In recent years, the Mexican banking sector, along with other areas of our economy, has been subject to an accelerated and profound deregulation of its operative and legal framework. The deregulation measures that have been implemented in many areas to speed up the Mexican economy have benefited out financial sector.
These measures, together with the current dynamic pace of growth, will place Mexico in the vanguard of the international financial sector.
The privatization of the banking system, the formation of financial groups, and the participation of foreign investors as important shareholders in this key economic sector will substantially transform the banking sector in Mexico into one that is competitive, efficient, and growth-oriented.
Reforms Were Necessary
Banking reforms in Mexico were necessary due to important changes in worldwide financial activity and because Mexican banking laws, although adequate at one time, needed to be changed to modernize the banking system and provide it with greater flexibility.
As we anticipated, Mexico's banking reforms have brought a spectacular leap forward in the way banks operate in our country. Numerous regulations that were impeding the banks' efficiency and growth capacity have been eliminated.
For example, for many years, Mexican banks faced ceilings on their borrowing rates and were not allowed to design their own investment instruments.
This situation, especially in unstable times, caused drops in the banks' share of the domestic market and in their intermediation levels, affecting flows and savings levels in the country.
Interest Rates Liberalized
In 1989, however, the nation's central bank deregulated bank lending and deposit operations, and interest rates and terms for bank instruments.
The main goals were to create more efficient mechanisms for building domestic savings, to institutionalize them through the financial markets, to increase the available supply of credit, and to promote competition in attracting funds.
In short, the liberalization of interest rates and domestic market investment terms were the start of sweeping reforms.
As important as increasing savings -- or even more so -- was to establish ways to guarantee that these resources were allocated in the most beneficial manner possible.
A Freeing of Resources
Previously, Mexico's very high mandatory reserve requirements and selective credit controls restricted the availability of resources and limited options for channeling them wisely, based on the expected profitability of various business alternatives.
In time, government finances improved, permitting the elimination of "legal reserve" requirements, and, as a result, resources were freed to be lent to the private sector.
Furthermore, to guarantee the most economically profitable allocations of financial resources, selective credit controls were also eliminated.
Government Must Compete
Today, Mexican banks have complete freedom to determine their own credit policies. Now the government must also venture into the financial markets and compete against financial intermediaries for available resources.
The most important measure of all is the recently completed reprivatization of commercial banks in Mexico. This marked a return to the very essence of economics supporting modernization and growth.
Since privatization, the banks have been embarked on an important investment and restructuring process to prepare their human, technological, and physical infrastructures to meet the challenges facing Mexico today.
More Flexible Legal Framework
It's important to note that the reprivatization of the banks in itself would not have been sufficient to achieve the much-needed transformation of our financial system. The definition of a new, more flexible legal framework that fosters a competitive atmosphere has been vital for the restructuring process currently taking place in the Mexican financial sector.
A "universal banking" scheme by means of which a financial group may hold intermediaries of different types (banks, brokerage firms, foreign-exchange brokers, financial leasing companies, etc.) has become the new banking model for Mexico's economic future.
The possibility of taking greater advantage of economies of scale and the synergies that exist between a financial group's integrated companies will contribute to building a more effective, productive financial system.
Long Road Lies Ahead
Mexican banks' supervision mechanisms are now more modern and efficient. A technically professional administration is required, as well as institution solvency. Numerous national and foreign investors are shareholders in the banks, although majority is held by Mexican nationals.
Despite recent achievements, we have a long road ahead of us. Still far from attaining the levels of quality and efficiency that characterize foreign banks, we are under heavy time pressures because of the imminent financial opening of our country.
We are working toward increasing the quality of our services, reducing costs, developing and introducing new products with state-of-the art technology.
Strategic Alliances Forming
Mexican banks have already begun to form partnerships and strategic alliances with foreign banks, a process that will continue with vigor. Though these associations imply greater competition, those entering into them will benefit from having more elements at their disposal than those who work on their own.
Mexican bankers' experience in the domestic market and knowledge of its particular niches and segments, as well as the sector's large physical infrastructure, can be enriched by applying our foreign partners' wide range of modern technology to operations and management.
In Mexico, the future is quite promising for financial intermediation activities. Income levels are expected to grow and our population is young and prone to saving.
Financial and banking penetration in the economy is still low. As a sector, we strive to adapt ourselves with better tools to the modernization process demanded by current circumstances, to take advantage of business opportunities ahead.
Mr. Somoza is chief executive officer of Grupo Financiero InverMexico, one of Mexico's major banks.
