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Cross Border Financial Positions and Exposures

Juan Pablo GrafBanco de México

I. Introduction

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Dom

estic

Sec

tors

Foreign Sectors

Banks

Other Financial Entities

Listed Corporations

Non - Listed Corporations

Households

Banks Non Banks

Information Gaps(Authorities)

3

Dom

estic

Sec

tors

Foreign Sectors

Banks

Other Financial Entities

Listed Corporations

Non - Listed Corporations

Households

Banks Non Banks

Information Gaps (Publicly disclosed)

I. Introduction

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The majority of systemically-important banks are foreign-owned

I. Introduction

Market Share

CITIBANK-BANAMEX

23.5BBVA-BANCOMER

21.2

SANTANDER-SERFIN 14.4

HSBC 9.5

SCOTIABANK-INVERLAT

BANORTE 11.1

3.2

INBURSA

%

Other subsidiaries of foreign banks (14)

Other Banks (21)

4.6

8.4

4.0

II. Exposures of financial corporations

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Banks Non Banks

BanksDetailed daily information on:

• Loans & Deposits• Securities (incl. Repos)• Derivatives

• Swaps• Forwards• Options

• FX transactions

Detailed daily information:• Securities and Derivatives

• Credits and Deposits (No individual counterpart ID)

Monthly Information• Corporate credit

Financial Entities (Brokerage Houses,

Insurance Co., Pension Funds)

Detailed daily information:• Securities and Derivatives

• Credits and Deposits (No individual counterpart ID)

Dom

estic

Sec

tors

Foreign Sectors

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Subsidiaries and Parent Banks•Financial regulation limits the exposure that domestic banks may have to related counterparties (i.e. individuals, firms and any financial entity owned by the same shareholders).

•For domestic banks, which are subsidiaries of foreign financial groups, the limits apply to any exposure to parent banks and their foreign subsidiaries (e.g., London, Cayman)

•As of 2008:•The limit applies to all financial exposures (i.e., loans, deposits, securities, repos, the net exposure arising from derivative transactions; and settlement risk in forex exposures)•The limit was reduced to 50% of Tier 1 capital.

II. Exposures of financial corporations

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• Some subsidiaries increased their lending to their parent banks significantly. These positions have been closely monitored. However, this information is not made public.

Subsidiaries and Parent Banks

II. Exposures of financial corporations

1 Information gaps

Detailed data collected by central bank allowed a prompt assessment of financial entities exposures to “toxic” assets

This information was very useful to assess early the level of exposure. This information was not made public.

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II. Exposures of financial corporations

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• Type of exposure:• Derivatives OTC• Debt with banks and other FIs• Debt through securities issued abroad

• Information sources:• Creditor data BIS-type data Central bank survey

Timeliness (work-in-progress) Granularity (maturity,counterparties currencies)

• Debtor data

Listed corporates (see next) Non-listed

?

• Credit registry

?

III. Exposures of non-financial corporations

?

• Non-financial corporations in emerging market economies reported large losses due to FX OTC derivatives

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IV. OTC Derivatives

Comercial Mexicana $2,200GRUMA $804CEMEX $711ALFA $250VITRO $293Grupo Posadas $50

Sadia $2,400Aracruz $2,130Grupo Votorantim $967

500 small and $1,000Taesan LCD $220

Source: Quarterly reports for Mexican firms; Bloomberg and Reuters for firms in other countries.

Merrill Lynch, JP Morgan, Barclays, Goldman Sachs, Credit Suisse, Deustche Bank AG and Citibank London (through Banamex, the Citibank's Mexican subsidiary)

Brazil

Losses

Citigroup Inc., Merrill Lynch & Co., Barclays Plc, Banco UBS Pactual SA, Banco Itau Holding Financeira and Deustche Bank.

South KoreaKookmin Bank (biggest korean bank), Shinhan Bank, Industrial Bank of Korea (small/medium size lender), Citibank Korea Inc. and SC First Bank Korea Ltd.

Estimated losses from derivatives operationsIn millions of US dollars, October 2008.

Firms Some financial institutions reported as counterparties

Mexico

Exchange Rate Domestic Currency / USD

15 days moving avg.

80

90

100

110

120

130

140

150

160

Jan Apr Jul Oct Jan

MexicoBrazilKorea

2008 2009Source: Banco de México

• Host authorities do not have timely and detailed information about derivative operations between foreign banks and other FIs domestic non-financial firms

• Financial counterparties (domestic and foreign) might not have information about firms’ derivatives operations with other counterparties

• Foreign financial counterparties of domestic firms do not have information about firms’ credit history

• Complexity of products

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IV. OTC Derivatives

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• Regulatory responses (May 2009)

Securities Markets Regulation(Periodical reporting - Quarterly) Market-to-market positions / Underlyings / Notional amounts Detailed payment conditions Contingency analysis

Financial Information Rules (Financial Statement Disclosure Rules) Risks involved (detailed analysis) Hedging structure of every derivatives position (including “off- balance sheet” transactions) Collaterals Valuation techniques Levels of exposure

IV. OTC Derivatives

• Creditor data• Timeliness, granularity of disclosures (maturity, counterparties,

currency)

• Households: debt or equity

V. Non-listed non financial corporations and households

Banks Non Banks

Non-listed Corporations BIS-typeAggregate statistics

No information (If regulated or listed home supervisors may have

some information)Households

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Foreign Sectors

Dom

estic

Se

ctor

s

14

• Response to “Madoff and Stanford” cases: stress the importance of investors verifying that institutions are authorized to take deposits or investments.

• Irregular deposit taking and low-profile soliciting will continue, thus information gaps for domestic authorities remain.

• Cooperation among international authorities may mitigate the information gaps and greatly contribute to understanding risks borne domestically from investments in foreign funds.

Investments in foreign funds “through” an institution in Mexico

(“low profile soliciting”, e.g. Stanford)

Domestic authorities have no power over such investments.

V. Non-listed non financial corporations and households