In response to the Mexican financial crisis of 1995, the Mexican government, through the financial authorities, adopted a series of principles to follow during the crisis, which included:

	Reducing the risk of a run on banks and the resulting collapse of the financial system;
	Protecting savers’ deposits and bank creditors;
	Maintaining the integrity of the system of payments;
	Supporting the solvency and liquidity of banks;
	Supporting the greatest possible number of families and businesses and avoiding a culture of nonpayment;
	Minimizing the fiscal impact by spreading it out over time;
	Encouraging participation by leading foreign banks to improve the competitiveness and solvency of the system and lower country risk;
	Promoting public confidence; and
	Keeping banks in the private sector.

Practicing these principles was complicated by the legal environment in which banks operated and the politization of the crisis.

As regards the legal environment, collection and foreclosure on guarantees became increasingly difficult and the courts became saturated. The Law of Bankruptcies proved obsolete and did not facilitate restructurings, as it provided excessive protection for the stockholders of indebted businesses.

On the other hand, high interest rates and loss of purchasing power limited debtors’ payment capacity, while fostering the appearance of "non-payment groups". In general, the existing legal and political framework prevented banks from solving their past-due loan portfolio problems.

SUPPORT MEASURES IMPLEMENTED BY FOBAPROA

Financial authorities were faced with the need to implement various measures, some with the participation of the Banking Savings Protection Fund (Spanish acronym FOBAPROA).

The support made available through FOBAPROA was implemented by means of the so-called "Dollar Liquidity Window", the "Temporary Capitalization Program (Spanish acronym PROCAPTE)", and the "Capitalization and Portfolio Purchase Program (Spanish acronym PCCC)" and through financial strengthening of full service banks to protect the interests of the saving public.

The “Dollar Liquidity Window” and “PROCAPTE” were temporary measures to bolster banks’ liquidity, forestalling a systemic crisis that could produce a run on banks by depositors fearing a potential lack of liquidity.

In general terms, the characteristics of the support measures offered by FOBAPROA are described below.

Dollar Liquidity Window

Since early 1995, FOBAPROA, with funding provided by the Central Bank, granted loans in U.S. dollars to various full service banks that needed liquidity to pay operations in that currency. Such financing was made available in two phases. The first started in January 1995, and consisted of granting banks simple loans on a seven-day term. The second phase started on April 19, 1995, and consisted of opening a line of credit in current account to the banks in question, revising the terms of the loans granted in phase one, specifically the applicable interest rate.

All the loans were repaid by the banks, and in the period from July to September 1995 FOBAPROA notified them of the resolution to restrict access to new drawdowns on the line of credit in current account and to terminate all the loan agreements.

PROCAPTE

This program was implemented to support banks that were not capable of meeting the required capitalization levels established in applicable regulations until they could obtain capital contributions from other sources. A low capitalization level can eventually prevent credit institutions from honoring their savers’ requests for return of their deposits.

PROCAPTE was implemented by FOBAPROA starting March 31, 1995, and consisted of FOBAPROA’s acquisition of subordinate obligations mandatorily convertible to bank shares, for up to an amount sufficient for the bank to achieve a 9 percent capitalization ratio.

Participation in PROCAPTE was voluntary, with a term of five years. For the time banks took part in the program, they were required to maintain a capitalization ratio of at least 9 percent. This ratio could be reduced to 8.5 percent only when the reduction was a consequence of the creation of global preventive reserves.

Simultaneously with the delivery of funds by FOBAPROA for acquisition of subordinate obligations, the bank made a cash deposit in the Central Bank, in a special account opened for the purpose, as a result of which the program had no fiscal cost.

Financial Strengthening Operations

In the case of banks with severe financial problems whose shareholders were unable to inject additional funds, FOBAPROA, to protect the interests of the saving public, contributed the necessary capital, taking equity control of the corporations and implementing financial strengthening operations so that they could in turn be purchased by other financial entities. The banks in question had usually already been intervened by the National Banking and Securities Commission (Spanish acronym CNBV).

The process followed in these operations is described in broad terms below:

If irregular operations were detected that could put the interests of the saving public at risk, the CNBV intervened in the institution designating a managing intervener.

Usually, the first phase of FOBAPROA’s support was to grant the bank a line of credit that would allow it to meet its obligations to savers. At the same time shares of the borrowing bank and/or its holding company or other members of the financial group to which the bank belonged were given in guarantee.

By virtue of the aforementioned guarantee, FOBAPROA was authorized to exercise the corporate rights of the shares representing the capital stock of the holding company or full service bank, as the case might be, which allowed FOBAPROA to vote for the shares in question in a shareholders’ meeting, acknowledge the corporation’s losses and pay them, and contribute such capital as the bank might require. For this purpose, FOBAPROA capitalized the credit granted and, if necessary, provided additional funds. This allowed the supported bank to continue to operate and meet its obligations to the saving public. It is pertinent to mention that if the bank was under CNBV intervention, the intervention was maintained.

If a bank had value as an ongoing concern, it was sold. Otherwise, FOBAPROA proceeded to take actions leading to its liquidation. The process usually included sale of the bank’s network of branch offices, leaving pending the realization of its assets and downsizing of its personnel structures.

Financial strengthening operations conducted by FOBAPROA were implemented with the aim of covering the bank’s losses to put it in a position to meet its obligations to the saving public and its creditors.

Capitalization and Portfolio Purchase Program

In 1995, the federal government designed this program to capitalize credit institutions whose financial position was solvent but which, due to the deterioration of their credit assets, were at risk of not complying with their minimum capital requirements. The program sought to induce banks’ shareholders to inject fresh funds into banks and thereby capitalize them jointly through FOBAPROA.

As part of the program’s implementation, credit institutions subscribed with the National Banking and Securities Commission (Spanish acronym CNBV) and the Central Bank, in its capacity as trustee in FOBAPROA, documents entitled "Terms of Capitalization", whereby FOBAPROA acquired the right to receive all funds obtained from the administration, recovery, and collection of the loans designated by the participating banks. In exchange for those rights, FOBAPROA issued the banks non-negotiable 10-year promissory notes, payable on maturity and bearing interest capitalizable quarterly.

For FOBAPROA to take part in the scheme, each bank’s shareholders had to inject it with new capital. For this purpose, portfolio was purchased for the equivalent of twice the capital contribution made by each bank’s shareholders.

The banks maintained management of their portfolio, which was placed in trusts created in the banks themselves, establishing shared losses and in some cases incentive schemes. The proceeds from collections on the portfolio were used to liquidate the aforementioned promissory notes.

The banks assumed the obligation to continue managing the loans originating the funds or "recovery cash flows ", applying the same policies and guidelines as for other loans in their portfolio.

When the operations were formalized, the levels of reserves and provisions and the admissibility of the loans were subject to a process of review. Consequently, the amount of the consideration payable by FOBAPROA could be changed.

On the other hand, it was agreed that all cash flows would be used to reduce the value of payment documents assumed by FOBAPROA, deducting expenditures related to management, recovery, and collection of the loans. On the documents’ maturity the participating banks forgave FOBAPROA an amount equivalent to a percentage of the value of the payment documents. This is known as the loss sharing mechanism.

At FOBAPROA’s request, the banks had to transfer to FOBAPROA, or whomsoever it might designate, the loans originating the recovery cash flows, without the banks’ being entitled to any consideration other than that originally agreed upon.

On instructions from FOBAPROA’s Technical Committee, on completing the process of reviewing the portfolio, the interested parties proceeded to subscribe the documents relating to the closing of the "portfolio purchases" and the amount of the consideration payable by FOBAPROA was adjusted in the appropriate cases.

Thus, the Capitalization and Portfolio Purchase Program sought to maintain the capitalization level of the participating institutions, as a means of preserving their financial solidity in relation to their savers.