Report No. PID8409
Project Information Document
Project Name             Mexico-Bank Restructuring Facility Loan (BRFL)
Region:                  Latin America and the Caribbean
Sector:                  Finance
Project ID :             MX-PE-P067491
Borrower:                NAFIN
Guarantor:               United Mexican States
Implementing Agencies:   Bank Savings Protection Institute (IPAB)
Lic. Jose Antonio Meade
Secretario Ejecutivo Adjunto
Boulevard Manuel Avila Camacho No. 184 Piso 13
Col. Reforma Social. C.P. 11650 Mexico DF
Date this PID Prepared:          November 16, 1999
Project appraisal date:          October 25, 1999
Project Board Date:              December 14, 1999
Country Sector and background
The Mexican economy has recovered from the Tequila episode of 1994-95.
Previous bank resolution scheme under FOBAPROA, now under liquidation, was
able to avert a systemic crisis and a run on the banks, but did not solve the
problem of the insolvent and undercapitalized banks. The approval, in
December 1998, of a law establishing the Banks Savings Protection Institute
(IPAB), provides the framework and the incentives for a more effective
resolution of the remaining problem banks, in a way that was not possible
before. The new approach adopted by the Government to strengthen the banking
sector and accelerate the resolution of the bank problems include:
Legal reforms to improve incentives in the banking sector by: (i) the
gradual phase-out of the universal deposit insurance scheme, replacing
it with one with limited coverage; (ii) the presentation to Congress of
the Bankruptcy Law and the Secured Transactions Law; and (iii) the end
to additional debtor relief programs ("Punto Final").
Regulatory reforms to improve Banks' capitalization and soundness:
these include the change in the definition of bank capital, change in
the loan classification norms according to risk; the phasing out of
deferred taxes; the tightening of provisioning rules; changes in
accounting standards (in the direction of USGAP) and higher
provisioning rules.
IPAB's bank capitalization and resolution program. IPAB has under its
purview the banks that had been assisted by the old FOBAPROA. There
are four groups of banks in IPAB's program: (i) Two large banks
recently intervened; (ii) three banks under the new restructuring
program; (iii) intervened banks in the final stage of
resolution/liquidation (12 banks); and (iv) banks under private
capitalization programs.



IPAB's program for the disposition of bank assets. IPAB is in the
process of outsourcing the sale of the mountain of loans purchased from
banks to specialized asset management companies, in compliance with the
timetable set in IPAB's law (5 years for banks under operation and 3
years for banks under liquidation).
Loan Objectives
The Bank loan would support the Government's bank restructuring program.
Bank funds would help finance part of IPAB's debt-servicing needs arising
from the implementation of its bank resolution program, complementing other
sources of funds available to IPAB, such as: fiscal transfers, proceeds from
asset disposal/recovery; and fees from deposit insurance premia. The
proposed operation would be the first of a series of adjustment loans in
support of Mexico's bank restructuring program, in particular the incremental
cost of servicing the real component of IPAB's liabilities.
Loan Description
The Bank loan would support the first stage of the Government's program for
bank restructuring, which is based on: (i) intervening, selling, merging or
closing five banks and speeding the strengthening of the banking system
through IPAB; (ii) improving market incentives in the financial sector
through the introduction of a limited deposit insurance system to replace the
universal deposit guarantee scheme; (iii) regulatory reforms to improve the
quantity and quality of the banks' capital and enhancing transparency and
disclosure; and (iv) speeding the sale of bank assets inherited or acquired
by IPAB.
Loan financing
The proposed loan will be for US$500 million, to be disbursed in three
tranches. It is anticipated that all the tranches will be disbursed before
the end of this administration.
Project Implementation
IPAB is the implementing agency for the operation. It will work with the
SecretarUa de Hacienda y Credito Publico (SHCP) and the National Banking and
Securities Commission (CNBV) to ensure that the bank resolution transactions
supported by this operation meet agreed eligibility criteria.
Program sustainability
The legal, institutional and regulatory changes that support the Government's
bank restructuring program ensure the sustainability of the restructuring
transactions supported by this operation. Congressional debates for the
approval of the IPAB law have made clear to all stakeholders, including the
public, of the urgency to tackle the financial resolution of the intervened
and insolvent banks. The bank resolution transactions to be supported by
this operation will be the restructuring, sale, merger, or liquidation of
banks under IPAB's purview. These transactions will create stronger banks
that will be able to operate and expand credit availability in the Mexican
market.
Lessons learned from past operations in the country/sector
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Lessons learned from past banking sector operations in Mexico and other
countries have been taken into account in the design of this operation.
These include: (i) a strong borrower ownership is indispensable in
complicated, time-intensive banking sector operations; (ii) the operations
should set limited objectives, because over ambitious objectives may be
beyond a single operation; (iii) loan disbursements should be linked to the
completion of specific bank transactions; and (iv) the main implementing
agency should be the main recipient of the loan funds.
Poverty category
The proposed loan would have little social impact in the short-run. In the
longer run, however, the measures supported by this operation would have
important social implications as they would stimulate the resumption of
prudent lending to the private sector, with the associated benefits in terms
of output growth and employment generation. The ultimate objective of the
bank restructuring/resolution process supported by the proposed operation is
a better functioning banking sector, able to withstand external shocks and
better able to lend to the private sector, opening access to groups and
enterprises (SMEs) today largely excluded from bank financing. Greater
access to credit by small and medium enterprises would create more job
opportunities. A banking system less vulnerable to crises is a clear
protection for the welfare of the poor, who tend to be the most severely
affected by generalized banking system dislocations.
Environmental aspects
This operation would not have any direct effect on the environment. For that
reason, it has been placed in Category "C", in accordance with the Bank's
Operational Directive on Environmental Assessment (OD 4.00 Annex A).
Program Objective Category. The Program Objective Category is Economic
Management (EA).
Contact Point
The World Bank InfoShop
1818 H Street NW
Washington , D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
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