(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Martin Hutchinson
NEW YORK, April 25 (Reuters Breakingviews) - Mexico’s banking revamp – postponed this week – deserves a shot. The reforms include a universal credit registry and easier foreclosure, both big improvements that could boost consumer borrowing and spending. But they also allow the regulator to force banks to lend. That’s a flaw that leaves the risk of a Brazil-style hangover.
The Mexican banking system is underdeveloped compared to its peers, with only 27 percent of the population having a bank account, according to the World Bank. Domestic credit to the private sector totaled only 26 percent of GDP in 2011 compared with 61 percent in Brazil, 71 percent in Chile and 191 percent in the United States.
A central credit bureau will help. The high level of informal employment in Mexico’s economy makes credit assessment difficult, but a universal registry will, for example, help banks learn whether a would-be customer has previously defaulted on other providers’ credit cards – something they can’t at present find out. The difficulty lenders have foreclosing in Mexico thanks to a slow and convoluted legal environment also makes mortgages expensive with an average interest rate of 12.1 percent, according to the central bank, against current annual inflation of 4.3 percent. Changes to the foreclosure rules should help bring that cost down.
The bank reform package therefore stands a decent chance of getting more credit flowing at lower cost and so increasing the rate of GDP growth. Yet it carries a big risk that doesn’t apply to Mexico’s useful plans for changes in energy, telecommunications and education. The bank regulator will be empowered to force banks to lend and prevent them from trading securities for their own account if they fail to do so. That’s a recipe for distorted lending that could help trigger a credit crunch in the future.
Brazil’s private sector lending increased to more than 60 percent of GDP from less than 30 percent of output in just eight years. That helped create an economic boom from the extra consumption. But growth has now stalled, and there are signs of lingering credit headaches. Mexico needs to open up its banking market – but avoid too much of a credit carnival.
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- The presentation in Mexico of major banking reform legislation, which had been due on April 23, was delayed because of a dispute between Mexico’s three political parties relating to funding of regional elections in the state of Veracruz.
- The legislation would establish a nationwide credit reporting bureau, including data from government and other banking sources. It would ease the process for banks to take possession of assets in case of default, which can take five years in the case of a home mortgage. The banking regulator would also get new powers to punish lenders that fail to channel enough resources into credit, even limiting banks’ securities trading on their own account.
- The Banco de Mexico’s policy interest rate is currently 4 percent compared to 12-month inflation of 4.3 percent, while mortgage rates average 12.1 percent and credit card rates 29 percent, according to Banco de Mexico data.
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- For previous columns by the author, Reuters customers can click on [HUTCH/]
(Editing by Richard Beales and Martin Langfield)
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