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posted on 26 December 2015

Mexico Development Bank Lending Rises Following Financial Reforms

from the Dallas Fed

-- this post authored by Michael Perez

There are indications that Mexico's financial reforms are working. The loan portfolios of the nation's six development banks increased 28 percent in the 18 months following the reforms' initiation in January 2014.

Mexico's development banks are publicly owned institutions serving economic sectors not generally reached by commercial banks. The big banks' relatively high collateral requirements and stringent screening mechanisms exclude many potential customers.

Extending more credit signals an important strategic shift. The development banks have traditionally maintained a low-risk appetite, with restrictions on short- and medium-term loan issuance. The new regulations direct the development banks to more actively expand credit by mandating that they more aggressively serve their target markets. Examples include increased lending to small- and medium-sized enterprises and low-income households.

Development banks also now have options to help struggling firms. They can make multiple loans to the same borrower without finance ministry permission and may assume more risk and incur losses so long as their equity and reserves are not depleted. Lending can be based on pledged collateral, and the development banks' increasing asset base allows them to offer more backstops for commercial bank loans to small and medium enterprises.

[click on image to continue reading]

Source: http://www.dallasfed.org/assets/documents/research/ swe/2015/swe1504f.pdf

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