The Banking Sector Rescue in Mexico
ELIZABETH MCQUERRY The author is a senior economic analyst in the Latin America Research Group of the Atlanta Fed’s research department. She thanks Leslie Elliott Armijo, David Gould, Frank King, Mary Rosenbaum, and members of the Latin America Research Group for their helpful comments and suggestions.
HE DEVALUATION OF THE MEXICAN PESO IN DECEMBER 1994 PROVOKED A PROFOUND ECO-
NOMIC DOWNTURN AND REVEALED A FRAGILE BANKING SECTOR. ALTHOUGH MEXICO HAD
ALREADY LIBERALIZED MANY PARTS OF THE ECONOMY AND PRIVATIZED STATE-RUN BANKS, T MANY BANKS STILL HAD LAX MANAGEMENT, AND ALL BANKS OPERATED WITHIN A WEAK ACCOUNTING AND SUPERVISORY ENVIRONMENT. 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 THAT INCLUDED INTERVENING IN THE DAILY OPERATIONS OF SOME PROBLEM BANKS WHILE
ESTABLISHING A SERIES OF CAPITALIZATION AND RESTRUCTURING PROGRAMS AVAILABLE TO ALL BANKS.
The banking sector’s problems were not quickly This article examines Mexico’s bank rescue efforts surmountable. Immediate government intervention (1995–98) with a particular focus on the role of the helped shore up the system and began improving bank deposit insurance fund, the Bank Fund for the balance sheets, but past due loans remained at high lev- Protection of Savings (FOBAPROA) and shows how the els and credit provision remained low. The continued rescue was successful in stabilizing the banking sector poor performance of some banks compelled authorities but failed to revitalize it as the nation’s financial inter- to expand their systemic restructuring efforts through mediary. In terms of evaluating the bank restructuring new interventions and the forced sale of some banks. efforts, this article uses the definition provided by Resolution of the bank rescue was further complicated Dziobek and Pazarbasioglu (1997). They define the goal by the fact that Mexico was also undergoing political of restructuring efforts as twofold: “to restore the finan- liberalization. The governing Institutional Revolution- cial viability of the banking system (restore solvency ary Party (PRI) lost its long-time control of Congress in and sustainable profitability); and to restore the sys- 1997, forcing it to seek the approval of opposition par- tem’s intermediation capacity and an appropriate level ties for new legislation. of banking services relative to aggregate economic These bank rescue programs carried huge financial activity” (1997, 7). The article also attempts to place costs. By early 1998, the price tag for the bank rescue the overall rescue effort within a larger context by look- efforts, which took four years to complete, had risen to ing at its economic and political consequences. $55 billion, equal to around 15 percent of 1997 gross The article first provides a short background dis- domestic product (GDP).1 cussion of important developments in the Mexican
14 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 banking sector in recent years and then describes the were removed, many nonbanking components of the peso crisis and its consequences for domestic banks. banks such as insurance companies and brokerage The next section describes the different programs insti- houses were sold back to the private sector, and the pro- tuted by the Mexican government to prevent a sys- vision of credit by state-owned development banks was temwide collapse of the banking sector. This discussion curtailed (Maxfield 1997). is followed by an analysis of the impact of the banking Nevertheless, the banks remained under govern- sector rescue on Mexico’s democratizing political sys- ment control for a decade. During this period, govern- tem. The last section attempts to evaluate the bank res- ment ownership was complicated by the fact that many cue in Mexico by looking at bank performance institutions were not healthy when they were national- indicators and by comparing the Mexican case with sim- ized, and the poor performance of the Mexican economy ilar experiences in other countries. during the 1980s never permitted any real improvement. The Mexican Congress commissioned an indepen- Low oil prices, high debt service payments, rising infla- dent audit of the governmental bank rescue as part of tion, and financial repression by political authorities kept the compromise legislation that brought the bank the banks from becoming effective financial intermedi- bailout to a formal close in December 1998. The audit, aries. By 1988 when Carlos Salinas de Gortari took office known as the Mackey Report, is both an evaluation of as president, the gov- government efforts as well as the first publicly available ernment was poised to institutional history of the bank rescue. The findings of get out of the banking the Mackey Report are cited throughout. business. Salinas, a Immediate government U.S.-trained technocrat Background Developments and an ardent supporter intervention helped shore acing an incipient debt crisis, Mexican President of economic liberaliza- up the system and began José López Portillo nationalized the banks in 1982 tion, was eager to follow improving bank balance Fin an attempt to assert the government’s ability to the same liberalizing control the direction of the financial system. Although policies set in motion by sheets, but past due loans policy there had favored domestic over foreign capital in President Miguel de la remained at high levels, the banking sector since the 1940s, many politicians at Madrid. Almost immedi- and credit provision the time of nationalism now feared that private finan- ately, Salinas began to cial interests were becoming too powerful. The nation- lay the legal framework remained low. alization decree brought fifty-eight banks under the for returning the banks umbrella of the state and enshrined the concept of to private hands and state-owned banks in the Mexican constitution. Only also worked to open up two banks were spared nationalization: a branch of the the financial sector to foreign participation (Gruben and U.S.-based Citibank (the only foreign bank operating in McComb 1993; Maxfield 1997). Mexico at the time) and the union-owned Banco Obrero Mexico privatized the remaining eighteen banks in (Welch and Gruben 1993). 1991 and 1992, and the actual process took less than a This policy direction was short-lived, however, as year and a half as a sale was held approximately every the next administration began to liberalize Mexican three weeks. The banks brought in an average of more financial markets shortly after the banks had been than three times their book value and nearly fifteen nationalized. Not surprisingly, nationalization of the times the previous year’s earnings, for a total of more banks was not well received by domestic or internation- than $12 billion (“Mexico” 1993; Gruben and McComb al capital markets, and leaders were faced with the 1993). At the time, the privatization process was con- challenge of revitalizing the economy after the debt cri- sidered a success for the government in its efforts to sis. According to Maxfield (1997), the next generation reorder the Mexican economy and was hailed as being of Mexican presidents understood “that sustained eco- efficient, transparent, and lucrative (“Mexico” 1993). nomic recovery from the nation’s fiscal and balance-of- Over time, however, the manner in which the banks payments crisis would require reestablishing Mexico’s were privatized has undergone considerable scrutiny, investment and creditworthiness” (95–96). often being blamed for setting the stage for subsequent Over the course of the next four-year period, policy problems in the sector. The Mackey Report cited the mechanisms were put in place that paved the way for “price maximization” focus of privatization as an liberalization of the banking sector. Exchange controls “underlying cause of the banking crisis” (1999, 179).
1. Using government data from June 30, 1998, Mackey estimated the cost to be nearly $64 billion (1999). Peso figures are cal- culated in dollar terms using the exchange rate on December 31, 1998 (U.S.$1:9.9 Mexican new pesos).
Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 15 Analysts have argued that the high prices paid for tions of core regulatory requirements in Mexico, com- the banks probably meant that the new owners had pared with international standards, provided another expectations of operating in an environment of reason that potential problems were undetected or restrained competition, which would allow them to poorly understood. The Mackey Report faults the defin- recoup their large investments (Gruben and McComb ition of capital used by banking authorities in determin- 1993). The study by Rojas (1997) of Mexico’s postpriva- ing capital adequacy, asserting that it “may significantly tization banking sector reached similar conclusions. overstate the quality and quantity of the capital of Rather than the increase in competition that would nor- Mexican banks” (1999, 129). mally be expected to take place among the newly priva- tized banks, there was only a small increase in Banks and the December 1994 Peso Crisis competition in the credit market compared with the lthough competition in the sector was probably period when banks were owned by the government. greater than the new bank owners expected, Competition for deposits, on the other hand, fell sharply AMexico’s newly privatized banks did have the lux- over the same period. Rojas concludes that these data ury of operating in an environment of foreign exchange “suggest a tendency toward tacit collusion, which would stability. Since 1991, Mexican monetary policy had allow Mexican banks to increase profits at the expense maintained a managed exchange rate that was set on a of a smaller surplus of banking customers and of an oli- slow depreciation schedule. Chart 1 demonstrates this gopolistic distortion in the financial intermediation period of currency stability in the first part of the process” (1997, 71). decade and its abrupt end in 1994. This stability began Even though competition among banks did not to erode in March 1994 when the peso first came under heat up the banking sector as would be expected in the pressure, and monetary authorities intervened to prop period after privatization, credit was being offered on a up the exchange rate as it reached the upper limit of broader basis. Domestic commercial bank lending to the currency band. These interventions hedged against the private sector grew at an annual rate of 25 percent a more rapid decline in the currency’s value, but they between late 1988 and late 1994. Mortgage loans were unsuccessful in deterring further pressure. increased 47 percent per year, direct store credit for Managing the foreign exchange rate also meant costly consumer durable goods ballooned by an annual rate of declines in international reserves, which fell by almost 67 percent, and credit card liabilities grew at a yearly 80 percent in 1994, dropping sharply from $29 billion in rate of more than 30 percent (Gil-Diaz 1998). “[B]anks February to only $6 billion in December. actually lent so much that they passed the point that The exchange rate pressures in March followed the marginal cost exceeded marginal revenue. . . . [T]here assassination of PRI presidential candidate Luis Donaldo was much evidence to suggest banks began to expand Colosio earlier that month. The peso continuously depre- consumer credit despite limited information on the ciated over the course of 1994, and in December the gov- creditworthiness of the borrowers” (Gruben and ernment allowed the peso to float because it was no McComb 1993, 25). Banks also overlooked some regula- longer able to prop up the exchange rate. The value of tions and “did not devote enough attention to minimiz- the currency fell by more than half in the three-month ing the problems of asymmetric information that were period between December 1994 and March 1995. inherent in the market” (Gavito and others 1998, 97). While the direct impact of the devaluation on bank There were other indications that potential prob- balance sheets was minimal because Mexican regula- lems were developing in the sector. In a February 1993 tions limit banks’ foreign currency exposure, the indi- survey on Mexico, the Economist alerted readers that rect consequences were considerable. A study by the the potential problems facing the financial sector Organisation for Economic Cooperation and Develop- included an expansive growth rate in credit allocation, ment highlighted three important impacts: the drop in problems associated with high interest rates and cur- economic activity, rising interest rates, and the immedi- rency risk, and rising past due loans. The article also ate demand for dollars (1995). Economic activity plum- noted that one analyst had forecast a banking crisis meted in 1995; real (inflation-adjusted) GDP growth within eighteen months (Economist 1993). dropped to –6.2 percent from a positive 4.4 percent Why then were these problems not mitigated or growth rate in 1994. The official unemployment rate resolved in a timelier manner? Much of the explanation doubled to 7.6 percent in the first eight months of the seems to lie in the quality and extent of the regulatory year. The fall in economic activity was devastating for apparatus. While Mexican authorities had designated the banks as the value of depositors’ peso holdings was parts of its financial apparatus to overseeing the recent- slashed in dollar terms and many borrowers lost their ly privatized banks, hindsight shows that the agencies jobs, leaving them unable to repay their loans. were unprepared and resources were insufficient for The hike in interest rates further impinged on bor- the magnitude of the problems. Different interpreta- rowers’ ability to meet their obligations. Although the
16 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 linked debts. brought aboutasharpriseinthepesovalueofdollar could r to commercialinstitutionssothattheyandtheirclients central bank,hadtotemporarilymakedollarsavailable r Mexican borrowershadanacuteneedfordollarsto ally unwillingtorolloverdollar 2. loans intheMexicanbanking sector the Mexicanbankingsector mor Thus, ratherthanbeingacatalyst,thedevaluationwas its originindevelopmentsthathadoccurr ration inthebankingsectorafterdevaluationhad T Rising PastDueLoans ing demandfordollars.As to earninter and madeborrowingprohibitive,r inter ter of1997.Alongwiththeeconomicdecline,high not dropbelow20percentagainuntilthesecondquar 1994, itroseto58percentbythemiddleof1995anddid prime lendingratewasalmost17percentattheendof Source: Haver epay theirloans.TheBancodeMéxico,thecountry’ timated duringthis period.Seethesectionon“Preventing SystemicRisk”foradiscussion ofthenewreportingmethodology Subsequent revisions toloan-classificationguidelines stronglysuggestthatnonperforming loansweresubstantiallyunderes e ofafinal,cripplingblowtomanyinstitutionsin Chart est ratescausedahugeincr blow tothebankingsector effects ofthepesodevaluationdealtacrippling he pr epay for Pesos per dollar 2, whichshowstheincidence ofpastdue evious sectionsshowthateventhoughthe est income.Theothermainimpactwasris Analytics 4 12 8 0 January eign obligations.Thedevaluationalso 1990 CHAR T 1 . eign lenderswer ease inpastdueloans , muchofthedeterio Mexican Peso–U.S.DollarExchangeRate,1990–98 educing banks’ability -denominated debts, , r eveals thatther ed befor e gener e. Federal Reser e s - - - - - r problems inthebankingsectorandsituation growth haddroppedsharply jumped evenfurtherto12.3percentandr first fullyearafterthepesocrisis,pastdueloanshad time ofthepesocrisis(1999).Byend1995, the entir many banksinsolvent.TheMackeyReportassertsthat have sufficientcapitaltocoverlosses.Thissituationleft many clientstor cr lending inordertoincr incr 4.4 percentr ing acrisis.In1994theeconomypickedupagainwith Mexican economywasnotconsider 2.0 percentin1993,butthedeclinewasgradualand growth didslowconsiderablyfrom5.1percentin1990to wer befor in 1993whentheyconstituted7.3percentofallloans, sur when economicgrowthpicked upagainbutpastdue loans wer although declining.Thedeep problems withpastdue high befor eal economy edit toobroadly January es appear e clearsignsofstrainbefor eased nonetheless. 1995 ve Bankof Atlanta These datasuggestar This patternstronglysuggeststhatthepracticeof e risingto9percentbytheendof1994. e bankingsystemwasundercapitalizedatthe e evenmor e thepesocrisis,whengrowthwaspositive ed. Nonperformingloanswer , showingthatpastdueloanswer eal GDPgrowth,butpastdueloans . Afterthedevaluation,inabilityof epay loansmeantthatbanksdidnot ECONOMIC REVIEW e visibleinthe1996–98period ease marketshar elative disjunctionbetween . e for eign exchangepr ed tobeexperienc Thir d Quar January e hadextended 1999 e alr ter 1999 2 Economic eady high e alr eal GDP eady es 17 . - - - 18 crisis occurr have contributedtothesector’ and McComb(1993)outlineseveralfactorsthatmay important roleinthebankingsector’ percent, 6.7and4.8percentr loans continuedathighlevels:growthr Source: MexicanNationalBankingandSecuritiesCommission it cultur loans. Mexicanbankingr banking, andloosebankingr risky borrowers,problemsassociatedwithuniversal though 1998. so, pastdueloansr tion tobanking,mayhavecontributed tothesector’ tutions tooperatearangeoffinancial servicesinaddi r of anorganization.Onlyin1995 wer cern theextentofself-lendingamong thediffer problems becauseitsometimes makesitdifficulttodis criteria. to encouragetheuseofsoundcr weakly competitiveenvironment.Thiscultur needs, orwer in whichcasetheyfacilitatednationaldevelopmental the 1990sbankswer and balancesmaybelargelyduetothefactthatprior States” (1993,26). their banks’behaviorasfullydothoseoftheUnited “do notimposeuponshar tributed toaweakbankingenvironmentinthatthey equir Less stringentr The universalbankingstructur The absenceofacr Federal Reser ed topr e capableofeffectivelyidentifyingandr Percent total loans ed. Theseincludethelackofastrongcr 3 e heldinprivatehandsbutoperateda 12 4 8 0 esent consolidated financialr ve Bankof Atlanta emained above11percentfrom1996 e eitherownedbythegovernment, egulatory standardsalsoplayedan 1990 edit cultur egulations mayalsohavecon eholders theconsequencesof ECONOMIC REVIEW s fragilitywhenthepeso egulations forpastdue edit historyaslending e withstrongchecks e, whichallowsinsti s problems.Gruben e financialgroups espectively CHAR esumed to5.1 e didlittle eports in ent parts Thir ejecting T 2 . Even d Quar ed s ter 1999 - - - - - Past DueLoans 1994 been conductedinamor that, inhindsight,theprivatizationprocessshouldhave ment structur r and possiblytheincentive,forexcessiverisktaking bilities, wouldbemet,gavethebanksopportunity the governmentthatallliabilities,includingdepositlia themselves, coupledwiththeimplicitguaranteegivenby ment inwhichboththenewandprivatizedbanksfound sector debtor r began toimplementaseries ofr T Pr the sector’ vision andr self-lending. itself andobviouslywasnotconcernedwiththenotionof taking shape.Thestatehadlittleincentivetosupervise period whenfinancialgroupsandconglomerateswer be aconsequenceofstatecontrolbanksduringthe r existing agencies.Whiletheseomissionsmayhavebeen (CNBV) wasestablishedinMay1995byfusingtwopr Mexican NationalBankingandSecuritiesCommission ed, banksupervisionwasweakandineffectivebefor among r order tomakeiteasierseelinkagesandmoneyflows emoved theincentivetoputinplacepropermanage egulatory failur eventing SystemicRisk The MackeyReporthighlightsweaknessesinsuper . Despitethis early action,theabsenceof an after thefor banking authoritiesintonew roles. V he December1994devaluation pr elated entities.Althoughsomer escue programstoshor s problems:“Theweaksupervisoryenviron egulation asanimportantfactorincausing es. Ther es, weaksupervisionandr eign exchangecrisis,thegovernment egulatory authoritieshaveagr e prudentmanner”(1999,96). e upthefragilebanking 1998 ecapitalization and egulations exist essed Mexican egulation may ery shortly e the eed e e ------, established regulatory oversight agency made it virtual- program had strong incentives for banks to increase ly impossible for authorities to fully discern the breadth their capital to 8 percent because they were being of the crisis. In fact, the magnitude and implications of charged higher interbank interest rates and were pro- problems only appeared to increase upon deeper inves- hibited from issuing other subordinated debt until they tigation, leading authorities to adopt an incrementalist exited the program. approach by launching new support programs and Thus, PROCAPTE became a short-term program improved regulatory measures as new problems arose. with strong incentives for participating institutions to This section describes the most salient of these efforts.4 act expeditiously to improve their capital ratios. Government officials have stated that they were Nevertheless, the program did not fully function as fully aware of the dangers presented by a meltdown in intended. “The market considered participation as a the banking sector. One participant in setting up the sign of weakness or as a prelude to intervention. . . . rescue later wrote that “the authorities had to act Because of the negative promptly to provide liquidity and maintain the integrity public perception [of of the banking system; otherwise, deterioration of the PROCAPTE], banks at- system’s financial situation (or some of its segments) tempted to avoid parti- While the direct impact of could have spread quickly to the business sector” cipation by increasing (Gavito and others 1998, 98). A government document their capital on their devaluation on bank bal- clearly describes the imperative for action: “The deci- own. However, many ance sheets was minimal sion was made with the objective of preventing the banks were unable to because Mexican regula- grave consequences that the breakdown of the banking raise capital during this system would have had for all Mexicans” (Fondo period. As a result, tions limit banks’ foreign Bancario 1998b, 2). additional measures currency exposure, the The Mexican banking system was unaccustomed to were required following indirect consequences high levels of nonperforming loans. A World Bank study PROCAPTE” (Mackey estimated that past due loans as a percentage of total 1999, 191). were considerable. loans were very low during the 1980s—never rising The second pro- above 2.9 percent (Morris and others 1990).5 Although gram was the Loan the study also asserts that this figure probably underes- Purchase and Recapital- timates past due loans during this period, past due loan ization Plan, which exchanged delinquent loans held by levels above 10 percent after the peso crisis would cer- banks for government-issued bonds. The program is tainly have been considered shockingly high. often referred to as FOBAPROA, after Fondo Bancario Nevertheless, as will be seen later, the jump in the share de Protección al Ahorro, the deposit insurance agency of past due loans to 12.3 percent between 1994 and 1995 that administered it (see the box). The basic purpose of may not have fully demonstrated the extent of the sec- the program was to clean up bank balance sheets and tor’s problems. improve asset quality at virtually no immediate cost to Responding to this environment, the Mexican gov- the government. The bonds issued to the banks were ernment established a series of specialized stabilization ten-year, zero-coupon bonds. Interest payments, based and restructuring programs. Two principal programs on domestic treasury rates, were payable at maturity. As were designed to help banks increase the asset side of a condition of this program, bank shareholders injected the balance sheet in the face of rising past due loans. one peso of new capital into the bank for every two The Temporary Capitalization Program (PROCAPTE) pesos of bad loans transferred to the FOBAPROA trust. was targeted to help banks increase their capital-to- Banks were also required to set aside reserves valued at assets ratio above 8 percent. Some banks already met around 25 percent of the total debt transferred, but they this requirement but others did not. PROCAPTE could not profit from the transaction because the bonds allowed banks needing additional capital to issue five- were not tradable. year convertible bonds, which were purchased by The Mackey Report concluded that the Loan Pur- FOBAPROA. Participating banks agreed to surrender chase and Recapitalization Program had mixed results. their institution to banking authorities if they were The scope of the program was not sufficient for the sys- unable to convert their debt into equity capital. The tem’s capitalization needs, necessitating the inclusion
3. The return to growth in the Mexican economy is unusual in comparative terms. In a review of banking crises in more than 200 countries, Caprio (1997) found that countries that have a banking crisis tend to experience a growth slowdown in the years following insolvency. 4. Some material in this section was adapted from McQuerry and Espinosa (1998). 5. The World Bank study covers only the 1980–87 period. Some of the bank indicators are from World Bank staff estimates.
Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 19 BOX
FOBAPROA was created in 1990 as part of the Credit depositor in an individual institution. Although Mexican Institutions Law governing the legal framework for law does not guarantee full deposit insurance, 100 percent Mexico’s new universal banking structure. Its funding coverage of deposits had been an implicit and established comes from fees levied on commercial banks as well as practice of the Mexican government (Mackey 1999). monies from the central bank. The central bank also The original purpose of FOBAPROA was for it to act administers funds under the control of FOBAPROA. The preventively, addressing potential problems in commercial entity is still governed by a committee of representatives banks. FOBAPROA’s mandate was broadened in 1996 from the Finance Ministry, the Bank of Mexico, and the beyond deposit insurance responsibilities to make it a CNBV. As a deposit guarantee agency, FOBAPROA differs bank rescue agency (Mackey 1999). Later these responsi- from its U.S. counterpart, the Federal Deposit Insurance bilities were expanded further to include government Corporation (FDIC), in that deposits are insured to 100 intervention of individual banks as well as the resale of percent of their value, regardless of ownership or size of assets, much as the Resolution Trust Corporation (RTC) the account. The FDIC guarantees only $100,000 per did during the U.S. savings and loans debacle.
of additional resources. Also, some modifications had to percentage points, roughly equivalent to 42 and 46 per- be made because banks were unable to meet some of cent of all past due loans. the program’s reporting requirements. Mackey also con- In January 1997, the CNBV changed its reporting cluded that the supervision of the program was “ade- methodology as it required banks to adopt new account- quate” but that the results were uneven. “For five of the ing practices. The new system, which reported past due twelve banks that participated in this program the level loans only on a system-total basis, was another effort by of additional capitalization was sufficient, while the Mexican authorities to enhance the performance and remaining seven banks have continued to require addi- respectability of the sector. In requiring that domestic tional reserves and capital, with the net result being banks use a variant of the generally accepted account- that the effectiveness of the program was limited” ing principles (GAAP), the globally recognized account- (1999, 195). ing standard, banking authorities imposed a much These limitations were reflected in the fact that greater degree of disclosure on banks, made their bal- past due loans continued to increase even as bad loans ance sheets more directly comparable with banks in were taken off bank balance sheets. Chart 3 shows past other countries, and improved reporting of nonperform- due loans in the two-tiered format used by CNBV bank- ing loans. ing authorities through the end of 1997. The first cate- The new rules highlight how nonperforming loans gory, system totals, represented the share of past due went underreported in the old system. Under the new loans in the entire banking system. The category of measures, known as Mexican GAAP, the value of a past nonintervened banks reported them only in those insti- due loan is reported as the total unpaid balance of the tutions in which the government had not intervened loan. Under the old accounting system, only missed pay- and not taken over day-to-day operations. The data in ments were entered as past due and the outstanding Chart 3 shows an increasing concentration of bad loans balance could still accrue interest. Also, under Mexican in the banks that had been intervened, providing addi- GAAP, the outstanding balance is considered past due tional impetus for continuation of the bank rescue. after a set number of payments (varying by type of loan) Although CNBV data did not provide a breakdown for is missed. In this way, the new rules greatly expanded past due loans in the intervened banks, the figure the scope of the past due loan category. should be similar to the difference between past due A factor tending to reduce delinquency rates in loans for the entire banking system and that of the non- past due loan portfolios was the series of debtor relief intervened banks. Initially, in 1994, the difference programs offered by the government that focus on the between the two categories was only 1.7 percentage specific needs of borrowers, in contrast to the bank res- points. Calculating this figure shows that roughly 19 cue programs that sought to support the needs of the percent of all delinquent loans was held by the inter- banking institutions. These programs included protec- vened banks. By 1995 and 1996, however, the difference tion for borrowers against interest rates rising above a between the two categories had grown to 5.2 and 5.6 certain level depending on the type of loan as well as
20 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 CHART 3 Past Due Loans, Nonintervened Banks vs. System Totals
12
8 cent total loans
4 Per
0 1994 1995 1996 All Banks Nonintervened Banks
Source: Mexican National Banking and Securities Commission
restructuring loans so that borrowers would pay larger Mexican experience with banking sector restructuring interest and principal payments later, when the econo- but also provide perspective for countries facing similar my was assumed to have recovered. Other programs dilemmas. specifically targeted mortgage holders, agricultural bor- The financial sector reform measures sent to the rowers, and small and medium-sized business. These Mexican Congress by the Zedillo administration aimed programs were successful in preventing even larger to strengthen the soundness and supervision of the increases in banks’ past due portfolios even though they banking system as well as to finalize the governmental may not have been the most effective channel to bene- rescue of the banking sector by formally transferring fit the debtors themselves (Mackey 1999). assets in the FOBAPROA fund to public debt of the fed- eral government. The package also sought to consoli- Mexico’s New Debt Politics date supervision and regulation responsibilities by ust as the devaluation had spilled over into a frag- granting autonomy to the CNBV and moving it from the ile banking sector, Mexico’s political system was jurisdiction of the finance ministry to the Bank of Jalso affected by the tensions spawned by the bank- Mexico. Another key measure intended to strengthen ing sector rescue. While costs of the bank rescue the banking sector sought to eliminate most restrictions mounted, uncertainty also grew over their financing, on foreign investment in the banking system, allowing and much anticipation and speculation preceded the the country’s largest banks to form partnerships with government’s March 1998 announcement of a plan to foreign banks. assign these costs. However, rather than any sense of Finally, the package sought to formally dissolve collective relief, a political uproar resulted when the FOBAPROA and create two new institutions to carry out Zedillo administration proposed that the costs of bank its primary functions. An entity called the Asset restructuring be incorporated as national debt. The Recovery Commission (COREBI) would resell assets controversy was all the more noteworthy because, for acquired by FOBAPROA, and the Deposit Guarantee the first time in modern Mexican history, the political Fund (FOGADE) would replace FOBAPROA as the opposition mounted an effective legislative rebellion nation’s deposit guarantee agency and reduce the against the ruling PRI. This section reviews the govern- amount covered by governmental guarantee (Fondo ment’s proposal, details the costs associated with the Bancario 1998c; 1998d). FOBAPROA program, and attempts to explain how the While the Zedillo administration package con- proposal became such a contentious political issue. tained a wide-ranging set of reform measures, the single These details not only provide further insight into the point about granting the president the authority to
Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 21 22 wer inter loans, largelybykeepingcurr debtors whohadattemptedtomakepaymentsontheir thr had fallenbymor objected tothisproposalgiventhatpercapitaincome which canbeassumedaspublicdebt.ManyMexicans give theexecutiveofficerighttograntguarantees, r by farthemostcontroversial.Grantingthisauthority assume liabilitiesheldbyFOBAPROAaspublicdebtwas online at esident Zedillowaseffectivelyaskingforthe US$ billions 10 20 0 30 Januar ve Bankof Atlanta 1996 ed delinquent. .banxico.org.mx/public_html/fmi/finbc/fbmenu.html> e than20percentinMexicothe ecoverable loansandabsorbthemas ess fornearlyninemonths?T y "Financiamiento CanalizadoporlaBancaComercialalSectornoBancario";compiledfromdataavailable ed toFOBAPROAbecausethey escue waspr CHAR ECONOMIC REVIEW ent withtheenlarged , whichcarried an e inpublichands. T 4 edicated onthe December 1996 e effectively Funds T ent loans Thir wo pri s pro d Quar ransfer ter 1999 - - - - sur contingent governmentliability implicit guaranteeofpaymentandwasconsider environment. Thesechangesbroughtanincr tion fromalongperiodofPRIdominancetomultiparty troversial. Thepolitical-legislativeclimatewasintransi absorb theseloansaspublicdebt. government hadnotexplicitlystatedanintentionto authority toassumepublicdebtinMexico.Also,the bonds, estimated atnearly$34billion.Thisfigur largest partofther Mexican Congr figur the bankingsectorr billion and$65attheend of1998. the totalcostofbankr on thefor mor commonly attachedtoFOBAPROAis,however fund gr this period,thefacevalueofassetstransferr the beginningof1996throughyear the growthinvalueofFOBAPROA down ofthebankr FOBAPROA liabilities,thenextsectioncontainsabr delicate politicalquestionssurroundingther cy toMexicanpolitics.Befor testation, aswellagr e pointoutthatthepr e thantheamountofloansshownher r Political factorsalsomadetheproposalshighlycon Chart Composition ofFOBAPROADebts. es derivedfromdocuments pr ed toFOBAPROA ew from$11billionto$32billion.Thepricetag December eign exchangerateusedtoestimatethecosts, 1997 5 outlinesthefourmaincostcomponents of ess bytheZedilloadministration. The escue costs. escue wasthenetcostofFOBAPROA escue asofFebruary1998,based on eater expectationoftranspar e enteringadiscussionofthe escue rangedbetween$55 esident didnothavethe . Opponentsofthemea December -end 1998.During 1998 esented tothe ’ s portfoliofrom Chart e. Depending ease incon esolution of ed intothe 4 traces e iscal , much ed a eak en ------culated from the difference between the fund’s liabili- CHART 5 Breakdown of Banking Sector Rescue ties ($55.8 billion) and estimated value of its assets Costs as of February 1998 ($22.1). Among its assets, FOBAPROA holds a mix of shares of intervened banks, cash received for banks Toll Road sold, and fixed assets like real estate, all of which have Bailout 3% FOBAPROA differing expected recovery values (Garcia-Cantera, Other and Intervened Debtors’ Banks Burbridge, and Juárez 1998). Programs 61% The other components were costs incurred in car- 21% rying out the debtor rescue programs ($11 billion) men- tioned in the section on preventing systemic risk, costs already realized ($8 billion), and the governmental res- cue of the toll roads (almost $2 billion). The Zedillo administration proposal asked Congress to transfer the Costs entire cost of the bank rescue to public debt, not just Already Incurred the loans transferred to FOBAPROA. 15% The government hoped to reduce the program’s final cost by selling some of the assets under the control of FOBAPROA in a secondary market. The government had set up an institution similar to the Resolution Trust Source: GarcÍa-Cantera, Burbridge, and Ard (1998) Corporation called the Asset Valuation and Sales (VVA) agency. By selling the loan-servicing rights and the con- fiscated collateral to domestic and foreign investors, amassed $42.5 billion in bad loans; Colombia, $40 bil- both the government and the banks would be relieved of lion; and Venezuela, $57.2 billion (Rojas-Suárez and the burden of debt collection as well as some portion of Weisbrod 1996). the debt. In the case of the banks, they would not have Political Questions Surrounding FOBAPROA. The the potential liability of a write-off if the loans were fact that the banking rescue took place at a particu- fully unrecoverable. The government would also benefit larly delicate conjuncture in Mexican history was the from supporting the creation of a secondary market for second reason the Zedillo administration’s proposal to the resale of assets, which had not previously existed. nationalize the banking rescue costs became so contro- While the effort ultimately had only short-term success, versial. Mexico was undergoing democratization in its establishment of the VVA signaled the government’s political system at the same time that it liberalized the intention to apply a market logic to this aspect of the economy. This process exposed the country to a myriad bank bailout. of new pressures. When elections in 1997 ended the The VVA’s first auction, containing some of the high- dominance of the PRI in the lower house of Congress, er-quality loans in the portfolio, recouped an impressive the Mexican legislature also became subject to compe- 49 percent of face value. This amount was significantly tition after having been effectively ruled by a single above the government estimate of an average recovery of party since 1929. 30 percent of face value. However, other auctions were The PRI held a majority in all elected political postponed for lack of bidders, and in August 1997, short- offices prior to the 1997 elections and exercised a vir- ly after the program became fully operational, the gov- tual monopoly in domestic political outcomes. After the ernment quietly folded the asset resale organization into elections, the governing PRI still held 39 percent of FOBAPROA after the VVA director unexpectedly resigned votes in the Chamber of Deputies but lost its majority (“False Start?” 1997; Brothers 1997). and was forced to seek at least minimal cooperation from How does the cost of Mexico’s bank rescue compare one of the opposition parties in order to pass legislation. with efforts of other countries? By any standard, the $55 The National Action Party (PAN), often referred to as the billion price tag attached to Mexico’s bailout of the party of business, now held 28 percent of the seats, and banks is considerable. However, even at 15 percent of the left-leaning Party of the Democratic Revolution GDP, Mexico’s rescue is not among the costliest in Latin (PRD), a party started in 1988 by disgruntled PRI mem- America. The fiscal costs of the 1980–82 rescue in bers, garnered 26 percent. This plurality of parties and Argentina totaled 55 percent of GDP, Chile’s 1981–83 votes forced the Mexican Congress to function more as a crisis represented 41 percent of GDP, and Uruguay’s deliberative body rather than a sanctum for ratifying 1981–84 problems totaled 31 percent of GDP (Caprio PRI proposals. and Klingebiel 1996, cited in Stiglitz 1998). Similarly, in The far-reaching implications of the financial terms of the absolute value of bad loans, Mexico’s $32 reform proposals immediately generated the opposi- billion is not among the highest in the region. Argentina tion’s ire and spawned a complicated political debate. Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 23 The crux of the congressional debate centered on the debate over how to finalize FOBAPROA held up the 1999 legality of the Zedillo administration’s issuance of budget for nearly nine months, but a compromise solu- FOBAPROA bonds backed by government guarantees. tion was reached at the eleventh hour. The new legisla- Opposition parties contended that, because in Mexico tion did not formally nationalize the costs of the banking only Congress can authorize the assumption of public sector rescue as requested by the Zedillo administration debt, the government did not actually buy debts from but included an agreement that the annual costs would the banks. Instead, the opposition argued, the debts be paid for by the government in each year’s budget. were guaranteed by the government and placed into Legislators agreed to disband FOBAPROA but declined to contingency. Thus, when the banks and the government formally separate out its asset resale responsibilities traded loans for FOBAPROA notes, the transactions were from the new deposit insurance agency. Assets under the carried out in the form of individual private contracts. custody of FOBAPROA will be transferred to the new The government, on the other hand, argued that Bank Savings Protection Institute (IPAB). The bonds the very real possibility of a crisis in the banking sector issued by FOBAPROA will be replaced by new ones that created a set of circumstances that demanded that it are tradable on the open market. The banks will hold the act quickly and decisively. Banking authorities contend- bonds, and the Mexican government will continue to pro- ed that the Zedillo administration acted legally when it vide the promissory guarantee. The government still transferred loans to the auspices of FOBAPROA (the hopes to recover part of the rescue’s cost by selling the government), and the March debt-nationalization pro- loans and collateral on the secondary market. posal ratified only those acts already carried out by the Legislators did not approve the Zedillo administra- government. “Legally, the guarantee [for the bank tion’s proposal to grant autonomy to the CNBV. The final loans] granted by the Federal Government is based on legislation did contain a provision to carry out an audit of the General Law of Public Debt and, without a doubt, several aspects of the bank rescue, including the loans justified by the clear effects and consequences which under FOBAPROA’s custody. Any loans in the FOBAPROA permitted the preservation of economic and political portfolio determined to have been illegally obtained stability in the country in these difficult times” (Fondo would be wholly returned to the issuing banks. Three new Bancario 1998b, 2). A government document asserted debtor-assistance programs were also approved along- that by transforming these loans into public debt, they side provisions to gradually do away with existing limits could be repaid “in the best terms possible with the low- on bank ownership by foreigners in Mexico. est interest rates” and that not recognizing these debts “implies denying reality and putting off the solution to Evaluating Mexico’s Bank Rescue this problem onto future generations of Mexicans” he political controversy over the proposal to (Mexican National Banking 1998b, 3). assume the costs of the banking sector rescue as While some in the opposition acknowledged that Tnational debt was clearly unintended. Similarly, the government had little choice but to intervene as it this section, which attempts to gauge the impact of the did, they could not support any attempt to transform bank rescue on banks themselves, shows that the bank such a large sum of bank liabilities into public debt. rescue did not have the expected result of reinvigorat- They argued that nationalization of this debt would only ing the banking sector. However, when compared with increase the burden on poor Mexicans while seeming to bank rescues in other countries, the Mexican experi- provide debt relief to Mexicans wealthy enough to ence shared many of the characteristics found in more obtain bank credit. The move would also appear to successful efforts. Two types of standards are evaluated. absolve rich bankers from the consequences of making First, the discussion examines some performance mea- bad lending decisions. sures of Mexican banks to access the impact of the gov- Some opposition legislators also alleged that ernmental rescue on the banks’ operational effectiveness. FOBAPROA’s bank rescue activities favored PRI sup- Then the Mexican banking rescue is compared with the porters and that officials who devised the bank rescue results from a study of best practices from other coun- were parties to corruption. The PRD released docu- tries’ experiences with systemic bank restructuring. ments alleging that some wealthy bankers who made Performance. One measure of the aggregate suc- sizable campaign contributions to the PRI’s 1994 presi- cess or failure of government programs is to look at a set dential election bid later had large sums of bad debt of common performance indicators, such as capital ade- transferred to FOBAPROA. Although the government quacy, profitability, and liquidity. Asset quality, another denies any such activity, these accusations resonated commonly used performance indicator often measured well with Mexicans who believe that the PRI is a corrupt by past due loans, has already been reviewed above.7 institution (Smith 1998).6 These data are shown in the table. By all accounts, the political implications of the gov- Probably the single most important traditional indi- ernment’s banking sector rescue were intense. The cator for bank soundness is capitalization, measured 24 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 T ABLE 1 Performance Indicators of Mexican Banking System 1993 1994 1995 1996 1997 1998 Net Capital/Risk-weighted Assets 9.93 9.72 10.79 13.06 17.22 13.33 Return-on-Average Assets 1.66 0.49 0.31 –0.64 0.43 0.03 Loans/Deposits 110.36 116.46 130.08 119.08 101.66 103.11 Source: García-Cantera, Burbridge, and Ard (1999). All figures are end of period. here by net capital over risk-weighted assets. A bank’s bank assets are being used to generate earnings, which capitalization level is extremely important because it in turn can be used to fund administrative operations as measures how prepared the institution is for unexpected well as generate revenue for shareholders. Whereas a developments, like the peso crisis, when borrowers are solid return on assets in the United States would be 1 unable to make payments or bank assets decline in value. percent, the average Mexican bank was attaining much According to the official data presented here, the average more than this amount in 1993. Average profits fell Mexican bank has been well above the commonly accept- abruptly with the peso crisis, and they were negative in ed Basle Accord standard of an 8 percent ratio of capital 1996. While profitability improved after the sharp to risk-weighted assets. These data show only a slight fall decline in 1996, banks have not yet been able to return at the end of 1994. The ratio improved by a full percent- to solid profitability despite the removal of a massive age point in 1995, and it climbed even further over the amount of bad loans from the system. Bubel and Skelton next two years before dropping off in 1998. Indeed, these (1998) observe that the loans for bond swaps did not data suggest that Mexican banks have been well capital- fully clean up balance sheets, thereby preventing banks ized (if not overcapitalized) all along and beg the ques- from returning to lending and earning profits from this tion of why banks needed government support. traditional source of income. Both the PROCAPTE and FOBAPROA programs Liquidity is another important performance indica- were primarily designed to help banks boost their capi- tor. Bank liquidity, here measured by the ratio of loans talization levels. As discussed above, the type and com- to deposits, is a demonstration of how quickly a bank position of capital allowed by banking authorities in could convert its assets to cash. The more deposits a Mexico has received sharp criticism (Mackey 1999). bank has, the more liquid it is unless the bank has tied Another analysis of bank capital valuation in Mexico up those deposits in longer-term instruments like loans asserts that the ratios are overvalued because they do and securities. In general, a lower ratio means a bank is not fully account for the high degree of potential losses more liquid (that is, has more short-term assets on from bad loans. The ratio would be much lower if prop- hand), but large banks might be comfortable with a erly adjusted for risk (Thorne 1998). higher ratio because these institutions generally have Bank profitability, the second indicator, is often access to other sources of cash or borrowing. Although measured by return on assets. This ratio shows how well the data oscillate a good bit over the six-year period 6. The strict bank secrecy laws in Mexico inhibited a more thorough examination of the debts transferred to FOBAPROA and allegations of corruption. Although the Zedillo administration furnished some documents to Congress for its internal inves- tigation, it refused to comment on the content of documents that were released to the public, citing that all information was protected by the secrecy statutes. The Mackey Report concluded that about $7.3 billion of the loans transferred to FOBAPROA did not meet the criteria established for inclusion in the Loan Purchase and Recapitalization Program and that just over $600,000 of those loans was of illegal origin (1999). 7. Figures presented here are system aggregates and represent the performance of the average bank. Performance indicators should be interpreted with a high degree of caution. System standards are always more meaningful when compared with a peer group, but in Latin America, comparison is not easily achieved because countries use different accounting standards and exhibit varying degrees of regulatory compliance. Similarly, comparisons with the United States should also be made with caution. In addition to accounting differences, U.S.-based banks operate in very different regulatory and macroeco- nomic environments. A comprehensive analysis of the Mexican banking sector would examine a larger range of perfor- mance indicators than presented here, including risk-weighted measures such as bank spreads, loan growth, and interbank debt ratios. See Rojas-Suárez (1998) for a discussion of why these measures may be more appropriate measures of risk in emerging market economies. Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 25 shown, they demonstrate the banks’ poor liquidity. Best Practices. This article also compares bank Thus, despite FOBAPROA’s efforts to remove bad loans restructuring efforts in Mexico to those of other coun- from the system, the average bank in Mexico has con- tries as a final measure of the rescue’s effectiveness. siderably more loans than deposits, making the system The twenty-four-country study of responses to systemic vulnerable to potential shocks or bank runs. banking crises by Dziobek and Pazarbasioglu (1997) Bank performance measures tell us about opera- provides the baseline for evaluation. The authors exam- tional effectiveness. Data on the allocation of credit by ined a range of indicators (performance and intermedi- the banking system are also used to measure the banks’ ation indicators and mix of policy instruments) in the capacity as a financial intermediary. Chart 6, which selection of countries and then drew out a series of best traces the provision of credit by the banking system from practices from the more successful cases. The list of late 1995 through the end of 1998, shows that total successful policies is more representative of the range financing steadily increased throughout the period, of successful policies than an exhaustive checklist. The growing from around $81 billion to $115 billion in study did not directly evaluate Mexico because it did November 1995 to year- not formally include countries in which bank restruc- end 1998. Financing to turing began after 1994. the private sector, how- The Mexican experience compares favorably with Despite authorities’ prompt ever, actually fell over the best practices of nations attaining substantial moves to implement this same period. On a progress in their bank restructuring efforts. Indeed, all restructuring programs, year-over-year basis, the but three of the fourteen policies identified as success- contraction in credit to ful by Dziobek and Pazarbasioglu were present to some none was successful in the private sector began extent in the Mexican case. The Mexican bank rescue substantially improving to ease only in late 1997. would rank highest in its efforts toward development of preexisting problems, As Chart 4 shows, the a comprehensive approach to a range of shortcomings government’s issuance (accounting, legal, regulatory, supervision), imposition such as high levels of of FOBAPROA bonds of operational restructuring techniques on banks, use delinquent loans and grew steadily during this of ongoing monitoring of bank operations, government insufficient capitalization. period. If these bonds financial support of insolvent banks, removal of non- are separated out, the performing loans from bank balance sheets, use of loan amount of credit being workouts to help recover some costs, and the return of supplied to the private positive economic growth. The presence of these poli- sector is much less. Subtracting the FOBAPROA bonds cies in Mexico promoted the government’s efforts to provides a more accurate snapshot of the banks’ per- restructure and rehabilitate the banks even if the formance as financial intermediaries because the results were uneven. FOBAPROA bonds are guarantees on past, possibly The Mexican example also exhibited other best unrecoverable credit issued, not new credit. Indeed, practices, but these were present to a lesser degree or, the Mexican government gradually took over loans in some cases, tended to have a negative effect on the equaling a quarter of the value of total loans outstand- outcome of bank rescue efforts. These areas were ing in the banking system through its issuance of prompt action by authorities within a year of crisis, des- FOBAPROA bonds. On a year-over-year basis, credit to ignation of a lead agency to coordinate efforts, central the private sector minus FOBAPROA notes did not bank disposition to provide short-term credit, and the begin to increase until three years after the devalua- existence of loss-sharing between banks and the public. tion in early 1998, only to have that figure fall again at As this article has shown, Mexican authorities did act the end of the year. quickly to design a restructuring strategy after the peso Another of the difficulties for the Mexican banking crisis, but they were not successful in initially recogniz- system in returning to the business of making loans is the ing the severity of the sector’s problems, and these concentration of bad-loan portfolios among the nation’s actions had to be followed by additional efforts to three largest banks. At year-end 1998, Banamex, improve system soundness. In Mexico’s case, because of Bancomer, and Serfin, which together controlled 55 per- its weak regulatory environment, authorities were poor- cent of assets in the banking system, held 48 percent of ly prepared for a rapid response. Similarly, despite the FOBAPROA bonds issued by the government. While authorities’ prompt moves to implement restructuring these bonds represent loans transferred off the three programs, none was successful in substantially improv- banks’ books, the banks must still make provision against ing preexisting problems, such as high levels of delin- 25 percent of the potential losses. Furthermore, two of quent loans and insufficient capitalization. these banks continue to have past due loan ratios above In Mexico, the FOBAPROA agency was clearly desig- the system average (Mexican National Banking 1998a). nated as the lead restructuring agency in the country’s 26 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 Ultimately began toincurbothr CAPTE) andtenyears(FOBAPROA),thegovernment antees tothebanksforperiodsoffiveyears(PRO bank supportprogramsbegantoextendfundsorguar loans wer program didnotproducefiscalcostsbecausethese produced positiver ment’ and impose100 percentofthelossesbackon the banks servative P FOBAPROA. Duringthecongr percent ofanylosseson loans transferr Program stipulatedthatbanks wouldbeliablefor25 bank r banks andthepubliccomplicated r sive tensionsintothenationalpoliticaldebate. cal costsforMexicantaxpayers,inturninjectingdivi tial for to thebanksbymakingdollarsavailableduringini r that FOBAPROAdidnotr r billions ingovernmentbondsandforassetr ing thedepositinsuranceagencyr Mexico’ supervision wasstillseparatedoutandheldbytheCNBV authority deposit insuranceagencyaswellther bank r online at egulatory environmentwasconfusedbymak US$ billions e r , theseprogramstranslatedintomassivefis AN soughttor , thequestionofloss-sharingbetween 40 80 epaid withinter 0 120 November 1995 ency crunch.Thismuch-neededeffort T 6 A wasdissolved.Furthermor .banxico.org.mx/public_html/fmi/finbc/fbmenu.html> esults. Mor esponsibility forbankr "Financiamiento CanalizadoporlaBancaComercialalSectornoBancario";compiledfromdataavailable elease itsr T eal andpotentialliabilities. eject thisloss-sharingformula rajector essional debate,thecon eover est. However ency esponsible forissuing ecords ordataonthe . , thedollar y ofCr esolution ofthe November 1996 egulation and estructuring , whenthe emoval and edit Pr e, thefact -liquidity ed to Financing tothePrivateSector ovisions, November1995–November1998 Federal Reser ------, by theMexican government tor financial systeminthatcountry pr Mexico wassuccessfulinattaining itsprimarygoalof Conclusion bank r problems inthesector which Mexico’ banks appropriate designoftheprivatization case. Aspr and Pazarbasiogluwer principal impedimenttopassingthefinallegislation. equation becameadelicatepoliticalquestionand the P avoided anynationalizationofbadbankdebts.Although (“Mexico’ shortcoming. Finally bank r sion ofadditionaldebtorr development ofstrategiesforeachproblem.Theinclu provide anadequate also lackedthepr ed” (1999,179). operations wouldbe‘r Mexico was“thatnobankswouldfailandthatbank policy down insolventbankswastheexactoppositeofanexit the practiceofbankingauthoritiestowardshutting eventing asystemicbr ve Bankof Atlanta The governmentalr Thr AN initiativewasunsuccessful,theloss-sharing . TheMackeyReportnotedthatthepolicyin . Muchevidencesuggeststhatthemannerin escue programsisalsoindicativeofthefailur less Financing toPrivateSector escue legislationisfurthertestamenttothis November ee ofthebestpracticesr 1997 s P FOBAPR eviously discussed,Mexicoclearlylackedan T AN ..”1998).Thisproposalwouldhave otal Financing s bankswer OA ECONOMIC REVIEW esence of Notes , thebankr diagnosis e largelymissingintheMexican egularized’ ratherthanliquidat . Theincr escue ofthebankingsectorin eakdown ofthebankingand e soldsetthestageforfutur elief initiativesinthefinal firm exitpolicies . Atthesametime,efforts ecapitalize and r of systemproblemsand estructuring inMexico emental natur November ecognized inDziobek 1998 Thir d Quar state-owned ter 1999 . Indeed, efurbish e ofthe e to 27 e - - domestic banks have failed to improve the sector’s finan- The Mexican experience also suggests that country- cial viability or its financial intermediation capacity. In specific factors can profoundly affect the success of gov- particular, the transfer of more than $30 billion in bad ernment policies. The outcome of the bailout was deeply loan portfolios off bank balance sheets had little effect in shaped by the process of political democratization under addressing fundamental problems in the banking sector. way there. The polemical debate surfacing out of the leg- Past due loans remained very high, and bank capitaliza- islative battle over allocating the costs of the bank rescue tion levels were still considered inadequate after four demonstrates the need to pay more attention to political years of bank rescue programs and billions in expense. matters, even when the problems appear economic or The review of performance indicators showed that the technical in nature. The ultimate resolution to the bank average bank requires additional enhancement before rescue may have been more easily reached had the the sector’s recovery will be complete, and Mexico’s use Mexican government presented the bank rescue to the of many best-practice policies in the banking sector res- public in a more transparent manner and proposed legis- cue did not correlate with a revitalization of the sector. lation more acceptable to a multiparty Congress. REFERENCES BROTHERS, CAROLINE. 1997. “Mexico: Focus-Spending Spree ———.1999. “Mexican Bank Reference Guide.” Salomon Underway in Mexico Asset Sale.” Reuters Business Briefing. Smith Barney Industry Quarterly 7 (January): 1–39. Reuters News Service, July 11. GAVITO MOHAR, JAVIER, AARÓN SILVA NAVA, AND GUILLERMO BUBEL, ROBERT V., AND EDWARD C. SKELTON. 1998. “Fiscal ZAMARRIPA ESCAMILLA. 1998. “Recovery after Crisis: Lessons Therapy: The Mexican Banking Industry in Rehab.” Federal for Mexico’s Banks and Private Sector.” In Mexico’s Private Reserve Bank of Dallas Financial Industry Issues (Fourth Sector: Recent History, Future Challenges. Edited by Riordan Quarter): 1–7. Roett. Boulder: Lynne Rienner Publishers. CAPRIO, GERALD, JR. 1997. “Safe and Sound Banking in GIL-DIAZ, FRANCISCO. 1998. “The Origin of Mexico’s 1994 Developing Countries: We’re Not in Kansas Anymore.” World Financial Crisis.” CATO Journal 17, no. 3. Available online Bank Policy Research Working Paper 1739, March. at 28 Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 “Mexico’s PAN Wants Banks to Take On FOBAPROA Risk.” SMITH, JAMES F. 1998. “Mexico Bank Bailout Stirs Furor over 1998. Reuters Business Briefing. Reuters News Service, Dealing, Costs Latin America.” Los Angeles Times, Sunday, August 26. August 30, sec. A, 1, home edition. Available online at ROJAS-SUÁREZ, LILIANA, AND STEVEN WEISBROD. 1996. “Banking Crises in Latin America: Experiences and Issues.” In Banking Crises in Latin America. Edited by Ricardo Hausmann and Liliana Rojas-Suárez. Washington, D.C.: Inter- American Development Bank. Federal Reserve Bank of Atlanta ECONOMIC REVIEW Third Quarter 1999 29