A New Model for Market-Based Regulation of Subnational Borrowing: The Mexican Approach
26 Pages Posted: 20 Apr 2016
Date Written: November 1999
Abstract
To bring fiscal discipline to state and municipal governments, Mexico's federal government has established a two-pillar framework that explicitly renounces federal bail-outs and establishes a Basel-consistent link between the capital-risk weighting of bank loans to subnational governments and the borrower`s credit rating. Whether the framework succeeds will depend partly on market assessments of the government's commitment to enforce bank capital rules and refrain from bailing out defaulting subnational governments.
Faced with weak subnational 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 subnational 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 borrowers' creditworthiness; and elicit a strong demand for institutional development at the subnational level.
But its success will depend on three factors critical to implementation: · Whether markets find the federal commitment not to bail out defaulting subnational governments credible. · Whether subnational governments have access to financing other than bank loans. · How well bank capital rules are enforced.
This paper - a product of the Mexico - Country Department and Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the subnational underpinnings of sustainable, national economic framework. The authors may be contacted at mgiugale@worldbank.org, akorobow@worldbank.org, or swebb@worldbank.org
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Federalism and the Soft Budget Constraint
By Yingyi Qian and Gérard Roland
-
Fiscal Aspects of Evolving Federations: Issues for Policy and Research
-
Fiscal Management in Federal Democracies: Argentina and Brazil
By William Dillinger and Steven B. Webb
-
Intergovernmental Fiscal Relations in Leningrad Region
By Roy W. Bahl
-
Subnational Bailouts in Germany
By Helmut Seitz
-
Decentralization in Regional Fiscal Systems in Russia: Trends and Links to Economic Performance
By Lev Freinkman and Plamen Yossifov
-
Size and Soft Budget Constraints
By Ernesto Crivelli and Klaas Staal
-
Size, Spillovers and Soft Budget Constraints
By Ernesto Crivelli and Klaas Staal
-
Decentralization and Fiscal Management in Colombia
By William Dillinger and Steven B. Webb
-
Problems of Soft Budget Constraints in Intergovernmental Relationships: The Case of Italy