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IMF Urges Mexico to Enhance Financial Stability and Address Climate Risks

Mexico City - The International Monetary Fund (IMF) has released its latest Mutual Evaluation Report, urging the Mexican government to implement several measures to enhance financial stability and address climate risks.

Gradual Recovery from Pandemic Effects

The report highlights Mexico’s gradual recovery from the economic effects of the pandemic. However, it also warns of potential downside risks, including:

  • Rising inflation
  • Difficult trade-off between managing risks to inflation and growth
  • New COVID-19 variants

Recommendations for Financial Stability

To address these challenges, the IMF recommends that Mexico:

  • Strengthen Systemic Liquidity and Crisis Management Framework:
    • Review liquidity risk mitigation framework for development banks
    • Explore options to enhance emergency lending authority (ELA) framework
    • Strengthen mechanisms for financial contingency arrangements while preserving resolvability and cost-effective resolutions
  • Introduce Statutory Bail-in Powers and eliminate barriers to effective use of deposit guarantee scheme and bridge bank tools
  • Shorten Resolution Planning Cycle for Systemically Important Banks (D-SIBs) and midsize banks, and eliminate impediments to their resolvability

Financial Development Issues

The IMF also recommends that Mexico:

  • Broaden Scope of Regulated Fintech Activities and finalize implementation of open finance
  • Establish National Climate Finance Strategy and set ambitious climate finance targets for development financial institutions

Addressing Climate Risks

Mexico is facing two structural transitions, including the transition to a lower carbon economy, which could affect earnings in carbon-intensive industries and banks that lend to them. Rising climate physical risk could impact the financial sector, but there are also opportunities for green finance.

Conclusion

The IMF’s recommendations aim to enhance Mexico’s financial stability by strengthening its liquidity and crisis management framework, promoting financial development, and addressing climate risks. By implementing these measures, Mexico can mitigate potential downside risks and ensure a stable and resilient financial system.

“As Mexico faces significant economic and financial risks, it is essential that policymakers take proactive steps to address these challenges,” said an IMF official.