Both the U.S. government and U.S. financial institutions have long backed efforts to open protected banking markets to foreign competition, but expectations may be outstripping reality.

More than five years after U.S. banks gained a major victory - Mexico's agreement to let them operate in that country - market liberalization is proving something of a hollow triumph.

"The thinking was that by entering Mexico U.S. banks would have greater opportunities," said Gerald Schwebel, executive vice president and head of the international division at International Bank of Commerce in Laredo, Tex. "But my information leads me to believe that the fruits of that labor have yet to be seen, and I wonder whether any of them are making money there."

Only one banking company, Citigroup, has made a visible effort to expand in Mexico. Two years ago it bought Banca Confia, a Mexican bank with more than 200 branches, as part of a move into the local midsize corporate market.

And last week it agreed to exercise an option to acquire a 51% stake in pension fund manager Afore Garrante for about $179 million from Grupo Serfin, Mexico's third-biggest banking group. The deal would raise Citigroup's stake in the pension fund manager to 91%.

FleetBoston Financial Corp., the only other banking company with a stated policy of expanding in Mexico, still has only about $600 million of Mexican assets.

Bankers cite several obstacles to building up business in Mexico. Political and economic turmoil can make it an unstable environment in which to run a bank. Seizing collateral on a loan can be virtually impossible. And operating in Mexico can be very expensive because of capital and staffing requirements.

Under the North American Free Trade Agreement, U.S. banks were allowed to operate in Mexico provided they set up banks that were separately capitalized and licensed in Mexico.

This, bankers say, has proven to be inordinately cumbersome and expensive.

"The biggest problem is that your capital has to be in Mexican pesos, and that has to be hedged," said Thomas Farmer, general counsel of the Washington D.C.-based Bankers Association for Foreign Trade. "That money is constantly exposed and sitting there even when you don't need it." Staffing levels are another problem.

"Mexico makes it very difficult for foreign banks to make money," said a senior U.S. banker who declined to be named.

Regulations require a specific number of employees for each activity, the banker said, "so everybody winds up overstaffed."

One talked-about change that theoretically would please U.S. bankers would be to allow direct branches in Mexico. This would eliminate the need to capitalize each unit separately, but the branches would still be subject to the Mexican regulatory and legal system.

U.S. bankers said they are unlikely to embark on any significant expansion in Mexico until it modifies its regulatory and legal systems.

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