Who Regulates Wal-Mart's Bank in Mexico?

I made a promise, yesterday, that I would give you "more on the subject of Wal-Mart banking" today. And so, I point you to a new paper by the ever-astute Anna Gelpern, who's discovered something of a loophole in international banking regulations. The problem relates to Adelante, the new bank that Wal-Mart is setting up in Mexico.

As long as Adelante remains Wal-Mart’s only banking venture worldwide, the Mexican authorities will have sole responsibility for regulating and supervising it. Because it is Wal-Mart’s first banking venture worldwide, the corporate headquarters in Bentonville, Arkansas will likely take a keen interest in the new bank. But Wal-Mart’s Mexican hosts—formally the “home” regulator of its banking operations—have at best indirect leverage over its unregulated U.S. parent. This raises the possibility of a supervisory gap, where no authority has a comprehensive view of the entire corporate structure containing the bank.

Indeed, the way that Adelante is set up, the Mexican regulators will regulate only Adelante, the subsidiary: they won't even have access to Wal-Mart de Mexico, let alone Wal-Mart in the US.

Gelpern quotes Mexican central bank governor Guillermo Ortiz as saying that international conglomerates today make credit policy at the parent level, driven by global strategy and country risk perceptions. That's true, but at least a bank like Citibank, which is huge in Mexico, is also very closely regulated at the parent level as well. In the US, no bank regulators have any interest whatsoever in Wal-Mart. Gelpern teases out the worst-case scenario:

A business like Wal-Mart might be tempted to ride the consumer lending boom in Mexico, using its Mexican bank subsidiary in the short term to make up for flagging U.S. sales. A further rapid, large-scale credit expansion in a sector already growing by over 30% a year could easily turn unsustainable. A rash of consumer defaults could have systemic financial and political implications in Mexico. Moreover, should the lending boom go bust, or in the event of a macroeconomic shock of the sort that regularly befall the emerging markets, the bank subsidiary may seek liquidity from Mexico’s Central Bank. Should the bank fail, it would have a claim against Mexico’s deposit insurance fund.
Here the parent retailer’s size and political power become all-important. As the country’s largest private sector employer, Walmex would be in an unusually strong position to demand support from the Mexican government by threatening to abandon the bank along with its labor-intensive retail operation. Neither foreign banks operating in Mexico, nor Mexican retailers that have opened banks, have similar leverage. Citibank has no shops; Azteca cannot leave.

The most interesting thing about Gelpern's paper is that she concludes this is a problem without a solution: while the present situation is hardly ideal, there's no obvious way of fixing it. There are regulatory patches which could be imposed, but they would likely weaken Mexico's standing, possibly to the point at which the Mexican authorities wouldn't be allowed to let Wal-Mart do any banking at all, even if they wanted to.

This is "an important case study in financial globalization," says Gelpern – and it remains to be seen whether it will be a positive one.