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Mexico's central bank fumes over cash law as affront to its autonomy - Metro US

Mexico’s central bank fumes over cash law as affront to its autonomy

The logo of Mexico's Central Bank (Banco de Mexico) is seen at its building in downtown Mexico City

MEXICO CITY (Reuters) -Mexico’s central bank on Thursday hit back against a draft law moving through Congress, saying the legislation sold as a fillip for migrants jeopardized its independence and could force it to handle the proceeds of drug cartels.

Mexico’s Senate on Wednesday passed the bill that would make the Bank of Mexico (Banxico) buy up cash that commercial banks cannot return to the financial system. That, critics say, could mean the bank has to absorb money made by organized crime.

The law must still pass the lower house of Congress. President Andres Manuel Lopez Obrador, whose ruling National Regeneration Movement (MORENA) crafted the proposal, said it should be respected if it passes both chambers.

The tensions are the latest in a string of ructions that have arisen between Banxico and MORENA and Lopez Obrador on issues ranging from the use of its reserves to economic policy.

Late on Wednesday, Banxico sharply criticized the law, saying it would force the bank to undertake “high risk” operations that could put international reserves at risk and compromise its ability to safeguard the value of the peso.

Investors appeared unimpressed by the initiative.

The peso struggled against the dollar on Thursday after the Senate’s approval of the bill, falling by 0.8%.

Members of the Banxico board fired off more broadsides on Thursday, including Bank of Mexico Governor Alejandro Diaz de Leon, who told local radio the legislation was “very unwise” and “undermines the central bank’s autonomy.”

Diaz de Leon called on lower house lawmakers to hold talks with the central bank in a bid to rectify the initiative.

“We have the best disposition to collaborate with Congress, in this case the lower house, to be able to identify a more appropriate solution that does not put the bank or the fulfillment of its mandate at risk,” Diaz de Leon told Reuters.

He added that regulations to prevent illegal money from flowing through the banking system can only do so much.

“Risk can be mitigated, but not eliminated,” he said. “This risk would be transferred to the bank.”

MORENA lawmakers did not respond to requests for comment on whether the bill would be modified, and one person familiar with discussions said it looked likely to pass unchanged.

Meanwhile Gerardo Esquivel, another Banxico board member to sound the alarm, on Thursday urged people to read a Twitter thread by economist Valeria Moy that flagged the risks of drug traffickers’ cash entering the bank’s reserves.

MORENA denies the bill will encourage money laundering and says it will help poor migrant families disadvantaged by the financial system by making it easier for them to offload cash.

Critics say that irrespective of the legislation’s intentions, it risks pushing the central bank onto a slippery slope of increasing interference from lawmakers.

“This could end up being a Trojan Horse,” said Gabriela Siller, an economist at bank Banco Base, arguing the bill could put Banxico in the sights of international financial authorities. “It’s an unnecessary risk for the Bank of Mexico.”

(Reporting by Dave Graham Additional reporting by Anthony Esposito, Ana Isabel Martinez, Daina Beth Solomon and Sharay Angulo; Editing by Tom Brown & Simon Cameron-Moore)

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