The Mexican Banking System 1982-2002

1. The Mexican Banking System 1982-2002 Stephen Haber Stanford University

2. Mexico’s bank privatization Three stylized facts • The bankers paid 3.5 times book value in 1991 • The banks failed 4 years later • Mexican banks were sold to foreign banks Stephen Haber, Stanford University

3. What caused this outcome? Was it: • A problem of institutional design? • The macro shock of a peso devaluation? Stephen Haber, Stanford University

4. Central argument • The fundamental problem of Mexico’s bank privatization was its design: • Banks were protected • Undercapitalized • Inefficient • Could not recover loans Stephen Haber, Stanford University

5. Context of bank privatization Bankers faced several problems: • Government not constrained • Property rights poorly defined and not enforced • No credit reporting Stephen Haber, Stanford University

6. Bankers… So then, what did bankers require. • To be compensated for expropriation risk Protection against foreign and domestic competition • But bankers didn’t grasp how severe problems of property right enforcement and lack of debtor information were Stephen Haber, Stanford University

7. … These goals were consistent with the interests of the government: • Maximize revenue from privatization • National (not foreign owned) banking system. • The government achieved both of these goals; it got 3.5 times book value. Stephen Haber, Stanford University

8. The bankers got a protected market Privatization Stephen Haber, Stanford University

9. Herfindahl-Hirschman index Stephen Haber, Stanford University

10. What is interesting is that this has been the same since the 1940s Stephen Haber, Stanford University

11. The bankers got a high return on equity Stephen Haber, Stanford University

12. And a modest return on assets Stephen Haber, Stanford University

13. Basel Standards The implication is that the banks are undercapitalized Capital assets ratio Stephen Haber, Stanford University

14. Not only were they undercapitalized, banks were inefficient Stephen Haber, Stanford University

15. Banks could not recover loans • Banks had difficulties enforcing property rights. They did not realize this early on. • So, they plunged into the credit markets. Even before 1994 they were amassing lots of unrecoverable loans. Stephen Haber, Stanford University

16. Total Loans (pesos of 2000) Stephen Haber, Stanford University

17. NEW ACCT. STANDARDS PRIVATIZATION Non-performing loans to total loans Stephen Haber, Stanford University

18. … • They were also finding that they could not recover collateral Stephen Haber, Stanford University

19. Repossessions Stephen Haber, Stanford University

20. Insider Lending • One response was to insider lend. • Mexican bankers had done that for a hundred years and it worked! (Maurer, 2001 and Del Angel, 2002) • This time, Bankers turned out to be worse debtors than non-related borrowers (La Porta, Lopez de Silanes and Zamirripa, 2002) • The government tried to limit insider lending. But, these rules were easily flouted (La Porta, Lopez de SIlanes and Zamarripa, 2002). Stephen Haber, Stanford University

21. End outcome… • Banks were too big too fail, so they were bailed out. • Banks needed to be recapitalized, so sold to foreign banks. • But, this is not a happy ending because banks still lend very little. Stephen Haber, Stanford University

22. Banks’ portfolio Stephen Haber, Stanford University

23. Total Loans (Million pesos of 2000) Stephen Haber, Stanford University

24. Loans/GDP Stephen Haber, Stanford University