LATIN AMERICA-WIDE Trends and Developments Contributed by: Brian Minutti, Alejandro Carreño and Miguel Martínez Herrera, Legal Disruption
and borrowers, raising the cost of financing and limit - ing its long-term sustainability. The role of financial authorities in this context is nec - essarily ambivalent. Although private debt falls out - side the traditional scope of supervision, the growth of non-bank financial intermediation has led institu - tions such as the Bank of Mexico to monitor the risks associated with these segments more closely. How - ever, the variety of investment vehicles and the lack of standardised information make it difficult to develop accurate and timely diagnoses. The regulatory dilemma posed by private debt does not admit simple solutions. Excessive regulation could inhibit financial innovation and restrict access to credit for segments that depend on this type of financing, while the total absence of minimum standards per - petuates current weaknesses. The challenge is to move toward a proportional framework that strength - ens governance, transparency and market discipline without distorting the flexibility that has enabled the growth of private debt. Ultimately, the sustainability of the private debt market in Mexico will depend on its ability to evolve from a predominantly contractual model to a more institution - alised one. This implies greater professionalisation of administrators, a clearer separation of critical func - tions, a more conservative assessment of credit risk and a realistic understanding of the limitations of the legal framework. Private debt cannot and should not serve as a full substitute for bank credit, but rather as a complement that fulfils a specific function within the financial ecosystem. Conclusions The problem with private debt in Mexico does not lie in the existence of this instrument, but in the institutional conditions under which it has grown. Private debt has filled a real gap in business financing, but it has done so by transferring significant risks to the contractual sphere and relying on an institutional architecture that is still in the process of consolidation. The challenge for the Mexican financial system is to recognise the relevance of private debt, understand its limits, and promote its evolution toward a more transparent, dis -
ciplined and legally sound market capable of contrib - uting to economic development without compromis - ing financial stability. The challenge for the Mexican financial system there - fore lies in recognising the relevance of private debt as a structural component of corporate finance, clearly understanding its limits, and promoting its evolution toward a more transparent, disciplined and legally robust market. This requires not only improved con - tractual practices and stronger governance standards, but also a more realistic assessment of the conditions under which private debt can contribute sustainably to economic development without becoming an addi - tional source of vulnerability for financial stability. The silver lining is that only two aspects of private debt can provide for its progression and growth in developing markets like Mexico and, broadly, in Latin America, accelerating impact in the financial sector. • Legal structures – solid legal structures allow for better and more efficient risk management. Recent history and experience has shown that transac - tions that are correctly structured have outper - formed other transactions when recovering credit. This is achieved with solid sources of payment and properly structured guarantees. • Risk assessment – due diligence processes are important to correctly assess risk in private credit transactions. Local counsel can provide valu - able information on the good standing of debtors, including any sources of payment and guarantees. Continuous oversight is necessary to evaluate any changes in risk during the different stages of financing. Companies must understand the growth potential that can be achieved with private debt structures in devel - oping markets and start shifting towards having better governance and institutionalisation to access sound private debt. In addition, financial participants, includ - ing regulating authorities, jurisdictional authorities, banks, non-banking financial institutions and funds, each should encourage clear propositions from their sectors to promote responsible private debt mecha - nisms.
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