The Banking Sector Rescue in Mexico

14 Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Third Quarter 1999 The banking sector’s problems were not quickly surmountable. Immediate government intervention helped shore up the system and began improving bank balance sheets, but past due loans remained at high levels and credit provision remained low. The continued poor performance of some banks compelled authorities to expand their systemic restructuring efforts through new interventions and the forced sale of some banks. Resolution of the bank rescue was further complicated by the fact that Mexico was also undergoing political liberalization. The governing Institutional Revolutionary Party (PRI) lost its long-time control of Congress in 1997, forcing it to seek the approval of opposition parties for new legislation. These bank rescue programs carried huge financial costs. By early 1998, the price tag for the bank rescue efforts, which took four years to complete, had risen to $55 billion, equal to around 15 percent of 1997 gross domestic product (GDP).1 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 (FOBAPROA) and shows how the rescue was successful in stabilizing the banking sector but failed to revitalize it as the nation’s financial intermediary. In terms of evaluating the bank restructuring efforts, this article uses the definition provided by Dziobek and Pazarbasioglu (1997). They define the goal of restructuring efforts as twofold: “to restore the financial viability of the banking system (restore solvency and sustainable profitability); and to restore the system’s intermediation capacity and an appropriate level of banking services relative to aggregate economic activity” (1997, 7). The article also attempts to place the overall rescue effort within a larger context by looking at its economic and political consequences. The article first provides a short background discussion of important developments in the Mexican E L I Z A B E T H M C Q U E R R Y 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.