By: Karla Valdés
At the end of 2020, the Senate approved a bill that aims to make changes to the Bank of Mexico Law, the final approval was postponed due to all of the implications that will come as a result. The Senate and Chamber of Deputies’ Finance and Public Credit Commissions will convene an Open Parliament session, with various specialist, on February 1 & 2 to analyze the opinion of the Banxico Law.
What changes are being proposed?
In general, the reforms to the law propose that Banxico buy surplus cash in dollars, which is collected by commercial banks, essentially making it into a large exchange.
What need does this initiative address?
The explanatory memorandum mentions that it is needed to cover the demand for dollars brough in by migrants and tourists. In fact, it was found that almost all tourists make their payments through electronic transfers or credit cards. In the case of most migrants, they also make electronic transfers instead of cash, so these arguments are not strong enough.
Actually, this is a problem with correspondent banks, it is not a systemic problem, which will be explained next.
What is the role of correspondent banks?
In general, the way that the exchange market normally operates is that when commercial banks close their operations they must “repatriate” their surplus dollars in cash, meaning that the dollars that they could not place in the market (by buying or selling) are transferred to the correspondent bank.
Among the procedures that banks must comply with are the requirements to know their customers, in this case, the correspondent bank must verify that the commercial bank in Mexico complies with the requirements to prevent money laundering and that they have robust controls, among other measures.
However, there are a small number of banks, perhaps just one, that correspondent banks do not feel comfortable operating with, and for this reason they have reserved the right to receive dollars, which has caused commercial banks to keep these dollars in their positions.
What implications does this have for Banxico?
In addition to the issue of constitutional autonomy, it would have great impacts on the depletion of international reserves.
Taking it one step further, foreign authorities could sanction the central bank, which would imply the prohibition of carrying out transactions with foreign counterparts, confiscation, or freezing of funds, all of international reserves.
I would like to emphasize the importance of money laundering prevention programs. Banks must have robust procedures for correspondent banking, deficiency remediation programs with the objective of strengthening controls, and operate under an adequate control environment to prevent money laundering throughout the system, or also limit and/or adapt their business model to receive dollars in cash at branches.
I hope you find this article useful and that the proposed changes to the law come to a good conclusion for the central bank.
