currently does not allow foreign banks to open separately capitalized subsidiaries or branches and does not permit foreign investors, including banks, to own more than 30% of Mexican banks.

The United States already allows both Mexican and Canadian banks to set up branches and subsidiaries, while Canada allows foreign banks to set up locally capitalized subsidiaries.

Mr. Ortiz added that Mexico also wants subsidiaries rather than branches in order to keep closer supervisory control over foreign banks setting up operations in the country.

"It's important for us to know who's doing what, and it's more transparent in terms of extra-territorial legislation," he said.

Danger Seen to Local Market

Opening Mexico to unlimited competition by foreign banks while local banks were adjusting to recent privatizations and market deregulation could "destabilize" the local market, he said.

"We would like to give Mexican institutions time to consolidate," Mr. Ortiz said.

"We are prepared to be open but want it to translate into added value for the Mexican [banking] system. Branching does not come into question."

He added that any opening of the Mexican banking system as part of a free-trade agreement would probably take "two or three years" to implement.

The Mexican official's comments are the first indication to date of what concessions Mexico is prepared to grant in opening its financial markets to foreign institutions.

Banking sources said that the Mexican government is particularly concerned that foreign banks, which have access to cheaper foreign currency funding, greater expertise, and wider international networks, will have an unfair advantage over Mexican banks if allowed unrestricted entry into Mexico.

Mexican officials said they hoped to finalize the draft of a free-trade agreement by February in order to be able to take advantage of the so-called "fast track" authorization by Congress.

Extension Already Granted

"Fast track" sets a 90-day limit for discussing the agreement with industry and Congress and gives Congress a further 90 days maximum to debate and vote on the bill. The authorization has already been extended to May 1993, but cannot be renewed a second time.

Senior Mexican officials, however, added that there is no fixed schedule for concluding an agreement.

"Everything, including financial services, is on the table," said Jaime Serra Puche, Mexico's minister of trade and industry. "The negotiations will determine the timing."

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