Well-developed financial markets are indispensable to modern economies. Countries with underdeveloped and ineffective financial markets face significant barriers to growth and competitiveness. Indeed, higher levels of financial service availability are generally associated with lower rates of poverty because credit creation facilitates development.

      Given the importance of well-functioning financial markets, surprisingly little attention has been paid to Mexico’s recent progress in laying the foundation for a world-class financial system. A series of quiet reforms — many enacted in just the past few years — points to a financial big bang in the making.

      A prominent example is securitization, which some consider financial innovation at its best. By pooling previously illiquid assets and selling their future income streams to investors, securitization unlocks value and promotes a free flow of capital, spreads risk and boosts credit availability for consumers and businesses. Mexico issued its first mortgage-backed security — for $178 million — in December 2003. Since then, the market has expanded to approximately $1.5 billion a year, a total expected to double over the next year, then double again in 2008.

      This rapidly growing market for mortgage-backed securities is a prime example of Mexico’s success in financial development. Not long ago, financing for home purchases was scarce, and obtaining it typically required a down payment of 50 percent or more for a relatively costly adjustable-rate loan.

      The development of a mortgage industry should boost Mexico’s economy by encouraging higher quality housing, increased savings and greater wealth creation. At the same time, making it easier to buy and sell homes will promote household mobility, a key factor in freeing labor resources to move from slow-growing to more dynamic parts of the country.

      Recent loan growth at Mexican banks has been robust in the three major categories. Consumer lending has risen dramatically for the past six years, albeit from a low base. Commercial lending, largely nonexistent since 1994, resumed growing in 2004, a movement expected to accelerate. Most remarkable, however, is the surge in home mortgage lending that began in 2005. The upturn reflects a continuing trend in Mexico’s home mortgage industry: explosive growth in the total number of mortgages originated by bank and non-bank lenders since 1999.

            Compared with the previous high-growth environment of the early 1990s, today’s lending risk is much better contained and monitored. The improvement results from advances in accounting rules, capital adequacy measures, loan classification requirements and auditing and risk management procedures — all of which now meet or exceed international standards...

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