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.