Mexico: FOBAPROA Blanket Guarantee, 1993–1994

In 1990, Mexico created FOBAPROA, a deposit insurance system. Then, in 1991 and 1992, the government privatized the Mexican banking system (La Porta, Lopez-de-Silanes, and Zamarripa 2002). In December 1992, the Bank of Mexico announced FOBAPROA’s coverage limit for 1993. Then in December 1993, to preemptively protect the newly privatized banking system, the Bank of Mexico announced its intention to protect all liabilities the next year. A similar statement was made in December 1994 following a run on the peso (Haber 2008). The Bank of Mexico’s announcement in both years noted that there was an established “tradition that the Mexican financial authorities try to protect investors from any loss in case of insolvency of Credit Institutions” (Mackey 1999, 53). The historically close relationship between the Mexican government and the banking system adds context to why the Bank of Mexico was so quick to express its intent to guarantee all unsubordinated liabilities in 1993, before the crisis was in full force.

During the Mexican financial crisis, the Mexican government used several measures to stabilize the financial system in addition to the blanket guarantee. The central bank opened a US dollar credit window for commercial banks; the government also charged FOBAPROA with recapitalizing banks and buying NPLs from troubled banks (Haber 2008; Sánchez 2009). When needed, the CNBV resolved failing banks. In total, the CNBV took over 12 failing banks—suspending shareholder rights, replacing management, buying NPLs and injecting capital through FOBAPROA, and facilitating the sale of the bank. The CNBV did not resolve the two largest banks but did replace their management and find merger partners. Notably, several of Mexico’s banks were considered too big to fail, specifically the two largest banks, which were not completely resolved. FOBAPROA’s purchases of NPLs lasted through 1998.

The Mexican government also received funding from the IMF to address the liquidity problem caused by short-term obligations maturing. The IMF funding intended to convert short-term debt and reverse the depreciation of the peso (IMF 1996). The United States’ Exchange Stabilization Fund also allowed the US to assist Mexico via swap lines, starting in 1994 (GAO 1996). These swap lines from the Federal Reserve for USD 30 billion lasted until October 2009 (Sánchez 2009).

On July 18, 1990, the Mexican government adopted the Credit Institutions Law to establish a framework for banking in the private sector (World Bank 1995). The same year, the administration created a deposit insurance agency, FOBAPROA (Hernandez-Murillo 2007). FOBAPROA was governed under the principal statute governing the activities of commercial banks, Article 122 of the Credit Institutions Law. This article established the goal of FOBAPROA, to “provide preventative support to commercial banks and protect savings” (World Bank 1995, 96–97). This article also required the Bank of Mexico to, each December, announce the maximum amount that would be covered by FOBAPROA the next year.

In 1993 and 1994, FOBAPROA did not announce a deposit insurance limit, instead making a statement establishing an intention to cover all liabilities except for subordinated debt (Laeven and Valencia 2008).

FOBAPROA was also used for other banking policy. In 1995, FOBAPROA was used by the Bank of Mexico to offer short-term dollar-denominated credit to banks (Hernandez-Murillo 2007). As part of the banking system bailout, FOBAPROA held government funds to be used to help banks, and the government used FOBAPROA to purchase NPLs from troubled banks (Haber 2008).

In 1998, Congress disbanded FOBAPROA and replaced it with IPAB.

The Bank of Mexico was responsible for FOBAPROA’s day-to-day operations (World Bank 1995).

The Technical Committee had nine members, four named by the minister of finance and public credit, one being the minister, three members appointed by the Bank of Mexico, one being the governor, and two members appointed by the CNBV, one being the president of the commission (World Bank 1995).

In 1998, after the bailout, a different party gained control of Congress and conducted a nine-month investigation into the bailout. Ultimately, Congress disbanded FOBAPROA and replaced it with IPAB (Haber 2008). IPAB was required to periodically publish its financial statements and report regularly to Congress (IMF 1999). FOBAPROA had never made its financial statements publicly available as of 1995 (World Bank 1995).

The Bank of Mexico was responsible for announcing FOBAPROA’s deposit coverage amount every December; in December 1993 and 1994, it did not announce a limit and instead announced a guarantee of all liabilities except subordinated debt. The announcement of a blanket guarantee in 1994 appeared to promote market confidence, as the Bank of Mexico was able to quickly reduce the liquidity support it provided to banks (Laeven and Valencia 2008). The Mexican government also announced that the blanket guarantee was a temporary measure and ultimately would be replaced by limited deposit protection (IADI 2005).

FOBAPROA’s funding came from contributions from commercial banks and loans from the Bank of Mexico. The banks’ contributions were based on the amount of liabilities protected by FOBAPROA. The central bank and the Ministry of Finance and Public Credit were authorized to fund FOBAPROA. Article 122 of the Credit Institutions Law stated that the minister could establish contributions to be paid by the commercial banks to fund FOBAPROA (World Bank 1995).

The Bank of Mexico was supposed to be fully reimbursed for loans to FOBAPROA through contributions from the banking community and the liquidation of assets.

The blanket guarantee covered all commercial banks (World Bank 1998).

The blanket guarantee covered all unsubordinated liabilities, including interbank deposits as of the 1995 announcement (Laeven and Valencia 2008; World Bank 1998). The guarantee covered all deposits equally, regardless of the creditworthiness of a bank or the amount of its deposits (Hernandez-Murillo 2007; La Porta, Lopez-de-Silanes, and Zamarripa 2002). The guarantee excluded liabilities resulting from “illicit, irregular, or bad faith operations” (Mackey 1999, 53).

Commercial banks funded FOBAPROA through contributions calculated annually and paid monthly. Banks’ contributions consisted of ordinary and extraordinary contributions collected by the Bank of Mexico—ordinary contributions could be up to 0.5% of protected liabilities and extraordinary[1] contributions could be up to 0.7% of protected liabilities (World Bank 1995).

Research did not reveal the process for exercising the guarantee.

Article 122 of the Credit Institutions Law, which governed FOBAPROA, provided that if a troubled bank received preventive support, FOBAPROA could require a guarantee from that bank. This guarantee could be in the form of a lien over the shares of the bank. Later amendments to the Credit Institutions Law specified that FOBAPROA’s lien was preferential over preexisting encumbrances and allowed FOBAPROA to exercise corporate rights associated with the shares without executing the lien over the shares (World Bank 1995).

In December 1993, the Bank of Mexico did not announce a limit to FOBAPROA’s deposit insurance coverage for the following year, creating a preemptive blanket guarantee for the next year. A year later, in 1994, the Bank of Mexico made a similar announcement instead of setting a limit for FOBAPROA, this time following the peso crisis (Laeven and Valencia 2008). Mexican authorities said that the guarantee would be a temporary measure when the measure was put in place, and it was gradually removed starting in 1999 and ending in 2005 (IADI 2005; Sánchez 2009).