A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach

Faced with weak sub-national finances that pose a risk to macroeconomic stability, Mexico's federal government in April 2000 established an innovative incentive framework to bring fiscal discipline to state and municipal governments. That framework is based on two pillars: an explicit renunciation of federal bail-outs, and a Basel-consistent link between the capital-risk weighting of bank loans to sub-national governments, and the borrower's credit rating. In theory, this new regulatory arrangement should reduce moral hazard among banks and their state, and municipal clients; differentiate interest rates on the basis of the borrower's creditworthiness; and, elicit a strong demand for institutional development at the sub-national level. But its access will depend on three factors critical to implementation: 1) Whether markets find the federal commitment not to bail out defaulting sub-national governments credible. 2) Whether sub-national governments have access to financing other than bank loans. 3) How well bank capital rules are enforced.

Bibliographic Details

Main Authors:	Giugale, Marcelo, Korobow, Adam, Webb, Steven
Language:	en_US
Published:	World Bank, Washington, DC 2000-06
Subjects:	accounting, bank capital, bank lending, bank loans, banking supervision, banking system, bankruptcy, bankruptcy laws, banks, borrowing, business cycles, capital formation, collateralization, commercial banks, competitive markets, contingent liabilities, cost of capital, credit markets, credit ratings, current expenditures, debt, Decentralization, demand curve, demand elasticity, deposits, development banks, disposable income, equilibrium, expected value, externalities, externality, financial markets, financial performance, foreign exchange, GDP, gross revenue, Inelastic Demand, institutional development, interest rate, interest rate effect, interest rates, macroeconomic stability, mandates, marginal cost, marginal revenue, market forces, moral hazard, municipal governments, municipalities, negative externalities, oil, opportunity cost, profit maximization, public debt, public good, public services, rating agencies, regulatory framework, regulatory regimes, return on equity, revenue sharing, risk assessments, risk of default, subnational finances, subnational governments, technical assistance, transparency, voters, zero elasticity, risk management, incentives, local officials, federal funds markets, creditworthiness, institutional framework, credibility, capital adequacy, default rates,
Online Access:	http://hdl.handle.net/10986/21456
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