News Column

Moody's: Bicentenario failure exposes weaknesses in Mexico's niche bank strategy

August 13, 2014

The Mexican authorities' revocation of niche bank BicentenarioBicentenario's license and liquidation of its assets

highlights both recent reforms of the financial sector and the

limitations of those reforms, says Moody's Investors Service in its new

report "Bicentenario's Failure Highlights Weaknesses in Mexico's Niche

Bank Strategy."

"The expedited liquidation process initiated on July 23 highlights the

deposit insurer Instituto para la Protecci×£n al Ahorro Bancario's (IPAB)

extended powers," says David Olivares. "But the liquidation of

Bicentenario, a niche bank created just 15 months ago, also raises

questions about the government's strategy of using such specialized

lenders to increase Mexico's low level of financial intermediation," says

Felipe Carvallo.

Bicentenario was one of several niche banks created to bring more

customers into the formal banking system, but results have fallen short

of expectations, says Moody's. Their narrow focus and limited experience

means many of these banks are in precarious financial positions and have

weak assets.

The failure of Bicentenario highlights the need for improved risk

management and controls at these new lenders, says the rating agency.

Bicentenario's rapid credit losses combined with spiraling costs drained

its capital, and left it unable to raise fresh capital from shareholders,

says Moody's.

These negatives, along with burdens associated with Mexico's banking

regulations and the authorities' treatment of shareholders in this

bankruptcy will dissuade some non-bank institutions from seeking a bank

charter, unless these issues are addressed, says the rating agency.

In addition, although IPAB's new powers will strengthen depositor

confidence system wide, the failure of Bicentenario highlights the

vulnerability of unsecured creditors. The new regulations give the IPAB

intervention powers that will protect eligible depositors and permit more

orderly, and swifter resolutions that benefit secured creditors. But

senior debt and junior creditors, lacking IPAB protection by law, are

more vulnerable and likely to absorb losses in the event of a bank

failure, says Moody's.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: EMBIN (Emerging Markets Business Information News)

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