Banking on Mexico: Hector Rangel Domene, president of the Mexican Bankers' Association, talks about the citigroup/banacci deal, foreign ownership and the future of Mexico's banks. (Close Up).

How do you view Citigroup's surprise purchase of Banacci?

The Citigroup-Banacci purchase demonstrates the confidence that exists in the Mexican financial system. I believe it will help accelerate the banking sector's recovery process and will stimulate other banks as well, not just Banamex.

How advanced is Mexico's banking sector?

I think it's very advanced. Physically, we have more than 7,000 bank branches throughout the country, and more than 15,000 automatic tellers. Technologically, we have introduced telephone- and Internet-based banking services that allow electronic transfers and transactions, but there is still much to be done, and we're a long way from the stage where you can have a bank branch on your mobile phone. It would also be worth reviewing the possibility of allowing clients to open accounts in U.S. dollars in Mexican banks in the near future.

Has the increased availability of alternative credit sources and savings/investment options in recent years provided more competition for banks?

Yes, and I think increased competition is a very good thing. There are more specialized organizations dealing with a specific sector of the economy or a specific product or need, and that's useful for consumers. We welcome competition.

What about the increase in foreign ownership of Mexico's banking sector?

This stems directly from the 1995 crisis and the situation that followed. Many banks experienced intervention or closed or liquidated in the fallout. The banking sector needed new capital, and had to get it from abroad, as billions of dollars of capital were lost. With the new capital, the banking sector has created a solid, efficient system.

What safeguards are there now against a repeat of the 1994/1995 crisis?

Today's banking scenario is very different to that of 1995. Since the banking system has adopted international standards, there is much greater transparency in the way banks manage their accounts and greater prudence among the banks in authorizing credit and loans. There is also greater political and economic stability with inflation and interest rates under control. As a result there are far less non-performing loans, and the banks have been re-capitalized.

Are banks willing to finance the infrastructure needed for economic growth?

Yes. Banks have the strength, resources and will to lend the government and companies the money to finance these projects. In 2000, demand for credit increased among consumers by 20% and by 7% among companies.

What role should the government and state-owned lending institutions play in the financial sector?

The state must stop participating directly in the financial sector. It should not be a competitor with commercial banks, but should provide services that complement what the commercial banks do.

In what way?

For example, the government should transform public lending institutions into second-floor banks, so they can act as a guarantor. Today, their lending policies are very unclear and heavily politicized with little or no commercial objectives. In some cases they're nothing more than subsidies in disguise. Government lending institutions are too lax in their financing criteria, and they have had some lending programs that have failed spectacularly.

But so have the commercial banks in Mexico...

Yes ... but we have learned from past failures.

Has the new banking legislation approved by Congress this year helped?

Yes. The new legislation is generally quite good. The government has been gradually improving conditions under which banks operate in this country. The situation for banks is now stronger and safer than it was a few years ago.

Is it desirable for the CNBV (National Banking Regulator) and IPAB (Bank Savings Protection Institute) to merge?

Yes. We want to see just one banking sector regulator--currently we have seven. We should be following the British banking model, which has just one: the Financial Services Authority. The FSA supervises and regulates all banking-related activities, including financing, insurance, mortgages, investment banking, etc.

What else needs to be done?

There are various issues pending. We want to streamline costly and excessive regulations and procedures and see more self-regulation. We would also like to have more flexibility to expand the range of financial activities we can cover, such as long-term deposits, and address the amount of quotas paid to IPAB.

What about electronic banking?

It's becoming more important. There are already more than I million users of e-banking services via the Internet in Mexico. In 2000, a law was approved covering e-commerce and e-banking activities.

Dean Ilott is Mexico City bureau chief of Business News Americas, where this interview first appeared.