Mexico’s Controversial Central Bank Bill Was Delayed. Here’s Why

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In an eleventh-hour decision, Mexico’s congress put the brakes on a controversial bill that would have forced the central bank to buy dollars from local banks, even if their origin was dubious.

The legislation had already passed the senate last week and was scheduled for debate in the lower house on Tuesday, the final day before Christmas recess. Lawmakers from the ruling party of President Andres Manuel Lopez Obrador delayed the vote after heavy opposition from Banxico, as the central bank is known, as well as global banks from HSBC Holdings Plc to Bank of America Corp.

But that’s not the end of the bill. Legislators vow they’ll discuss it next month and bring a reworked version to the floor in February.

Here’s what you need to know about the legislation and why it’s so contentious:

What would the bill do exactly?

The bill, if passed in its current form, would require Banxico to act as the buyer of last resort for local banks that are having trouble selling their dollars back to the U.S. due to money laundering controls. Mexico’s central bank would add the dollars that it bought to its international reserves.

U.S. banks have increasingly severed relationships with Mexican financial institutions to protect themselves from sanctions following money laundering allegations against HSBC and Wachovia Corp.

That’s not a problem for banks operating in Mexico with correspondent entities abroad, but it crimps business to some domestic institutions, which can’t easily unload dollars.

Why are Banxico and global banks so concerned?

Banxico officials have complained that the legislation risks forcing the central bank to buy cash of dubious origin. The problem for policy makers is that many of the dollars circulating in Mexico come from drug trafficking or other illicit activities.

In a call on Monday morning with the lower house’s Finance Committee members, Mexico’s top bankers fretted that the bill could lead to money laundering sanctions on the central bank by international entities.

Because the dollars would be bought without the usual discounts, it would also act as a magnet for illicit money from abroad, drawing cash “from all the oligarchs of the world,” said Sergio Luna, a former chief economist at Citigroup Inc.’s local unit Citibanamex.

Alberto Ramos, the chief Latin America economist at Goldman Sachs Group Inc. in New York, said the quality of Banxico’s balance sheet may deteriorate because physical dollars flowing in can’t actually be used by the bank to intervene in currency markets, unlike U.S. Treasuries.

“There’s no silver lining,” Ramos said in an interview. “We’re looking at this with some concern. Who are they trying to help here?”

Why are proponents of the bill supporting it?

The rationale given by legislators backing the bill is that it would help migrant workers send dollars in cash back to Mexico and make it more affordable for them to exchange U.S. currency during visits to their home country. Those receiving cash from tourists would also benefit.

Officials at the central bank counter argue that just 1% of the money sent from the U.S. is in cash, with the rest sent via digital transfers. The central bank offered to work with legislators to come up with a solution for banks who are having trouble offloading excess dollars, which has become a growing problem in Mexico.

Read More: Mexico Postpones Contentious Banxico Bill Until February

Who is pushing for this legislation?

One senator publicly claimed that the bill has been pushed by conglomerate Grupo Salinas. The group is controlled by Mexico’s third-richest man, Ricardo Salinas Pliego, who is also a supporter of Lopez Obrador.

Banxico deputy governor Jonathan Heath said in a tweet that it wasn’t worth changing the law to favor just one company, especially one with a negative record with the U.S. Securities and Exchange Commission. The tweet appeared to refer to Salinas’s empire, which includes bank Banco Azteca. A Grupo Salinas spokesperson said that while the company has a positive view of the law, it doesn’t take responsibility for it.

Read More: Mexico Central Banker Says Contentious Bill Would Aid One Firm

What happens next?

The legislation will be discussed in January by lawmakers, policy makers, banks and migrant groups and a modified draft will be presented in February. Lawmakers still want better conditions for Mexican migrants to send remittances home, the author of the bill, senate majority leader Ricardo Monreal, said on Tuesday.

In an interview before the bill was delayed, lower house majority leader Ignacio Mier said lawmakers in his party have discussed options such as removing the obligation of the central bank to buy the dollars, or capping the amount of cash it needs to purchase.

President Lopez Obrador, for his part, said the postponement will provide time to reach a consensus on the bill, while also adding that fears of its impact on Banxico’s autonomy were overblown.

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