MEXICO: Strengthening Risk-Based Banking Supervision

Mexico is a middle-income country. Since the mid-nineties, the growth of its financial sector has significantly outpaced that of the rest of its economy. Although it does lag regional peers in both financial inclusion and depth, the financial sector is expected to continue to grow at a strong pace, and thus, if not effectively monitored, could increase risks to the country’s financial stability.
The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV) recognized several potential challenges early on and began reforming the sector in 2006. By 2012, the latest FSAP reported that the CNBV had significantly overhauled and improved its organization, regulations, and prudential supervision. In addition, to alleviate the concentration of assets in a handful of banks, the CNBV had increased competition among financial institutions  by authorizing several new banks.
In 2013, the CNBV launched the Internal Supervisory Process Project to review, improve, standardize, and adequately document the supervision of Mexico’s financial institutions. In January 2014, it published financial reforms to expand the scope and breadth of the financial sector. The overarching benefits of these reforms were to (i) ensure the soundness and safety of the financial sector as a whole, (ii) extend credit to financial institutions, (iii) increase competitiveness in the financial sector, and (iv) promote credit through development banking. This backdrop and the recommendation of the 2012 FSAP showed that although the CNBV’s supervision of the banking sector had been reasonably effective, several gaps still needed to be addressed in order to develop a fully risk-based regulatory system, in line with international standards.
The CNBV requested TA from FIRST and the World Bank to provide insights into RBS processes,  methodologies, and monitoring system components. Their objective was to strengthen the CNBV’s risk-based bank supervision approach by putting in place an appropriate governance structure; a mix of on-site and off-site supervision methodologies, tools, and processes; and a set of monitoring indicators that enable supervisors to monitor the banking system effectively and promote stability in Mexico’s financial sector.
The project team developed guidelines to enhance the CNBV’s risk governance framework and an action plan to improve and standardize its supervisory process in accordance with best international practices. In addition, the team provided guidelines to define the scope and intensity of supervision (on- site) and surveillance (off-site) activities; as well as guidelines to strengthen the definition, quantification, and mitigation of individual and systemic risk factors (including internal controls, auditing, and risk management, among others).
The CNBV has achieved a number of tangible outcomes from the TA. As a result, the CNBV has now embarked on the process of adopting a fully risk-based supervisory approach. The success of the project, which was in large part due to the strong buy- in and commitment of the CNBV’s senior management, has contributed to improved efficiency, consistency, and rigor in banking supervision as the results of comprehensive efforts such as the following:
  • Adoption of an improved risk-rating matrix and enhanced on-site supervisory procedures
  • Development of a more comprehensive template for reports on financial institutions
  • Development of custom software for the institutional supervisory manual
  • Incorporation of streamlined risk indicators and tools to develop early warning models
  • Delivery of an Anti-Money Laundering Manual that aims to help authorities better integrate such efforts into the standard supervisory process
  • Improvement of coordination between units of the CNBV
  • Establishment of monitoring of supervision