Development banks are instruments of economic policy of the federal government, which should have an impact on development when used properly. However, despite their financial soundness, they did not fulfill their mission, therefore new definitions and operational changes were required.
One of the objectives of the financial reform is to solve the problem that although the Mexican financial system has healthy financial intermediaries, the financing of companies and productive projects is very low. That is, the strengths of the Mexican financial system have not been reflected in development, and strategic sectors such as micro and small enterprises, agriculture, entrepreneurs, infrastructure and housing do not have sufficient access to credit 1
Internationally 2, prosperous development banks have been able to identify and mitigate market failures, and have complied with a well-defined mandate, using innovative financial instruments, care of their financial sustainability, and have adopted sound banking practices in in the field of corporate governance. Therefore, several measures are being considered in the financial reform to strengthen the Mexican banking system: redefining its mandate, relaxing its regulatory framework and setting measures to improve its operation.
Justification of development banks
The first theories of the financial systems stressed the role of the mobilization of savings to invest in productive activities that foster industrialization. Today we know that the functions of financial systems are much broader: They provide payment systems; mobilize savings and provide credit; monitor and ensure that the credit is used correctly; and limit, group and put a price on the risks.
An efficient financial system is a prerequisite for promoting economic development; however, there are failures in financial markets due to problems of information. The imperfections of the financial markets impede the proper allocation of resources, so that markets alone have no effect on the development that they desire.
The State has elements to compensate for market distortions, so normally its participation in the financial system is warranted. Levy et al et al.3 classify the case for State intervention in the banking sector into four groups: the need to maintain the safety and soundness of the banking system, the need to overcome the problems of asymmetric information, the need to finance projects that are socially valuable, and the need to promote financial development..
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1 Informe Semanal del Vocero. Secretaria de Hacienda y Crédito Público (Weekly Report, Secretary of Finance and Public Credit) January 6-10, 2014.
2 Eva Gutiérrez, Heinz Rudolph, Theodore Homa, Enrique Blanco. (2011). Development Banks: Role and Mechanisms to Increase their Efficiency. World Bank.
3 Eduardo Levy Yeyati, Alejandro Micco y Ugo Panizza (2004). ¿Es conveniente la banca estatal? El papel de los bancos estatales y de desarrollo. BID.
The existence of development banks is justified by three of these four reasons: 1) it contributes to overcoming the problems of asymmetric information, which facilitates the access to financing, for example, of micro and small enterprises; 2) it finances socially valuable projects, such as major infrastructure works and sustainable projects; and 3) it offers efficient banking services.
The importance of State intervention is not the degree of intervention in itself, but its quality. The role of development banks in the financing of development is to serve as a catalyst, that is, to accelerate the efficient allocation of resources. At the same time, its intervention should not generate inefficiencies in the financial markets.
The manner of operation and the instruments of development banks depend on the market failure that one wants to remedy. It is not a matter of deciding whether a bank is first-tier or second-tier, but what are the appropriate instruments to comply with that mandate, as it may be first-tier, second-tier or mixed.
In carrying out their functions, development banks are at risk, which inevitably has an impact on their financial structure. Thus a circle is closed: The bank tries to have an effect on development, it manages the risk appetite and through an appropriate bank management it takes care of financial solvency.
Mandate of development banks
Development banks finance valuable projects for society that do not interest the private sector because they are not very profitable; that is, the private sector has few limited incentives to finance projects that produce externalities.
Rudolph4 believes that the mandate of development banks should cover the sector to meet the rules of cooperation with the private sector and minimal levels of efficiency. This consideration is complied with in Mexico, as each sector attended by a development bank is defined by a market failure. The role of development banks is complementary to that of the private sector. The Basel regulations are applied to this banking in regard to the amounts of capitalization to ensure its efficiency and financial stability.
The National Financing Development Plan 2013-2018 5 stipulates that development banks are “institutions that carry out the service of banking and credit, subject to the priorities of the National Development Plan, and in particular the National Financing Development Plan, to promote and finance sectors that are mandated in in the organic laws of those institutions.”
In Mexico, the sectors in which a market failure occurs and which require a development bank are agriculture, 6, housing, infrastructure, exports, and micro and small enterprises, in addition to the lack of savings instruments for certain groups of the population. The table presents the development banks7 that operate in Mexico and their objectives:
Institution of development bank
Objective
Banco Nacional de Comercio Exterior, S.N.C.
To promote and finance foreign trade.
To ensure efficiency and competitiveness of foreign trade in the stages of pre-export, export, import and replacement of goods and services.
Banco Nacional de Obras y Servicios Públicos, S.N.C.
To finance or refinance public or private projects of investment in infrastructure and public services, and help the institutional strengthening of the federal, state and municipal governments.
Banco del Ahorro Nacional y Servicios Financieros, S.N.C.
To promote savings, financing and investment among members of the popular savings and credit sector; to offer financial tools and services, as well as channelling financial and technical support to encourage the habit of saving and the development of the sector and, in general, national and regional economic development of the country.
Nacional Financiera, S.N.C.
To promote savings and investment, such as channeling financial and technical support to industrial development and, in general, national and regional economic development of the country.
Sociedad Hipotecaria Federal, S.N.C.
To promote the development of primary and secondary markets for mortgage lending, through loans and guarantees for the construction, adquisition and improvement of housing, preferably for low income families. To increase production capacity and tecnological development related to housing.
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4 H. Rudoph (2012). State Financial Institutions: Mandates, Governance and Beyond. The World Bank.
5 SHCP. Programa Nacional de Financiamiento del Desarrollo 2013-2018. Government of Mexico. México.
6 The agricultural sector is serviced by the Financiera Nacional de Desarrollo Agropecuario, Rural, Forestal y Pesquero (National Financial Institution of Agricultural, Rural, Forestry and Fisheries Development), which according to the classification of the National Banking and Securities Commission is a body of promotion.
7 Does not consider the Bank of the Army, Air Force and Navy (Banjército)
Summary
Financial reform starts from the supposition that it is essential to modernize development banks to transform them into a useful tool to strengthen the country’s economy.
The existence of development banks is justified because of the failures of the financial markets.
In Mexico, the development banks serve a specific sector of the private sector in which there is a market failure.
Bibliography
Gutiérrez, Eva, P., Rudolph, Heinz, Homa, Theodore, y Blanco Beneit, Enrique (2011). Development Banks, Role and Mechanisms to Increase their Efficiency, Policy Research Working Paper. The World Bank.
Levy Yeyati Eduardo, Micco, Alejandro, y Panizza, Ugo (2004) ¿Es conveniente la banca estatal? El papel de los bancos estatales y de desarrollo. BID.
Rudolph. Heinz (2012). State Financial Institutions: Mandates, Governance, and Beyond. The World Bank.
SHCP. Programa Nacional de Financiamiento del Desarrollo 2013-2018. Government of Mexico. México.
SHCP (2013). Presentación de la Reforma Financiera y Exposición de Motivos del Decreto por el que se Reforman, Adicionan y Derogan diversas disposiciones que dan origen a la Reforma Financiera.
Development Banks, Financial Reform and Impact on Development
Development banks are instruments of economic policy of the federal government, which should have an impact on development when used properly. However, despite their financial soundness, they did not fulfill their mission, therefore new definitions and operational changes were required.
One of the objectives of the financial reform is to solve the problem that although the Mexican financial system has healthy financial intermediaries, the financing of companies and productive projects is very low. That is, the strengths of the Mexican financial system have not been reflected in development, and strategic sectors such as micro and small enterprises, agriculture, entrepreneurs, infrastructure and housing do not have sufficient access to credit 1
Internationally 2, prosperous development banks have been able to identify and mitigate market failures, and have complied with a well-defined mandate, using innovative financial instruments, care of their financial sustainability, and have adopted sound banking practices in in the field of corporate governance. Therefore, several measures are being considered in the financial reform to strengthen the Mexican banking system: redefining its mandate, relaxing its regulatory framework and setting measures to improve its operation.
Justification of development banks
The first theories of the financial systems stressed the role of the mobilization of savings to invest in productive activities that foster industrialization. Today we know that the functions of financial systems are much broader: They provide payment systems; mobilize savings and provide credit; monitor and ensure that the credit is used correctly; and limit, group and put a price on the risks.
An efficient financial system is a prerequisite for promoting economic development; however, there are failures in financial markets due to problems of information. The imperfections of the financial markets impede the proper allocation of resources, so that markets alone have no effect on the development that they desire.
The State has elements to compensate for market distortions, so normally its participation in the financial system is warranted. Levy et al et al.3 classify the case for State intervention in the banking sector into four groups: the need to maintain the safety and soundness of the banking system, the need to overcome the problems of asymmetric information, the need to finance projects that are socially valuable, and the need to promote financial development..
——————————————————————————————————————————–
The existence of development banks is justified by three of these four reasons: 1) it contributes to overcoming the problems of asymmetric information, which facilitates the access to financing, for example, of micro and small enterprises; 2) it finances socially valuable projects, such as major infrastructure works and sustainable projects; and 3) it offers efficient banking services.
The importance of State intervention is not the degree of intervention in itself, but its quality. The role of development banks in the financing of development is to serve as a catalyst, that is, to accelerate the efficient allocation of resources. At the same time, its intervention should not generate inefficiencies in the financial markets.
The manner of operation and the instruments of development banks depend on the market failure that one wants to remedy. It is not a matter of deciding whether a bank is first-tier or second-tier, but what are the appropriate instruments to comply with that mandate, as it may be first-tier, second-tier or mixed.
In carrying out their functions, development banks are at risk, which inevitably has an impact on their financial structure. Thus a circle is closed: The bank tries to have an effect on development, it manages the risk appetite and through an appropriate bank management it takes care of financial solvency.
Mandate of development banks
Development banks finance valuable projects for society that do not interest the private sector because they are not very profitable; that is, the private sector has few limited incentives to finance projects that produce externalities.
Rudolph4 believes that the mandate of development banks should cover the sector to meet the rules of cooperation with the private sector and minimal levels of efficiency. This consideration is complied with in Mexico, as each sector attended by a development bank is defined by a market failure. The role of development banks is complementary to that of the private sector. The Basel regulations are applied to this banking in regard to the amounts of capitalization to ensure its efficiency and financial stability.
The National Financing Development Plan 2013-2018 5 stipulates that development banks are “institutions that carry out the service of banking and credit, subject to the priorities of the National Development Plan, and in particular the National Financing Development Plan, to promote and finance sectors that are mandated in in the organic laws of those institutions.”
In Mexico, the sectors in which a market failure occurs and which require a development bank are agriculture, 6, housing, infrastructure, exports, and micro and small enterprises, in addition to the lack of savings instruments for certain groups of the population. The table presents the development banks7 that operate in Mexico and their objectives:
To ensure efficiency and competitiveness of foreign trade in the stages of pre-export, export, import and replacement of goods and services.
——————————————————————————————————————————–
Summary
Financial reform starts from the supposition that it is essential to modernize development banks to transform them into a useful tool to strengthen the country’s economy.
The existence of development banks is justified because of the failures of the financial markets.
In Mexico, the development banks serve a specific sector of the private sector in which there is a market failure.
Bibliography
Gutiérrez, Eva, P., Rudolph, Heinz, Homa, Theodore, y Blanco Beneit, Enrique (2011). Development Banks, Role and Mechanisms to Increase their Efficiency, Policy Research Working Paper. The World Bank.
Levy Yeyati Eduardo, Micco, Alejandro, y Panizza, Ugo (2004) ¿Es conveniente la banca estatal? El papel de los bancos estatales y de desarrollo. BID.
Rudolph. Heinz (2012). State Financial Institutions: Mandates, Governance, and Beyond. The World Bank.
SHCP. Programa Nacional de Financiamiento del Desarrollo 2013-2018. Government of Mexico. México.
SHCP (2013). Presentación de la Reforma Financiera y Exposición de Motivos del Decreto por el que se Reforman, Adicionan y Derogan diversas disposiciones que dan origen a la Reforma Financiera.