The Banking Sector Rescue in Mexico

Abstract

In Mexico the December 1994 peso devaluation provoked a profound economic downturn in that country and revealed a fragile banking sector. Fearful that the financial system would collapse under a rising level of past due loans, the Mexican government mounted a rescue of the banking sector by intervening in the daily operations of some problem banks while establishing a series of capitalization and restructuring programs available to all banks. ; This article examines Mexico's bank rescue efforts (1995-98) with a particular focus on the role of the deposit insurance fund, the Bank Fund for the Protection of Savings. According to the author, the governmental rescue programs prevented a systemic collapse of the banking sector but cost more than $55 billion dollars. The rescue was not entirely successful in restoring the banking sector's credit functions to a productive role in the Mexican economy. ; The article also attempts to place the overall rescue effort within a larger context by looking at its economic and political consequences. The Mexican experience suggests that country-specific factors can profoundly affect the success of government policies. The outcome of the bailout in Mexico was significantly shaped by the process of political democratization under way there. The polemical debate surfacing out of the legislative battle over the costs of the bank rescue demonstrates the need for governments to pay more attention to political matters, even when the problems appear economic or technical in nature.

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