Banks Show Resilience in Face of Shocks, But Vulnerabilities Remain

Mexico City - The latest financial stability report for the first half of 2024 has revealed that Mexico’s banking system is resilient and able to absorb shocks, including unexpected events in the short and medium term.

Credit Risk Remains Stable, Market Risk Decreases

According to the analysis, credit risk remains at relatively stable levels, while market risk decreased slightly due to adjustments in portfolio positions. This indicates that commercial banks are well-equipped to manage their risks and maintain stability.

Resilience of Commercial Banks

The report highlights that commercial banks as a whole are resilient, with solvency and liquidity stress tests showing that they would be able to withstand adverse scenarios. However, there are some individual banking institutions that could experience a greater impact on their capitalization levels under certain simulated scenarios.

Development Banks and Non-Bank Financial Intermediaries Show Improvement

Development banks and other development financial institutions were found to be financially sound, with favorable evolutions in both their balance sheets and income statements. The sector of regulated and non-regulated non-bank financial intermediaries also showed a slight recovery in its funding and market financing conditions.

Business Continuity Risks and Financial Market Infrastructure

The report also monitors business continuity risks for financial institutions, as well as the performance of financial market infrastructure and payment systems managed by Banco de México. As of April 2024, operability levels remained high, with no interruptions to payment system services.

Cyber Risk: A Growing Concern

Cyber risk remains a major concern for the global financial system, particularly with the growth in the use and sophistication of Artificial Intelligence (AI). Banco de México is monitoring this risk and incorporating it into its institutional risk management framework.

Climate-Related Risk Analysis and Stress Tests

The report also highlights the importance of climate-related risk analysis, which identifies banks whose loan portfolios are not well-diversified and are exposed to potential losses due to hydro-meteorological phenomena. Stress tests for physical risks associated with climate change show that although the impact on capitalization is not insignificant, it does not represent a risk to the banking system’s solvency.

Sustainable Financial Assets and Repurchase Agreements

The report also presents an update on the evolution of sustainable financial assets, which saw an increase in the issuance of thematic bonds by domestic private and public issuers in the first three months of 2024. Banco de México has implemented measures related to:

• Repurchase agreements
• Derivative transactions
• Reference rates
• Liquidity provision to commercial banks
• Sustainable financial assets
• Facilities for borrowers affected by Hurricane Otis

Conclusion

The central bank will continue to monitor the evolution of risks and vulnerabilities that could negatively impact financial stability, in order to implement actions to mitigate them and preserve both the stability of the financial system and the proper functioning of payment systems.