Document of The World Bank

Report No: 28797

IMPLEMENTATION COMPLETION REPORT(FSLT-70600)

ON A

LOAN

IN THE AMOUNT OF US$505.06 MILLION

TO NACIONAL FINANCIERA, S.N.C.

WITH THE GUARANTEE OF THE UNITED MEXICAN STATES

FOR A

SECOND BANK RESTRUCTURING FACILITY ADUSTMENT LOAN

June 28, 2004

Finance, Private Sector and Infrastructure Sector Management UnitMexico Country Management UnitLatin America and the Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of December 31, 2003)

Currency Unit = Mexican Pesos MXP MXP1 = US$ 0.089

US$ 1 = 11.23MXP

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

BRFL Bank Restructuring Facility LoanBRFLII Second Bank Restructuring Facility LoanCAS Country Assistance StrategyCETES Treasury Certificates (Certificados de Tesorería de la Federación)CNBV National Banking and Securities Comission (Comisión Nacional Bancaria y de Valores)FOBAPROA Trust Fund for the Protection of Bank Savings (Fondo Bancario de Protección al Ahorro)GDP Gross Domestic ProductIDB Inter-American Development BankIPAB Bank Savings Protection Institute (Instituto para la Protección al Ahorro Bancario)IMF International Monetary FundNAFIN Nacional Financiera S.A.SHCP Secretariat of Finance and Public CreditUDI Investment Units (Indexed)

Vice President: David de FerrantiCountry Director Isabel Guerrero

Sector Director Danny Leipziger Task Team Leader/Task Manager: Mariluz Cortés

MEXICOSecond Bank Restructuring Facility Adjustment Loan

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 116. Sustainability 127. Bank and Borrower Performance 138. Lessons Learned 139. Partner Comments 1410. Additional Information 14Annex 1. Key Performance Indicators/Log Frame Matrix 15Annex 2. Project Costs and Financing 16Annex 3. Economic Costs and Benefits 17Annex 4. Bank Inputs 18Annex 5. Ratings for Achievement of Objectives/Outputs of Components 19Annex 6. Ratings of Bank and Borrower Performance 20Annex 7. List of Supporting Documents 21Annex 8. Matrix of Policy Actions 22Annex 9. Comments from IPAB 26

Project ID: P071323 Project Name: MX Bank Restructuring Facility IITeam Leader: Mariluz Cortes TL Unit: LCSFFICR Type: Core ICR Report Date: June 29, 2004

1. Project DataName: MX Bank Restructuring Facility II L/C/TF Number: FSLT-70600

Country/Department: MEXICO Region: Latin America and the Caribbean Region

Sector/subsector: Banking (80%); Central government administration (20%)Theme: State enterprise/bank restructuring and privatization (P); Legal

institutions for a market economy (P); Macroeconomic management (S); Standards and financial reporting (S)

KEY DATES Original Revised/ActualPCD: 03/13/2001 Effective: 02/22/2002 02/22/2002

Appraisal: 04/16/2001 MTR: 04/25/2002Approval: 06/21/2001 Closing: 11/28/2003 11/28/2003

Borrower/Implementing Agency: NACIONAL FINANCIERA S. N. C. (NAFIN)/BANK SAVINGS PROTECTION INSTITUTE (IPAB) AND THE CNBV

Other Partners:

STAFF Current At AppraisalVice President: David de Ferranti David de FerrantiCountry Director: Isabel M. Guerrero Isabel M. GuerreroSector Manager: John Pollner (Acting) Fernando Montes-NegretTeam Leader at ICR: Mariluz Cortes Mariluz CortesICR Primary Author: Mariluz Cortes; Cara Zappala

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: HL

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:3.1.1. The objective of the loan was to assist the Mexican Government to implement the Second Stage of its Bank Restructuring Program (the Program), aimed at bringing about a better functioning banking sector, able to withstand external shocks and to expand prudent lending to the private sector, including groups and enterprises today largely excluded from bank financing.

3.1.2. The first stage of the Program was completed under the First Bank Restructuring Facility Loan (Loan 7003-ME) approved in December 1999. The first stage of the Program involved: (i) the reform of the legal framework to improve incentives in the financial sector through the introduction of a limited deposit insurance coverage and a major revamping of the bankruptcy and secured lending legislation to strengthen contract enforcement and creditor rights; (ii) the adoption of a comprehensive program of regulatory reforms to improve banks' capitalization, soundness and transparency; and (iii) the capitalization and resolution programs of three large insolvent banks in Government hands since the 1994/1995 banking crisis (these included the sale of Serfin, Mexico's third largest bank to a Spanish consortium (BSCH), concluded in May 2000; mergers of Promex/Bancomer; and the sale of a majority ownership of Inverlat to Bank of Nova Scotia; and (iv) the implementation of a program to sell assets from failed banks that had been transferred to the Institute for the Protection of Bank Assets (IPAB). Under this loan, Bank funds were transferred to IPAB to help finance part of its debt-servicing needs arising from the implementation of its bank resolution program, complementing other sources of funds available to IPAB.

3.1.3. The Second Bank Restructuring Facility Loan (BRFLII) was designed to support the Second Phase of the Bank Restructuring Program which included: (i) further reform of the banking sector legal and regulatory framework; (ii) the resolution of the remaining banks under the purview of IPAB; and (iii) further implementation of IPAB's program to sell assets from failed banks. Under this second loan, Bank funds were also transferred to IPAB to help finance part of its debt-servicing needs arising from the implementation of its bank resolution program, complementing other sources of funds available to IPAB.

3.1.4. Specifically, the BRFLII supported the following reforms:

Legal reforms to strengthen the banking sector: On April 28, 2001, Congress approved a lcomprehensive package of financial legal reforms. The most relevant legal reforms, from the point of view of this operation, are the following: Amendment to the Credit Institutions Law, which introduced, inter alia: (i) an early warning and prompt corrective action systems; (ii) new principles and rules of "corporate governance"; (iii) new norms for related credit; and (iv) new bank financial operations. Amendment to the Law to Regulate Financial Groups which introduced, inter alia: (i) definition of the concept of financial groups; and (ii) the principle of consolidated supervision.

Regulatory reforms to improve risk management and governance in the banking sector: lThe program of regulatory reforms to be implemented by the Banking and Securities Commission (CNBV) during 2001-2002, included: (i) new rules for regulatory capital and

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portfolio classification and provisioning for development banks; (ii) new guidelines for internal controls and governance in commercial banking institutions; (iii) amendment of the rules applicable to external audit reports; (iv) new rules to regulate the risks of banking operations via Internet; (v) amendment of the rules for asset diversification; and (vi) amendment of the Credit Bureau rules.

Resolution of the remaining banks under the purview of IPAB: The second stage of lIPAB's bank restructuring program involved the following bank transactions: (i) sale of Bancrecer; (ii) sale of Atlantico; (iii) resolution through sale or closure of seven intervened banks in which IPAB had equity participation: Union, Cremi, Oriente, Obrero, Interestatal, Capital and Pronorte; and agreement between IPAB and the CNBV on a plan of action to sell or liquidate three other intervened banks in which IPAB did not have equity participation.

Implementation of IPAB's Asset Disposal Program: The second stage of IPAB's asset ldisposal program established a timetable for outsourcing the sale of loans and other assets purchased from banks to specialized asset management companies.

3.1.5. The BRFLII incorporated appropriate development objectives. Completing the resolution of the pending troubled banks was necessary to create a well-functioning financial system. Banks that remained under government control relied on substantial government assistance, without truly operating as banks. In particular, the seven banks intervened by the CNBV continued to operate in the interbank market accumulating more debt to the Government, even if they had ceased to lend. Also, by focusing on additional legal and regulatory reforms to strengthen governance in the banking sector, the loan contributed to improve bank performance and strengthen their capability to withstand future crisis.

3.1.6. As its predecessor, the BRFLII was designed to support the Government's Bank Restructuring Program, which included several acquisitions and mergers of large troubled banks and the closure of several small failed ones. The Bank Restructuring Program was an effort to make the best of a difficult situation aggravated by the failure of the earlier bank resolution attempt through the Trust Fund for the Protection of Bank Savings (FOBAPROA - Fondo Bancario de Protección al Ahorro) scheme, under which the Government had assumed too many obligations at too high a price, postponing, but not resolving, the failed banks from a financial point of view.

3.1.7. A well-crafted feature of the BRFLII and of its predecessor, was that the Bank's assistance was transaction based, meaning that the disbursement of funds occurred only after appropriate restructuring transactions had been worked out. The Government and the Bank agreed for both loans on a set of eligibility criteria for transactions and a pool of funds was set aside to support transactions that met those criteria. In both cases, IPAB used the proceeds of the Bank loan to service its "performing" notes (notes that paid in cash at least the real component of the interest rate) issued to help capitalize the banks involved in those transactions and/or improve the quality of the bank's assets by replacing the old FOBAPROA notes that were "non- performing". By specifying only eligibility criteria, rather than identifying the transactions themselves, the BRFLII had an inherent flexibility that contributed to its success.

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3.2 Revised Objective:The loan objective remained unchanged.

3.3 Original Components:The BRFLII was designed as a three tranche loan to support the second stage of the Government's bank restructuring program. The first tranche was to be awarded upon effectiveness of the loan. Two floating tranches were linked to agreed bank resolution transactions. Based on the Bank's assessment that all the conditions under the Loan Agreement had been met, release of a first tranche of US$150 million was approved on February 22, 2002. Release of the second floating tranche of US$175 million was approved on March 24, 2003 and the third tranche of US$175 million was approved on November 26, 2003.

3.4 Revised Components:The loan components remained unchanged.

3.5 Quality at Entry:The operation was not rated for Quality at Entry. However, it can be said that both adjustment loans, the BRFLI and the BRFLII, were timely operations that came in the aftermath of a major crisis that had left a number of failed banks in Government hands and still operating at great losses. The Bank involvement in the resolution of the failed banks came at a time in which there was wide recognition of the failure of the previous FOBAPROA resolution scheme and a political consensus had emerged for the need to resolve the situation of the troubled banks and face past losses, no matter how large they might be. Quality at entry was further enhanced by the knowledge accumulated by the Bank about Mexico's banking sector and policy framework, through economic and sector work carried out since the banking crisis, and the Bank's experience on banking sector reforms in other countries.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:4.1.1 This loan has achieved its objective of supporting the second stage of Mexico's Bank Restructuring Program aimed at bringing about a better functioning banking sector, able to withstand external shocks and to resume prudent lending to the private sector. All policy reform measures supported by this loan were implemented within the expected time frame. The achievement of objectives is rated as satisfactory because the reforms have strengthened the banking sector by advancing the regulatory reform initiated under the previous operation and by completing the resolution of the banks that failed or were weakened during the 1994/1995 crisis. Under the Program, large foreign banks have bought over 80 percent of Mexico's private sector banking assets. These banks are now well capitalized and operate under strong banking rules.

4.1.2 To understand the extent to which this loan has achieved its objectives, it is important to look at the situation of the financial sector after the 1994/1995 crisis and the Government's strategy for restructuring the financial sector and avoid the repetition of a banking crisis. Between mid-December 1994 and the end of the first quarter of 1995, Mexico’s banking system suffered a major systemic, solvency and liquidity crisis, triggered by the massive (100%) devaluation of the peso. The banking system prior to the crisis was characterized by: (i) poorly

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managed and weak banks which went into a lending spree; (ii) poor accounting practices and disclosure; (iii) a weak regulatory and supervisory environment that made it very difficult to know the true financial conditions of the banks; (iv) an implicit Government deposit guarantee that contributed to moral hazard by bank shareholders, managers and depositors; and (v) weak legal and judicial frameworks in which debtors could default on their loans with little consequences.

4.1.3. To avoid a financial meltdown, towards the end of 1994, the Government responded with a number of measures that included: (a) partial reform of banking regulation and supervision; (b) support programs for the banks and their borrowers through the FOBAPROA; and (c) the reaffirmation of the universal guarantee on bank liabilities (including inter-bank deposits, but excluding subordinated debts). Under its Capitalization and Loan Purchase Program, FOBAPROA issued notes to purchase the impaired assets of many banks to improve their balance sheet. These notes were non-negotiable, to be redeemed in ten years, with interest being capitalized periodically, but payable at maturity. The lack of liquidity of these notes increased the large share of non-performing assets in the banks' balance sheets. This led to negative cash flow in some banks which had to be covered by borrowing short-term in the inter-bank market at relatively high interest rates. The programs implemented through FOBAPROA were successful in preventing widespread contagion and a systemic crisis. However, given the absence of a legal framework within which to allocate losses, the objective was often to minimize the immediate monetary impact of the measures taken and the immediate fiscal cost of the programs, with no actual financial resolution of the failed banks, given that the “solutions” amounted largely to accounting entries with limited or no cash-flow impact on the banks.

4.1.4. To restore and promote banking sector stability and soundness after the 1994-1995 crisis, the Mexican Government initiated, in late 1999, a program of banking sector reforms to strengthen prudential regulations and address legal obstacles for the resolution of troubled banks. The Government program involved four dimensions: (i) the reform of the legal framework to improve incentives and strengthen the financial sector; (ii) the adoption of a comprehensive program of regulatory reforms to improve banks’ capitalization and governance, including the extension of banking regulation to public banks; and (iii) the implementation of a program of bank capitalization/resolution, as well as a program for the disposal of the assets of the failed banks. This strategy has been successfully implemented in two stages; the first stage was supported by the BRFLI, and the second stage was supported by the BRFLII.

A. Legal and Regulatory Reforms to Strengthen the Banking Sector

4.1.5. Under the BRFLI, Mexican authorities adopted a number of legal reforms to improve incentives in the banking sector. These include the following: (i) Introduction of a limited deposit insurance coverage. The Law for the Protection of Bank Assets, approved in December 1998, provides for a gradual dismantling of the universal deposit insurance scheme, replacing it with a Deposit Guarantee Fund, with limited coverage, to be handled by the Institute for the Protection of Bank Assets (IPAB). The coverage (by categories or activities) of the deposit insurance was to decrease in stages, according to a timetable announced on May 31, 1999. By the end of January 2003, the guarantee no longer covered inter-bank deposits, and by January 1, 2005 it will only cover deposit liabilities up to a limit of 400,000 UDIs (about US$100,000) per

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depositor, still a significantly high level of coverage by regional standards and by GDP per capita; (ii) Creation of IPAB as a Bank Resolution Agency. IPAB was created with the legal powers to address the pending issues that had prevented the full resolution of the problems of Mexico’s banking system, make explicit the cost of the banking resolution, and reach a permanent solution to the banking problems in a transparent way; (iii) Regulatory reforms to improve banks' capitalization and soundness that included changes in the definition of regulatory capital, new classification and provisioning rules, disclosure requirements, and improvement in accounting principles and standards; and (iv) Improvements in contract enforcement and creditor rights with the approval of a new Commercial Reorganization and Bankruptcy Act of April 27, 2000; and of the Miscellany of Secured Lending of April 30, 2000. Once fully implemented, these major legal reforms were expected to substantially help the banking sector resume the provision of real credit to the private sector.

4.1.6. Under the BRFLII, the Mexican Government implemented the second stage of its financial sector reform program. The main reforms in this stage included: (i) Amendment of the Credit Institutions Law (April 2001), to incorporate features to improve corporate governance, delegate greater supervisory responsibilities to external auditors, introduce an early warning and prompt correction action system, introduce new norms for related credit, and allow for new types of financial operations; (ii) Amendment of the Law to Regulate Financial Groups (April 2001) giving the CNBV the capacity to regulate and supervise financial groups; (iii) approval of the Credit Information Institutions Law (January 2002) that defines the conditions that rule the activities of the Credit Bureaus; and (iv) issuance of new banking regulations: including on risk management. Finally, on April 24, 2003, Congress approved a package of reforms aimed at facilitating the recovery and repossession of guarantees used as collateral in loan contracts. It is expected that this new legal framework will contribute to the resumption of credit growth by providing banks with greater certainty about their legal ability to repossess guarantees.

4.1.7. With all these reforms, the financial sector legal and regulatory framework in Mexico now meets international standards, although there are some areas for improvement. One area that needs improvement is the bank resolution mechanism. The IPAB Law has helped the resolution of the banks affected by the 1994/1995 crisis, but it is geared in favor of open-bank resolution, which would become increasingly inconsistent with the planned reduction in the deposit guarantee. The existing system lacks a well-defined process and mechanism for the closure, resolution and liquidation of banks. There is the need to define legal and regulatory actions that can refine the failure resolution process to permit very clear roles for all agencies involved: IPAB, CNBV, the Secretariat of Public Credit (SHCP) and Bank of Mexico (BOM) and their respective accountability, and to allow for the option of actual closure and liquidation of insolvent banks, as an alternative to open bank assistance. There is also the need to strengthen the legal powers of IPAB as a liquidator such as: the need to have “strong arm” powers (e.g. the ability to repudiate contracts with appropriate compensation, power to avoid (and recover) fraudulent transfers, etc.; and authority to administratively determine claims filed by non-guaranteed creditors. Also, IPAB’s asset disposition tools need to be enhanced. In particular, the removal of some tax obstacles that presently impact the purchasers of distressed assets on secondary market, should be examined. The effective implementation of the new legal and regulatory system also remains a challenge. For example, the reforms to the Bankruptcy legislation should be accompanied with a

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reform of Mexico's registries to convert to electronic form in order to improve efficiency and safety of pledging commercial assets.

4.1.8. For the third tranche release, it is important to mention that the Borrower requested a waiver for two out of the six actions (see section 3.1.4) of its Regulatory Reform Program, namely: a) the issuance of new rules to regulate the risk of banking operations through the Internet; and b) the amendment of the rules applicable to external audit reports. The waiver was justified on the basis that the adjustment program objective on strengthening the legal and regulatory reforms had been achieved with the issuance and amendment of the many other important prudential regulations issued by the National Banking and Securities Commission (CNBV) and the Ministry of Finance (SHCP) since Board approval.

B. IPAB's Bank Restructuring and Resolution Program

4.1.9. IPAB inherited the assets and liabilities from the failed FOBAPROA in late 1998. It was later entrusted with the liquidation of the small banks intervened by the CNBV during the crisis, which had ceased to operate as lending institutions, but continued operating in the interbank market, increasing the Government liabilities. IPAB's bank restructuring and resolution program got started under the previous BRFLI with the completion of three bank resolution transactions: (i) the sale of Serfin, Mexico's third largest bank, to a Spanish consortium (BSCH) in May 2000; (ii) the merger of Promex and Bancomer in August 2000; and (iii) the sale of Inverlat to Nova Scotia in November 2000. To restructure and sell these banks, IPAB had to recapitalize them and replace the FOBAPROA notes with cash or performing notes, that is notes that pay in cash at least the real component of the interest rate. To finalize the resolution of these three banks, IPAB issued performing notes for a total of about US$17 billion: MXP100 billion for Serfin, MXP24.3 billion for Promex and MXP46.5 billion for Inverlat. Outside IPAB's program, but very important for the health of the financial sector, Bancomer, Mexico's largest bank, was sold to another Spanish bank conglomerate (BBVA) resulting in a majority injection of grade capital.

4.1.10. Under the BRFLII, IPAB completed the restructuring and sale of two remaining large banks under its control: Bancrecer and Atlantico; and revoked the banking licenses of seven banks intervened by the CNBV during the 1994/1995 crisis and had received assistance from FOBAPROA: Capital, Cremi, Interestatal, Obrero, Oriente, Pronorte and Union. In addition, IPAB closed three other intervened banks: Anahuac, Industrial and Sureste. The sale of the two large banks was done in compliance with the eligibility criteria detailed in the Loan's Implementation Letter. These criteria refer, inter alia, to: (i) the adjustments to be made to the banks' balance sheets prior to the sale; (ii) the recapitalization of the banks prior to sale; and (iii) the qualification of the purchasing banks. Also, to complete each bank resolution transaction (capitalization prior to sale or payment of liabilities prior to closure of each bank), IPAB issued performing notes or cash for about US$18 billion, above the amount stipulated under the Loan Agreement (US$13 billion). Thus, IPAB issued debt or cash in the following amounts for the resolution transactions: MXP102.2 billion for Bancrecer; MXP49.8 billion for Atlantico; and MXP35.0 billion for the intervened banks.

4.1.11. Sale of Bancrecer to Banorte: Bancrecer was the fifth largest bank in Mexico with total

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assets of US$8.9 billion equivalent as of December 31, 2000. In November 1999, IPAB took control of Bancrecer after writing off shareholders’ equity. Immediately thereafter, IPAB took over the management of the bank and an international investment bank was hired to evaluate and analyze the resolution alternatives for Bancrecer: sale (as an ongoing concern or sale of branches) or liquidation. The recommendation was to capitalize and sell the bank. IPAB capitalized Bancrecer subscribing share equity in the amount of M$102.2 billion (US$10.5 billion). The funds for IPAB’s capitalization of Bancrecer came from a credit from BOM, for the same amount. After the capitalization and restructuring of Bancrecer was completed, the bank had a clean balance sheet and the most advanced technological platform of any bank in Mexico. The non-performing loans and repossessed assets, along with some cash, were transferred to an independent asset recovery company fully owned by IPAB. IPAB issued a public offering for the sale of Bancrecer on June 1, 2001. Although five banks showed interest in purchasing Bancrecer, only two: Banorte and Grupo Financiero Scotiabank Inverlat requested registration and information on the sale. The winner of the bidding was Banorte, with an offer of MXP1.65 billion for the shares of Bancrecer. The sale/purchase contract between IPAB and Banorte was signed on October 5, 2001. Bancrecer shares were transferred to Banorte in January 2002.

4.1.12. Sale of Atlantico to Bital. In December 1997, Banco del Atlántico and a larger bank, Bital, signed a Letter of Intent for the restructuring and subsequent absorption of the former by the latter. In March 1998, FOBAPROA injected MXP6.5 billion into Atlántico to capitalize it and close the reserve gap, confirmed by the investment bank during the due diligence. The Letter of Intent allowed Bital to request additional funds from the Government if it found that there were missing assets or hidden liabilities. In response to a request by Bital for additional funds, IPAB carried out an evaluation and auditing of Atlántico. The results of the special audit were used to detail the terms and conditions of the restructuring of Atlántico and its absorption by Bital. On October 1, 2002, IPAB paid MXP49,857 million to complete the restructuring of Atlántico. The funds for the restructuring of Atlántico came from a credit from Bital in the amount of MXP47,357 million and IPAB’s own resources in the amount of MXP2,500 million. Also on October 1, 2002, Atlántico transferred its assets and liabilities to Bital, concluding the absorption process.

4.1.13. Closure of seven intervened banks. A strategy for the closure of these banks was approved by IPAB's Board on May 9, 2001 (before Board presentation of the Loan) and approved by the CNBV on June 19, 2001 (prior to Loan effectiveness). The main steps of the Intervened Banks Resolution Program involved the following: (i) assumption by IPAB of the liabilities of the intervened banks for MXP35.0 billion; and (ii) revocation of the banking licenses of the seven banks. The licenses of all the intervened banks were revoked in October 2001.

C. IPAB's Program for the Disposal of Bank Assets

4.1.14. As of December 1999, IPAB’s assets for sale amounted to a book value of MXP251.6 billion (US$26.32 billion), composed of loan portfolio (MXP215.4 billion); equity participations (MXP19.4 billion) and real estate and other assets (MXP16.8 billion). IPAB’s Law gives IPAB a timetable to dispose of these assets: 5 years for banks under operation and 3 years for banks under liquidation. IPAB has implemented its Asset Disposal Program through three modalities: direct

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sales, administration contracts and rights transfers. This program has been fairly successful.

D. Long-term objective: Increased Access to Credit

4.1.15. The expected resumption of prudent lending to the private sector by the private banks has, however, taken longer to materialize than originally expected. Bank credit to the private sector in Mexico collapsed after the 1994/1995 crisis; falling from a peak of 38.6 percent of GDP (including commercial and development banks) in December 1995 to only 12 percent of GDP in September 2003. This is less than half the level in Brazil and far below the 70 percent in the USA. During this period, non-bank credit, including external credit, has remained more or less constant, decreasing from about 24 percent of GDP in 1995 to about 20 percent since end-1999. Efforts in the last four years to revamp computer systems, train loan officers and improve the quality of loan portfolios, may help increase lending during the rest of 2004.

4.2 Outputs by components:A. Reform of the Banking Sector Legal Framework

Approval by Congress, in April 2001, of an amendment to the Credit Institutions Law lintroducing, inter alia, the following reforms: (i) Early warning and prompt corrective action systems, providing the CNBV with the faculties to implement an early warning system to take preventive actions with respect to financial institutions that are experiencing financial problems, before the need of intervention arises; (ii) New principles and rules of “Corporate Governance”, improving the standards of good corporate governance for banks, holding companies and bank subsidiaries; (iii) New norms for related credit, introducing more stringent rules for granting and monitoring loans to connected parties, which should be agreed on “arms-length” basis; smaller limits to connected lending, along with a wider definition of connected party; and information to be provided by banks on related credit; and (iv) New financial operations, allowing for new types of banking operations and new means to offer banking services, including derivatives, financial factoring and operations back-to-back. It also allows bank subsidiaries to issue subordinated obligations, which could be acquired by foreign investors. Approval by Congress, in April 2001, of an amendment to the Law to Regulate Financial lGroups. The amendment introduced, inter alia, the following reforms: (i) Definition of the concept of financial group. The amendment introduces a new definition of the concept of financial group and grants the holding companies of a financial group the possibility of issuing liabilities different from subordinated obligations of forced conversion; and (ii) Consolidated supervision. The amendment gives the CNBV the capacity to issue capital adequacy and prudential regulation rules (limits on loans to a single borrower and to related parties, etc.) to be applied to the consolidated financial groups, including reporting and disclosure standards for financial groups. Approval of the Credit Information Institutions Law. On January 15, 2002, a new law lregulating the functioning of Credit Bureaus (Sociedades de Información Crediticia) was published in the Mexican Official Gazette (Diario Oficial de la Federación). The new law defines the conditions that rule the activities of the Credit Bureaus to give certainty and judicial security to the users of these Bureaus, establishing homogeneous criteria with respect to the interpretation and modification of the information contained in the reports that they

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issue. Among other things, the law gives the banks more freedom of action with respect to the use of the information of the credit reports.

B. Strengthening of Banking Regulation

New guidelines for internal controls and governance in commercial banking institutions. In lSeptember 2001, the CNBV issued new regulations defining minimum standards of internal controls for banks’ different operations. New rules for regulatory capital and portfolio classification and provisioning for ldevelopment banks. In October 2000, the SHCP issued new norms for regulatory capital and for classification and provisioning of consumer and mortgage loans for development banks, similar to the rules that apply to commercial banks. In January 2002, the SHCP issued new norms for classification and provisioning of commercial credit portfolio of development banks.Amendment to the Rules for Credit Diversification. On March 20, 2003, the CNBV signed land sent for publication in the Official Gazette (Diario Oficial de la Federación) new rules for risk diversification in active and passive operations of credit institutions. The main changes of the new rules are the establishment of a clear definition of groups of common risk and a redefinition of the limits of counterpart risk exposure of the basic capital of the institutions.

C. IPAB's Bank Restructuring/Resolution Program

IPAB issued notes worth MXP102.2 billion to support the capitalization and purchase of lBancrecer by Banorte in October 2001.IPAB issued notes worth MXP49.8 billion to support the capitalization and completion of the lpurchase of Atlantico by Bital in October 2002.IPAB issued notes worth MXP35.0 billion to assume the liabilities of the seven intervened lbanks and revoked their licenses in October 2001.

D. Sale/recovery of bank assets held by IPAB

During 2001, IPAB sold eight packages of credit portfolios with a capital value of MXP15.6 lbillion, resulting in a recuperation of 22.4 percent of their value. During 2002, IPAB sold four packages of credit portfolio with a capital value of MXP4.4 billion resulting in a recuperation of 13.9 percent of their value. During the first quarter of 2003, IPAB sold a credit package of low recovery from Bancrecer with a capital value of MXP4.5 billion for about MXP11.4 million. IPAB also recovered MXP13.8 billion and MXP1.6 billion in 2002 and the first quarter of 2003, respectively, from the sale of real estate and other assets and from administrators under supervision.

4.3 Net Present Value/Economic rate of return:NA

4.4 Financial rate of return:NA

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4.5 Institutional development impact:The institutional development impact of both the BRFLI and the BRFLII has been substantial. The legal reforms to improve banking sector incentives implemented under the BRFLI have reduced moral hazard problems associated with the old universal system of deposit insurance and improvements in contract enforcement should make it easier and cheaper for banks to lend to the private sector. Also, measures taken with respect to measurement of capital, asset classification, disclosure of financial information and corporate governance have strengthened CNBV's ability to supervise banks and enforce regulations. The legal reforms implemented under the BRFLII further strengthened the ability of CNBV to regulate and supervise financial groups and public banks. Furthermore, the early warning and prompt correction action system allows CNBV to intervene at the first signs of distress in a bank, when corrective actions can best be implemented. IPAB's support for a number of bank restructuring transactions among Mexico's most important banks has strengthened the capabilities of IPAB as a bank resolution agency and has resulted in more capable ownership of the banks. Finally, IPAB's plan of residual assets disposal has generated an active market in which auctions of assets have become a recurrent activity.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:The policy reforms and the bank restructuring transactions supported by this operation were implemented as envisaged. The implemented reforms resulted in a strong and stable banking system that was able to weather the deceleration of the Mexican economy brought about by the deceleration of the US economy.

5.2 Factors generally subject to government control:5.2.1. The successful implementation of the policy reforms and the bank restructuring transactions supported by the BRFLI and BRFLII is due, to large extent, to the fact that the Executive Branch and Congress were able to reach agreement on an ambitious program of financial sector reforms, under two different administrations. An important factor in this successful meeting of the minds was the results of an audit of the FOBAPROA scheme, carried out by a Canadian consultant by Congressional mandate, which clearly showed the failings of the then prevailing legal and regulatory framework and the lack of effectiveness of the FOBAPROA scheme.

5.2.2. IPAB's bank restructuring program has succeeded due, to large extent, to the Government's decision to eliminate all legal restrictions to foreign ownership in the banking sector. Under the previous legal framework, foreign investors were not permitted to hold more than 20 percent of the shares of any bank that comprised more than 6 percent of the aggregate capital of the Mexican banking system. All limitations to foreign ownership of banks were removed as part of the December 1998 banking reform approved by Congress. Allowing full foreign participation in bank ownership resulted in much-needed injections of capital and sound management and know-how into the banking sector and substantial restructuring of the banks themselves through mergers and acquisitions. The share of banking assets held by foreign banks increased from 14.7 percent in December 1999 to 51.3 percent in December 2002 and 62.6 percent in December 2003 (excluding development banks' assets from the system's total assets, this figure rises to 82 percent). Similarly, the share of bank deposits in foreign banks increased

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from 19.6 percent to 56.8 percent during the same period.

5.3 Factors generally subject to implementing agency control:5.3.1. The strong technical capabilities and leadership of the CNBV, and the collaboration of the CNBV with other Government agencies involved in banking regulation (IPAB, BOM and SHCP), was crucial for the successful implementation of the financial sector legal and regulatory reforms. The continued success in implementing these reforms will depend on the willingness of the CNBV to enforce the strengthened regulatory framework.

5.3.2. The success in resolving the situation of the banks affected by the 1994/1995 crisis was, to large extent, the result of the capable management and the quality of the professional staff of both IPAB and CNBV. In particular, IPAB, which was a new agency during the implementation of the BRFLI, had from the beginning a very capable management that was able to incorporate a number of young, highly skilled professionals to its staff. In addition, IPAB's Charter dictates that it must report to Congress periodically and submit to Congressional audits. This oversight has brought much transparency and independence in IPAB's operations. An example of this transparency is that all of IPAB's activities are regularly posted on its website.

5.4 Costs and financing:N.A.

6. Sustainability

6.1 Rationale for sustainability rating:6.1.1. The reforms undertaken under both the BRFLI and the BRFLII are likely to be sustainable and not be overturned. The legal and regulatory reforms implemented under both loans are very important to support Mexico's growing participation in the global economy (Mexico is an OECD member) and could not be replaced without causing great damage to the banking sector and the rest of the economy. Also, increased participation of foreign banks in Mexico's banking system, a source of stability and good governance, is likely to remain. This has been recently demonstrated by the acquisition by BBVA (February 2004) of the remaining 40.6 percent stake it did not already own in Bancomer, involving an investment of about US$4.1 billion, the second largest in Mexico after the Citigroup's purchase of Banamex for US$12.5 billion.

6.1.2. The long-term goal of both loans of fostering a banking sector better able to lend to the private sector, opening access to groups and enterprises today largely excluded from bank financing (micro, rural and SME financing) has not yet materialized. The Government is very concerned about this situation and is contemplating additional measures to encourage bank lending to deserving SMEs. These measures include relaxing some requirements for lending to smaller companies which may lack the extensive financial documents that are required of larger borrowers, and creating a database of SMEs that might qualify for credit to help banks identify new customers. The banks have indicated that credit to the private sector will rebound in 2004 as the economy improves and efforts over the past four years to improve loan portfolios, adopt management information systems and train loan officers, will bear fruit.

6.2 Transition arrangement to regular operations:NA

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7. Bank and Borrower Performance

Bank7.1 Lending:The Bank's lending performance was satisfactory. This was a follow up loan to the BRFLI and, therefore, most of the issues had been identified during the preparation of the first loan. Nevertheless, Bank staff devoted substantial attention to the specific bank resolution transactions supported by this loan and to further the policy dialogue with the authorities.

7.2 Supervision:The Bank's performance during supervision was also satisfactory. Prior to each tranche disbursement, the staff carried out an in-depth review of the evidence of compliance with tranche conditions. As in the previous loan, staff gave particular attention to the review of all completed bank resolution transactions to ensure compliance with agreed eligibility criteria and loan covenants.

7.3 Overall Bank performance:Overall Bank performance was satisfactory.

Borrower7.4 Preparation:The Borrower's performance during identification and appraisal was satisfactory. The main bank resolution transactions to be supported by this loan had been identified during preparation of the BRFLI. The closure of the small banks intervened by the CNBV was challenging because it required the collaboration of the Government agencies involved. First, a mechanism had to be established to transfer the management of these banks from the CNBV to IPAB. Second, since Mexico had little prior experience in closing banks, a mechanism had to be established for the revocation of their banking licenses by the SHCP. All three agencies collaborated in the closure of these banks.

7.5 Government implementation performance:The Borrower has fully complied with the provisions of the loan, within the expected time frame.

7.6 Implementing Agency:The two main Government agencies involved in implementing the policy measures supported by this operation were CNBV and IPAB. The performance of both agencies was satisfactory.

7.7 Overall Borrower performance:Overall the Borrower's performance is rated as satisfactory.

8. Lessons Learned

The lessons learned during the design and implementation of this loan are the following:

Start with a thorough diagnosis of the situation. Financial sector adjustment operations need lto be based on prior economic and sector work. This operation benefited from the diagnosis carried out during preparation of the BRFLI and the results of the FSAP carried out by the Bank and the IMF of the financial sector in Mexico.

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Set limited objectives. Financial sector adjustment operations should set limited objectives. lOver-ambitious objectives such as the restoration of the solvency and soundness of the banking system are long-term goals that go beyond a single operation. It is more realistic to support a program of reforms with a programmatic operation or with a number of sequential operations that can be approved based on the success of the previous ones.

Disburse against specific transactions. Bank restructuring operations should disburse against lthe completed resolution of specific bank cases, not against the promise of future actions which may not materialize. However, the operations should not specify the transactions it will support ex-ante, but rather should develop criteria that determine which transactions are eligible for financial support, to allow for flexibility in the operation.

Ensure that the main implementing agency is the main recipient of the Bank resources. Bank lfunds should benefit the main agency in charge of implementing the policy reforms, to strengthen the incentives of these agencies to work in close collaboration with the Bank.

9. Partner Comments

(a) Borrower/implementing agency:Comments by IPAB, the main implementing agency, are presented in Annex 9.

(b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information

BRFLI - Report and Recommendation of the President on a Proposed Bank Restructuring Facility Adjustment Loan in the Amount of US$505.06 milllion for Nacional Financiera. November 29, 1999. Report No. P7347-ME

BRFLI - Implementation Completion Report, 12/21/2001. Report No. 23337

BRFLII - Report and Recommendation of the President on a Proposed Second Bank Restructuring Facility Adjustment Loan in the Amount of US$505.06 million for Nacional Financiera. May 25, 2001. Report No. P7452-ME

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Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

NOT APPLICABLE BECAUSE THIS IS AN ADJUSTMENT OPERATION

Output Indicators:

Indicator/Matrix

Projected in last PSR1

Actual/Latest Estimate

NOT APPLICABLE BECAUSE THIS IS AN ADJUSTMENT OPERATION

1 End of project

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Annex 2. Project Costs and Financing

NOT APPLICABLE BECAUSE THIS IS AN ADJUSTMENT OPERATION

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Annex 3. Economic Costs and Benefits

NOT APPLICABLE BECAUSE THIS IS AN ADJUSTMENT LOAN.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/PreparationAugust 2000 1 Team Leader/Lead Ops. OfficerJanuary 2001 1

1111

Team Leader/Lead Ops. OfficerSector ManagerBank SupervisorFinancial Sector SpecialistConsultant, Banking Specialist

Appraisal/NegotiationApril 2001 1

11

Team Leader/Lead Ops. OfficerBank SupervisorLawyer

SupervisionApril 2002 1

1

Team Leader/Lead Ops. OfficerRegional Financial Sector Advisor

September 2002 1

1

Regional Financial Sector AdvisorConsultant, Bank Supervisor

ICR

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 18.73 93.59Appraisal/Negotiation 8.02 40.11Supervision 14.05 62.0ICR 4.5 12.9Total 45.3 208.6

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

President's Report no. P7347-ME, First Bank Restructuring Facility Adjustment Loan, November 29, 1999.President's Report no. P7452-ME, Second Bank Restructuring Facility Adjustment Loan, May 23, 2001.Mexico Country Assistance Strategy, Report no. 28141-ME, March 18, 2004.Mexico Country Assistance Strategy, Report no. 23849-ME, April 23, 2002.Mexico Country Assistance Stategy Progress Report, Report no. 22147-ME, May 21, 2001.

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Additional Annex 8. Matrix of Policy Actions

MEXICOPROPOSED SECOND BANK RESTRUCTURING FACILITY ADJUSTMENT LOAN

MATRIX OF POLICY COMMITMENTS FOR TRANCHE RELEASE

OBJECTIVES ACTIONS TAKEN UNDER THE FIRST BRFL

ACTIONS TAKEN UNDER THE SECOND BRFL

1. MACROECONOMIC POLICY FRAMEWORK

Maintenance of Supportive Macroeconomic Program

§ Maintenance of sound macroeconomic framework consistent with policy objectives and program described in Letter of Sector Policy

§ Maintenance of sound macroeconomic policy framework consistent with policy objectives and program described in Letter of Sector Policy

2. REFORM OF LEGAL FRAMEWORK

Improve incentives in the financial sector

Introduction of limited deposit insurance coverage. In 12/98, Congress passed new legislation creating the Institute for the Protection of Bank Savings (IPAB). The Law phases-in a limited deposit insurance scheme to replace the existing universal insurance guarantee, between 06/99 and 12/05 (with the elimination of coverage on inter-bank liabilities by 01/04)§ Elimination of restrictions to full participation of foreign investors in existing Mexican banks§ Improvement in contract enforcement and creditor rights: In 4/00 Congress passed a Commercial Reorganization and Bankruptcy law which strengthens foreclosure procedures; and a Miscellany of Secured Lending which creates conditions for lending based on movable collateral.

Measures taken prior to Board Presentation:• Approval by Congress in 04/01 of an amendment to the Credit Institutions Law, introducing, inter alia, the following:ü Early warning and prompt corrective action framework ü New principles and rules of “Corporate Governance” to improve the practices of credit institutions, protect shareholders, and require the banks to have independent board members and audit committees ü Tighter norms for related credits in terms of amounts and conditionsü New operating norms allowing for new types of banking operations and new means to offer banking servicesü Ability of the CNBV to share information with foreign supervisors protected by bank secrecy provisions• Approval by Congress in 04/01 of an amendment to the Law to Regulate Financial Groups, introducing, inter alia, the following:ü Ability of the CNBV to issue prudential regulation that applies to the financial groups including capital requirements and inter group transactions.

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3. STRENGTHENING OF BANKING REGULATION

To raise banking sector regulation towards international standards to:§ Improve the quality of banks’ capital§ Enhance accounting and disclosure standards§ Eliminate unjustified forbearance§ Improve loan classification and provisioning rules

In 09/99, the SHCP/CNBV announced a series of regulatory reforms to be introduced gradually between 01/00 and 12/02. Within this program, regulations were issued in respect of:§ Changes in the definition of regulatory capital which includes: (i) limiting the weight of deferred taxes in Tier 1 capital; (ii) defining the characteristics of the non-cumulative subordinated debentures that could be counted as Tier 1 capital; (iii) deducting all equity investments in non-traded, non-financial companies from capital; and (iv) substituting specific provisions for general provisions in Tier 2 capital § Requirements to disclose the composition of regulatory capital§ Improvements in the definition of risk weighted assets§ New classification and provisioning rules for credit card loans§ New criteria to grant regulatory forbearance and requirements to disclose instances of regulatory forbearance § Requirements to disclose “troubled” debt, financial information by business segment and aggregate information on transactions with related parties§ Improvement of accounting practices towards international standards regarding market valuation of investments and derivatives § Introduction of accounting standards applicable to assets securitization and assets transfers§ New regulation for loan classification and loan loss provision for mortgages§ New regulation for loan classification and loan loss provision for commercial loans

Measures taken prior to Board Presentation:• Issuance between 10/00 and 01/01 of prudential norms for regulatory capital and for classification and provisioning of consumer and mortgage credits for development banks equivalent to those that apply to private banks

Measures to be taken prior to loan effectiveness:• Issuance by the CNBV of new prudential regulations in the following areas: ü Extension to development banks of the classification and provisioning norms for commercial credits that apply to private banksü Establishment of minimum guidelines for internal controls in commercial banking institutions

Second Tranche Actions• Evidence that the Regulatory Reform Program (which involves the issuance of new or the amendment of existing prudential regulations by the CNBV or the SHCP (as the case may be, in accordance with what is established and defined in the Implementation Letter) has been implemented on a consistent basis, in accordance with its terms.

Third Tranche Actions• Evidence that the Regulatory Reform Program

1 has been

implemented on a consistent basis, in accordance with its terms.

4. RESTRUCTURING/RESOLUTION OF BANKS BY IPAB

To restructure, sell, merge or liquidate banks under IPAB’s bank restructuring program

The IPAB Law, approved in 12/98, enables IPAB to assume the functions of a deposit insurance and resolution agency to: (i) manage the bank support programs and accelerate the financial strengthening of currently undercapitalized banks, and the

Measures taken prior to Board presentation:§ Official assumption by IPAB, in 12/00, of all the liabilities of two of the banks intervened by the CNBV (Cremi and Union), representing the

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sale or liquidation of intervened ones; and (ii) sell the assets purchased by FOBAPROA from banks under previous bank support programs within a time frame of up to 5 years.

Under the first stage of its Bank Restructuring and Resolution Program, IPAB completed the following bank resolution transactions: § Sale of Serfin to BSCH: Sale completed in 5/00§ Merger of Promex and Bancomer: Merger completed in 8/00§ Sale of Inverlat to Nova Scotia: Sale of majority ownership (55%) of shares of Inverlat to Nova Scotia completed in 11/00

All these transactions were “Eligible Bank Resolution Transactions”.

2 Eligible Bank

Resolution Transactions means the sale or liquidation of any banking institution in IPAB’s Bank Restructuring and Resolution Program, carried out in accordance with the eligibility criteria agreed with the Bank. The bank transactions are: sale of Bancrecer; sale or liquidation of Atlántico; revocation of the banking licenses of each of seven intervened banks: Cremi, Unión, Oriente; Obrero, Capital, Interestatal, and Pronorte; and sale/liquidation of the three remaining intervened banks: Sureste, Industrial, and Anáhuac under the BRFL. To complete these transactions, IPAB issued “Eligible Notes”.

3 Eligible Notes means notes (

instrumentos de crédito) issued by IPAB for partial financing of an eligible bank resolution transaction. These notes must pay in cash at least the real component of the interest rate. Eligible Cash Transactions are cash payments made by IPAB for partial financing of an eligible bank resolution transaction and are considered in computing the total amount of Eligible Notes for an aggregate amount of MXP127 billion (US$12.7 billion equivalent) and paid in cash for MXP39.5 billion (US$4.1 billion equivalent).

In order to ensure the stabilization of IPAB’s debt in real terms, the 2000 Budget Law included a budgetary allocation of MXP35.0

bulk of the intervened banks’ liabilities§ Approval by IPAB in 05/01, of the Procedural Guidelines for the Liquidation of the Intervened Banks (Mecanismo de Liquidación de los Bancos Intervenidos) for the Intervened Banks under liquidation (Cremi, Union, Oriente, Obrero, Capital, Interestatal and Pronorte)§ Approval in 12/00 of the 2001 Budget Law including a budgetary allocation to IPAB of MXP24.3 billion and allowing IPAB to continue refinancing its debt in the market

Measures to be taken prior to loan effectiveness:§ IPAB’s issuance of a public offering (convocatoria) for the sale of Bancrecer

Second-Tranche Actions§ That IPAB has issued “Eligible Notes” or entered into “Eligible Cash Transactions” in an aggregate amount equal to at least US$3.0 billion, in support of “Eligible Bank Resolution Transactions”§ That the Intervened Banks Resolution Program

4 (the program

of actions for the resolution of the banking institutions intervened by the CNBV, described in the Implementation Letter) is being implemented on a consistent basis in accordance with its terms§ That budgetary transfers to IPAB have been made in a timely fashion so as to allow IPAB to discharge its responsibilities under the Program

Third-Tranche Actions§ That IPAB has issued “Eligible Notes” or entered into “Eligible Cash Transactions” in an aggregate amount equal to at least US$10.0 billion, in support of “Eligible Bank Resolution Transactions” § That the Intervened Banks Resolution Program has been

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billion to IPAB, and allowed IPAB to refinance its debt in the market. The budgetary transfers to IPAB during calendar year 2000 were made in a timely fashion so as to allow IPAB to discharge its responsibilities under the Program.

implemented on a consistent basis in accordance with its terms§ That budgetary transfers to IPAB have been made in a timely fashion so as to allow IPAB to discharge its responsibilities under the Program§ Approval by CNBV and IPAB of procedural guidelines for the resolution of the remaining intervened banks under CNBV’s control (Sureste; Industrial; Anáhuac)

5. SALE/RECOVERY OF BANK ASSETS HELD BY IPAB

To recover the maximum amount from the bank assets under IPAB’s purview, within the time frame provided by the IPAB Law

During 1999-2000, IPAB disposed of part of the assets in its portfolio through three modalities: direct sales, administration contracts, and rights transfers, in accordance with its Asset Recovery Program. The amounts recovered were: MXP9.8 billion from the sale of eight packages of credit portfolio, and MXP2.8 billion from the sale of goods and real estate.

Second Tranche Actions § That IPAB’s Asset Disposal Program has been implemented on a consistent basis, in accordance with its terms

Third Tranche Actions• That IPAB’s Asset Disposal Program has been implemented on a consistent basis, in accordance with its terms

1 Regulatory Reform Program involves the issuance of new or the amendment of existing prudential regulations by

the CNBV or the SHCP (as the case may be) in accordance with what is established and defined in the Implementation Letter. 2 Eligible Bank Resolution Transactions means the sale or liquidation of any banking institution in IPAB’s Bank

Restructuring and Resolution Program, carried out in accordance with the eligibility criteria agreed with the Bank. The bank transactions are: sale of Bancrecer; sale or liquidation of Atlántico; revocation of the banking licenses of each of seven intervened banks: Cremi, Unión, Oriente; Obrero, Capital, Interestatal, and Pronorte; and sale/liquidation of the three remaining intervened banks: Sureste, Industrial, and Anáhuac).3 Eligible Notes means notes (instrumentos de crédito) issued by IPAB for partial financing of an eligible bank

resolution transaction. These notes must pay in cash at least the real component of the interest rate. Eligible Cash Transactions are cash payments made by IPAB for partial financing of an eligible bank resolution transaction are considered in computing the total amount of Eligible Notes.4 The Intervened Banks Resolution Program is the program of actions for the resolution of the banking institutions

intervened by the CNBV, described in the Implementation Letter.

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Additional Annex 9. Comments from IPAB

(original in Spanish)

Instituto para la Protección al Ahorro Bancario

Junio, 2004

Reporte de instrumentación de la operación de crédito

1. Desde que inició operaciones el Instituto para la Protección al Ahorro Bancario (Instituto), cuyo origen se remonta a la publicación de la Ley de Protección al Ahorro Bancario en enero de 1999, ha enfrentado diversos retos relacionados con el establecimiento del seguro de depósito y con la conclusión de diversas operaciones de saneamiento financiero derivadas de la crisis financiera de 1995. A la fecha, el Instituto ha logrado avances sustantivos en la administración del seguro de depósito y en el refinanciamiento de sus obligaciones, lo que ha contribuido a generar confianza y estabilidad al sistema financiero nacional.

Evaluación y cumplimiento de los objetivos del Segundo Préstamo de Reestructuración Bancaria (Programa)

2. El Segundo Préstamo de Reestructuración Bancaria presentó entre sus objetivos la conclusión del saneamiento y venta del Banco del Atlántico y la enajenación de las acciones representativas del capital social de Bancrecer, además de la definición de la estrategia para el cierre de los bancos intervenidos (Banca Cremi, Banco Unión, Banco Obrero, Banco de Oriente, Banco Capital, Banco Interestatal, y Banco Promotor del Norte).

3. En el caso de Banco del Atlántico, el 1 de octubre de 2002 se realizaron los actos corporativos para concluir su saneamiento. El proceso de venta de las acciones representativas del 100% del capital social de Bancrecer concluyó el 2 de enero de 2002, a través de la transferencia de las acciones a Banco Mercantil del Norte.

4. En materia de administración de los pasivos, el Instituto tiene como objetivos hacer frente a las obligaciones contractuales, mantener la deuda constante en términos reales con relación al Producto Interno Bruto y mejorar el perfil de vencimientos. El Instituto ha continuado la emisión y colocación de los Bonos de Protección al Ahorro Bancario con plazo a 3 y 5 años.

Sustentabilidad del programa, desempeño del prestatario y actuación del banco

5. La facultad del Instituto para canjear o refinanciar su deuda, mediante la emisión de Bonos de Protección al Ahorro y la contratación de créditos con bancos comerciales, bancos de desarrollo y organismos internacionales, aunado a las disposiciones de los recursos presupuestarios, los ingresos por cuotas bancarias, y las recuperaciones han permitido ejercer un manejo adecuado de la deuda, mejorar el perfil de vencimientos y mantener el nivel de los

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pasivos dentro de una trayectoria sostenible. En este sentido, el crédito otorgado por el Banco Mundial contribuyó al cumplimiento de dichos objetivos.

6. El desempeño del Banco Mundial fue altamente satisfactorio, lo que permitió al Instituto obtener los recursos de acuerdo con sus necesidades. Por otra parte, la eficiente operación de los desembolsos, una vez que se cumplieron las condiciones estipuladas en el contrato, proporcionó al Instituto certidumbre para la programación de las actividades de tesorería.

7. La comunicación con los funcionarios del Banco Mundial fue constante y fluida, lo que permitió el seguimiento y cumplimiento de las condiciones necesarias para proceder a los desembolsos. El trabajo conjunto realizado por la Comisión Nacional Bancaria y de Valores, la Secretaría de Hacienda y Crédito Público y Nacional Financiera, en su papel de Agente Financiero, contribuyó al éxito de la operación mediante el cumplimiento de los objetivos del programa.

Lecciones Aprendidas.

8. El otorgamiento del Segundo Préstamo de Ajuste para la Reestructuración Bancaria permitió al Instituto capitalizar la experiencia y el trabajo realizado durante el Primer Préstamo, situación que se tradujo en el aprendizaje de las siguientes lecciones:

· Las instituciones bancarias desempeñan un papel crucial en la asignación de recursos en una economía de mercado. Una crisis bancaria puede ocurrir en cualquier momento, y sus efectos pueden desestabilizar al sistema financiero en su conjunto. A este respecto, el Instituto ha reconocido que es necesario desarrollar planes y programas de acción preestablecidos que permitan hacer frente a las problemáticas bancarias de forma oportuna y al menor costo posible. El Instituto reconoce que una eficiente administración del seguro de depósito recae en tres actividades sustantivas: la constitución y administración del fondo, el monitoreo preventivo de las instituciones bancarias y la aplicación oportuna de los procesos de resolución de problemáticas bancarias.

· La experiencia internacional muestra que los seguros de depósitos con cobertura ilimitada reducen la disciplina que el mercado impone a los ahorradores y a los banqueros. En el caso de México se adoptó un sistema de seguro de depósito explícito y limitado, y a partir de junio de 1999 se instrumentó una fase de transición gradual de la cobertura de obligaciones. Esta reducción gradual propicia que las instituciones bancarias adopten una cultura prudencial del riesgo, lo que a su vez contribuye a la disciplina y estabilidad del sistema bancario. En la etapa final del proceso de transición, que dará inicio el 1 de enero 2005, el monto de cobertura será igual al equivalente en pesos de 400 mil Unidades de Inversión por persona y por banco.

· La experiencia que el Instituto ha acumulado en los últimos años en materia de liquidación de instituciones y en el pago de obligaciones garantizadas, le ha permitido consolidarse como administrador del seguro de depósito, proporcionando una mayor certidumbre a los depositantes.

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· La participación de diversos organismos en un mismo proyecto, en este caso de la Comisión Nacional Bancaria y de Valores y de la Secretaría de Hacienda y Crédito Público, es factible en la medida de que se cuente con objetivos claramente establecidos y delimitados. El proceso de análisis y de definición de objetivos y condiciones fue el elemento más importante para el desempeño exitoso del programa.

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