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Mexican market study and recommendation regarding competition conditions in the financial sector and its markets

COFECE, July 2014

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The financial system is the sum of the entities and markets that attract savings from society, and administers and channels them toward financing productive or personal projects. It is made up of numerous institutions—known as financial intermediaries—such as banks, non-banking intermediaries (that undertake complementary activities in parallel with banks), insurers, stock exchanges, investment- and pension-fund managers as well as sundry other institutions that carry out complementary activities on behalf of those financial services. That said, because of their public-facing nature, banks are the best known of such entities and therefore indispensable to the existence and proper functioning of a modern financial system.

The financial system is exceedingly relevant to a nation’s economy, not merely for its direct contribution to production, investment and employment, but also because of the impact it wields in terms of consumer wellbeing and other economic sectors’ efficiency. A competitive financial system excerts a positive impact on a country’s GDP and promotes rapid economic growth. As such Mexico’s Federal Commission for Economic Competition (Comisión Federal de Competencia Económica; acronym in Spanish: COFECE) stresses the importance of healthy in-sector competition as a motor of economic growth in Mexico.

The Mexican financial system exhibits strengths, such as low debt-delinquency rates and adequate capitalization indexes among all banking institutions, which provide stability to its financial markets. That said, both the system’s penetration levels and the general populace’s use of the services it offers are limited. In this context, the financial reform enacted in January 2014 seeks to strengthen this sector’s performance, through four-pronge approach: 1) by fomenting credit through Development Banks; 2) by increasing competition; 3) by expanding private financial institution credit and 4) by ensuring financial sector solidity and prudence. As part of the second thrust of the financial reform, Mexico’s congress mandated that COFECE conduct an investigation regarding competition conditions within the financial system and its markets.

Within the framework of powers that Mexico’s Federal Law for Economic Competition (Ley Federal de Competencia Económica; acronym in Spanish: LFCE) grants COFECE, LFCE article 24, section XVIII bis 2, effective as of the decree, grants the Commission power to undertake research work on sectorial economic competition, as required, in order to liberalize, deregulate or modify current norms when it detects damaging risks to the competition process, or openness therein, or when it identifies price levels that may indicate a competition problem, actions that lead to significant price increases, or when notified of such issues by other authorities. Specifically, when it carries out such study, the Commission realizes a diagnostic exercise on the causes why a market may be functioning inadequately in terms of efficiency, competition and consumer welfare.

Therefore, the Commission undertook a study on the financial system and its markets to fulfill Mexico’s congress mandate under the terms of LFCE described above. Ultimately, COFECE provided recommendations to financial authorities that aim to improve competition conditions within the system and its markets.

The present study seeks only to make a sector diagnostic and formulate recommendations. Therefore, it does not interfere with the powers that LFCE and the Commission charter grant COFECE to investigate anti-competitive practices or competition barriers, openness or essential resources in order to avoid monopolistic practices, illicit concentrations or other impediments to efficient market functioning. As a consequence, all conducts opposing to the LFCE that the Commission may report at present or in the future will be subject to COFECE’s due process and authority. To do so, and in order to safeguard the integrity of present and future investigations, Cofece’s present recommendations focus on regulatory actions and sector policy to improve financial system competition conditions.

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