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By Michael Christie
MEXICO CITY, July 20 (Reuters) - An independent audit into Mexico's multibillion-dollar bailout of its banks after the 1994-95 peso crash found it would have been much cheaper if the government had been prepared to simply close failing banks.
In a report presented to Congress on Monday, Canadian auditor Michael Mackey said a willingness to shut the doors of ailing banks instead of trying to keep them afloat through bailouts would have contributed to the growth of a more stable and healthier banking system.
``In our opinion, had (banking regulator) CNBV acted and been permitted to act more decisively with respect to information regarding the precarious financial condition of many of the banks, the costs that have since been incurred maintaining insolvent institutions would have been substantially reduced,'' Mackey said in the report.
``In order to secure the overall health of the banking industry, it is, in our view, essential that (the Finance Ministry) allow banks, once identified as insolvent, to be wound up,'' he added.
Mackey's $20 million, six-month probe was presented to Congress on Monday and made available to Reuters by deputies of the ruling Institutional Revolutionary Party (PRI).
The auditor's task was to identify how much was ``illegal,'' and not simply irregular, of the $65 billion cost of bailing out the banks after the peso crisis buried them under defaults.
According to financial reforms passed last December, loans or transactions taken on by the now-defunct bailout fund Fobaproa, which are determined to be illegal, should be paid for by the banks responsible and not the taxpayers.
Mackey said he could not say exactly how many transactions were illegal. But he identified 72.7 billion pesos ($7.7 billion) in ``reportable transactions,'' or transactions he considered worth highlighting, some of which could be considered dubious.
Mackey concluded that Mexico's regulatory, accounting and supervisory environment were still weak and urged passage of several reforms to help the fragile banking system back to health.
They included giving creditors' greater protection and improving the bankruptcy process, both of which the government has proposed in bills sent to Congress but which are languishing ahead of the 2000 presidential election.
But one of Mackey's main conclusions seemed to be the necessity to shut down banks when they go bust.
Mexico has intervened in several small banks since 1995, closing some down and selling them to new owners.
But the government has shied away from winding up larger institutions, such as the country's third-largest bank, Serfin, which recently was given a $1.4 billion capital injection by the IPAB deposit guarantee agency that replaced Fobaproa.
Mackey said government fears that drastic measures could have resulted in a run on banks were unfounded because of 100 percent guarantees on deposits.
He said costs would have been lower, depositors would have been protected anyway, market discipline would have been established and moral hazard avoided.
In addition, the banking system was not in a state of systemic crisis and allowing the failures would not have resulted in capital flight, he said. Also, keeping banks afloat meant the banking sector remained overcrowded.