By Juan Montes and Anthony Harrup 

MEXICO CITY -- Mexico's lower house of congress on Tuesday postponed debate on a controversial bill that bankers and critics said would jeopardize the central bank's autonomy by requiring it to buy foreign currency in cash that banks are unable to put into the financial system.

Proponents argued the bill aimed to benefit Mexicans who receive remittances or tourist dollars in cash but can't exchange them or are forced to exchange them on the black market at unfavorable rates.

The central bank said the bill, as passed last week by the Senate, would put the country's $195 billion in reserves at risk because the bank could end up buying dollars from illicit sources.

Following sharp criticism of the proposal from the central bank, private banks and major credit-rating firms, lawmakers in Mexico's lower house, the Chamber of Deputies, abandoned plans to debate and vote on the bill Tuesday, the last day of the current legislative session. Both houses of congress plan to hold joint hearings with all interested parties to agree on a bill that could be voted on in the session starting in February.

"We're not giving up. We still want to go ahead, but at the same time we want to open a broad debate and want the Bank of Mexico to tell us how we can do this without hurting them," said Ignacio Mier, the majority leader in the lower house and a member of President Andrés Manuel López Obrador's Morena party.

The Mexican peso strengthened more than 1% against the U.S. dollar following the decision to postpone the vote.

Mr. Mier said lawmakers have asked the Bank of Mexico to make a proposal that would tackle the problem and at the same time respect the bank's autonomy and its reserves.

The proposed legal changes were widely seen by economists as one of the most anti-market actions under Mr. López Obrador's two-year-old administration. Relations with investors already have soured after the cancellation of a $13 billion Mexico City airport under construction, and the renegotiation of several gas pipeline contracts with private firms.

"Compromising the central bank's autonomy would undermine the cornerstone of Mexico's macroeconomic stability and a key strength of its sovereign credit profile," Moody's Investors Service said in a statement on Monday.

Other market participants warned of larger consequences on the international financial stage.

"One of the risks of the proposed law that would require the Bank of Mexico to buy up foreign cash is that it could lose access to Fed swap lines," said Carlos Cantú, an economist with the Bank for International Settlements, in a post on Twitter.

Bank of Mexico Gov. Alejandro Díaz de León told legislators on Friday that despite anti-money-laundering controls that limit the use of foreign cash in Mexico, there is a residual risk the bill would transfer to the central bank.

Only around $200 million of the $30 billion in remittances received in the first nine months of this year was in cash, or less than 1%. In that period, commercial banks captured around $4.7 billion in cash, of which all but $102 million were either placed with Mexican clients or repatriated to their country of origin though correspondent banks, Mr. Díaz de León said.

"We don't consider this to be a generalized problem of Mexican banks," he said.

He said only one institution had more than $10 million that it was unable to repatriate. The official was seen widely to be referring to Banco Azteca, owned by billionaire Ricardo Salinas Pliego, who is close to President López Obrador.

In a recent blog post, Mr. Salinas Pliego defended the bill passed by the Senate and rejected assertions it jeopardizes the central bank's autonomy or puts the bank at risk of buying drug money.

Several opposition lawmakers said Mr. Salinas Pliego lobbied for the bill in congress and pressured its sponsor, Senate Majority Leader Ricardo Monreal, and others to support it. Mr. Monreal flatly denied this.

A spokesman for Grupo Salinas, a conglomerate that includes Banco Azteca as well as Mexico's second-largest TV broadcaster and a popular retailer, had no comment.

The Bank of Mexico, one of the most orthodox in the region, has been a key pillar of Mexico's financial stability since it was granted autonomy in 1994 after a series of fiscal crises and peso devaluations that devastated the economy.

Since taking office in 2018, Mr. López Obrador has repeatedly said he respects central bank autonomy. But analysts warned that the Bank of Mexico bill could badly hurt Mexico's reputation on the international financial stage, increase peso volatility and damage his government credentials' before foreign investors.

The Association of Mexican Banks said the bill would damage the international trust won over many years by the Bank of Mexico and the banking system.

Write to Juan Montes at juan.montes@wsj.com and Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

December 15, 2020 16:59 ET (21:59 GMT)