WASHINGTON - American banks stand to rake in profits and face increased risks if the United States, Mexico, and Canada agree to open their borders to more trade.

If Congress passes the North American Free Trade Agreement, U.S. and Canadian banks will - for the first time in nearly a decade - be allowed to open subsidiaries in Mexico, where only 18 banks now operate and there is one bank branch for every 18,000 people, compared to one for every 4,000 in the U.S.

"It is clear as a bell that U.S. banks and securities firms can make money in Mexico," said Rep. Toby Roth, R-Wis.

"When it comes to financial services. Nafta is a clear winner."

|Huge Profits'

"A number of very large U.S. banks stand to make huge profits by expanding their operations into Mexico," said independent Rep. Bernie Sanders of Vermont, who fears the agreement would hurt American workers.

Despite the potential for profits, there are risks for banks that open Mexican subsidiaries.

U.S. banks could face increased currency, credit, and interest rate risk in the more volatile Mexican banking environment, said Steven C. Davidson, senior vice president at Ferguson & Co., an Irving, Tex.-based bank consulting company.

Because Mexico allows its banking companies to underwrite securities and engage in other related activities, the subsidiaries of U.S. banks would be allowed in Mexico to engage in securities underwriting, which is considered riskier than lending.

Expanded Powers

In addition, they would be allowed to trade stocks and bonds. Those expanded powers are prohibited in the United States.

"Mexico will also allow all banks - foreign and domestic - to offer a wide array of financial services, a model which we hope the U.S. will someday follow," said Jack Guenther, senior vice president and senior adviser for international operations at Citibank, the only foreign bank now allowed to operate in Mexico.

Underbanked Mexico presents the industry with opportunities.

"Nafta effectively takes Mexico from being one of the most closed financial services markets in the Western hemisphere to being one of the most open," Mr. Guenther told the House Banking Committee at a hearing Wednesday.

With Congress' approval, the agreement would take effect Jan. 1.

Banking Committee Chairman Henry B. Gonzalez, D-Tex., is concerned about the potential for increased money laundering if Canadian and American banks expand their operations into Mexico.

Rep. Gonzalez said, "U.S. regulators should maintain a vigilant oversight of American firms' activities in Mexico to ensure their safe and sound operation and prevent any attempt to use such foreign operations to evade U.S. laws and regulations."

Regulatory Burden

It will fall to American bank regulators to guard against dangers from the increased risks, according to industry experts and members of Congress.

Ferguson's Mr. Davidson pointed out that Mexican banking regulators have "a limited track record" monitoring the country's banks, which were nationalized in 1982 then privatized again over the last few years.

"We must rely primarily on U.S. bank regulators to bear responsibility for adequate supervision of foreign operations of our financial institutions," Mr. Davidson said.

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