Mexico City — The Mexican financial system is resilient and solvent in the face of the adverse macroeconomic and financial shocks, but smaller banks could be at risk of stress due to de-capitalization in an extreme scenario, such as the onset of a recession, according to Banco de México (Banxico).
The country’s central bank conducted stress tests on commercial banks, and which indicate that the system is resilient to four scenarios: a tightening of global financial conditions due to higher interest rates, lower global growth, a weakening of consumption and investment in the country, and an adjustment in credit rating.
Likewise, the system is solid in the face of a repeat of one of three historical scenarios, such as the 1995 crisis in Mexico, which saw a sharp devaluation of the peso; the 2008 global financial crisis, and the episode of global financial volatility in May 2013 following the normalization of the US Federal Reserve’s monetary policy.
“The results of the stress tests show that in all simulated scenarios the system has stress horizons at levels above the regulatory minimum plus capital supplements,” states the central bank’s Financial Stability Report of June 2022.
Executives of the Mexican Banking Association (ABM) stated on August 17 at a press conference that banks have quality, liquidity and solvency indicators well above the regulatory minimums, and are resilient to shocks and extreme scenarios, according to the stress tests conducted by Banxico.
However, the Banxico report points out that, in the extreme scenarios simulated, some banks would end the year with capitalization levels below the regulatory minimum, although those would represent a low percentage of the banking system’s assets.
In the set of scenarios amid tightening global financial conditions due to higher interest rates, a weakening of consumption and investment in the country and an adjustment in credit rating, the institutions that would end the year with a capitalization index below 8% represent 5.32% of the total assets of the system.
In the scenario of lower global growth, the percentage is 4.1%.
Mexican banks must comply with a minimum capitalization index of 8% plus a capital conservation supplement of 2.5% constituted with fundamental capital, so they must have a total capitalization index of 10.50%, in accordance with Basel III regulations.
Banks’ capitalization
Enrique Díaz-Infante, director of the financial sector and social security of the Centro de Estudios Espinosa Yglesias (CEEY), said in an interview that low financial inclusion could be a factor that helps commercial bank to avoid being hit hard in the event of a recession, as well as the delinquency rate that has remained at 2.5%.
He pointed out that in the event of a recession, banks would probably not be so affected, since they have a favorable capitalization level of close to 19%, when Basel III requires 10.5%.
“I would not doubt that some of the banks that are already in bad shape or that are in liquidation, such as Accendo, are going to have a hard time. Maybe smaller banks will not be able to withstand a recession in the United States, which would impact Mexico’s growth and therefore the banks’ portfolios, and we could see some smaller banks go bankrupt, but none of the seven big banks would be able to withstand a recession in the United States.”
Enrique Díaz-Infante, director of the financial sector and social security of the Centro de Estudios Espinosa Yglesias (CEEY
Bansí, Autofin, Actinver, ABC Capital, Bankaool, Inmobiliario Mexicano, Dondé Banco, Bancrea, Banco Covalto (formerly Finterra), ICBC, Shinhan, Mizuho Bank, Bank of China and KEB Hana México are the 14 banks in the Mexican financial system that are classified as small commercial banks by the National Banking and Securities Commission (CNBV).
The capitalization index of commercial banks registered a level of 18.67% in June 2022, its lowest level since August 2021, according to the CNBV’s monthly report.
ABC Capital, Autofin, Bancrea, Consubanco and Ve por Más are the five banks with the lowest capitalization index within the system, with a level of between 12% and 13%, but they are above the regulatory minimum.
The multiple banking sector as a whole reported a core capital ratio (CCR) of 17.3% and a fundamental capital ratio (FCR) of 15.69%; these ratios essentially indicate the financial strength of the institutions. The regulatory minimums are 7% for CCR and 8.5% for FCR.
In this regard, the report highlights the case of Bancrea, which reported a level of 9.12% CCR and 9.12% FCR, the latter being the ratio that is just above the minimum required by the authority.
When the CNBV initiated the liquidation of Accendo Banco, in September 2021, the institution reported a capitalization index of 9.88% and CCR and FCR levels of 9.88%.