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 renunciat...

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Main Authors:	Giugale, Marcelo, Korobow, Adam, Webb, Steven
Format:	Publications & Research
Language:	en_US
Published:	World Bank, Washington, DC 2015
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

id	okr-10986-21456
recordtype	oai_dc
spelling	okr-10986-214562021-04-23T14:04:02Z A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach Giugale, Marcelo Korobow, Adam Webb, Steven 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 subnational finances regulatory framework risk management incentives local officials federal funds markets bank loans credit ratings interest rates creditworthiness institutional framework credibility capital adequacy default rates 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. 2015-02-13T19:39:31Z 2015-02-13T19:39:31Z 2000-06 http://hdl.handle.net/10986/21456 en_US Policy Research Working Paper;No. 2370 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper Latin America & Caribbean Mexico
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	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 subnational finances regulatory framework risk management incentives local officials federal funds markets bank loans credit ratings interest rates creditworthiness institutional framework credibility capital adequacy default rates
spellingShingle	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 subnational finances regulatory framework risk management incentives local officials federal funds markets bank loans credit ratings interest rates creditworthiness institutional framework credibility capital adequacy default rates Giugale, Marcelo Korobow, Adam Webb, Steven A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
geographic_facet	Latin America & Caribbean Mexico
relation	Policy Research Working Paper;No. 2370
description	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.
format	Publications & Research
author	Giugale, Marcelo Korobow, Adam Webb, Steven
author_facet	Giugale, Marcelo Korobow, Adam Webb, Steven
author_sort	Giugale, Marcelo
title	A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
title_short	A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
title_full	A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
title_fullStr	A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
title_full_unstemmed	A New Model for Market-Based Regulation of Subnational Borrowing : The Mexican Approach
title_sort	new model for market-based regulation of subnational borrowing : the mexican approach
publisher	World Bank, Washington, DC
publishDate	2015
url	http://hdl.handle.net/10986/21456
_version_	1764448315139686400

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

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