Bank Protectionism Hurts Mexico - and Us

Herb Vest argued in his Oct. 22 commentary ["Mexico's Banks Still Need Protection," page 4] against an immediate opening of banking in Mexico to U.S. banks. That "would severely endanger the banks of a developing country," he wrote.

This old protectionist position simply will not stand up to the requirement of a progressive new Mexico.

Economic reforms by the administration of President Carlos Salinas have begun to unleash the potential of Mexico's economy in several ways. His government has lowered import tariffs, and Mexico's formerly protected companies have really started to adjust to world market forces.

Protectionism out of Style

As these companies grow, they will export and import. Moreover, Mexico has privatized many state-owned companies, including its huge telephone company and several banks.

Mexico is moving away from a protectionist approach. Just a few years of these policies have triggered a boom in productive investment and improved prospects for growth and employment.

The privatization of Mexico's commercial banks is off to a fast start. In the year since President Salinas announced his plan to return the banking sector to private hands, eight of the nation's 18 banks - including the two largest banks-have been sold to the private sector.

Another key step is to let foreign banks compete on an equal footing with Mexican banks.

Foreign Banks Are Hobbled

Today, commercial banking stands apart from many other Mexican industries because it is protected from foreign competition.

Indeed, Mexico heavily circumscribes the powers of foreign banks within its borders. With but a single exception, all foreign banks are limited to representative offices and are denied basic banking powers.

Moreover, Mexican regulation prevents foreign firms from holding more than 30% equity in a Mexican bank. This limitation is likely to keep most foreign banks from participating in the privatization process.

Many banks, particularly since their own troubles in recent years, seek full control of credit and other key decisions when investing in another financial institution.

These banking restrictions are inconsistent with the thrust of Mexican government reforms. The open, trade-oriented Mexico now taking shape needs an efficient banking system.

Help Awaits

The yardstick of Mexican banking efficiency will include lower cost of money for Mexican customers, lengthening of maturities available, and improved overall intermediation of funds between savers and investors.

Competition between Mexican and foreign banks would be central to achieving this efficiency:

* Opening to U.S. banks would help push all Mexican banking transactions toward internationally competitive rates. help bring back capital that fled the country during the 1980s. Repatriation of these funds has already begun and will be an important source of development capital in the 1990s.

* Opening to U.S. banks would help assure Mexican banking access to modern technology. The business of banking is becoming more technology-intensive, and the ability of any bank to provide excellent service will rest more and more heavily on the use of constantly changing technology.

Importing Technology

Foreign banks would bring up-to-date technology into the Mexican market. This would provide service to the foreign banks' customers and encourage Mexican banks to provide such service to their own customers.

Foreign competition would provide additional market discipline to help avoid the relatively concentrated banking structure that had reduced Mexican competitiveness prior to nationalization.

An excellent financial services industry is an infrastructure less visible to the untrained eye than good roads or a modern telephone system, but bankers and businessmen know that a modern financial system plays a central role in progress.

Mexico was burdened for years with an outdated economic model. Each step of reform has been marked by those who said to slow down because it was too difficult.

But maintaining the status quo would limit economic growth.

Clearly, it would be good for Mexico to let foreign banks compete fully. But this is also important for the United States.

We need a growing and prosperous Mexico to provide a market for our goods. As in the U.S.-Canada Free Trade Agreement, we need a "win win" situation.

Mexican banks enjoy "national treatment" in the United States, where they are allowed to operate like U.S. banks. Certainly, it is reasonable for U.S. banks to be able to operate like Mexican banks in Mexico.

Mr. McPherson is executive vice president of Bank of America.

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