The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98

56 Pages Posted: 10 Apr 1999 Last revised: 25 Jul 2000

See all articles by Anne O. Krueger

Anne O. Krueger

International Monetary Fund (IMF); Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 1999

Abstract

In this paper we analyze the evolution of the Mexican economy between 1995 and 1998. The remarkable quick recovery seen in aggregate activity has not been uniform across the economy. The tradable sector has grown strongly, while the non-tradable sector has recuperated only sluggishly. This asymmetric response is intimately linked with the severe credit crunch that Mexico has experienced since 1995. Although fresh domestic bank lending dried up, tradable firms obtained financing in the international capital market. This was not the case in the non-tradable sector. A phenomenon that has gone hand in hand with the credit crunch is the steady increase in the share of non-performing loans. We analyze the reasons for this increase, the rationale for the partial bailout policy adopted in 1995, and we investigate why this policy stance did not solve the banking problem. An important lesson is that non-performing loans are unlikely to disappear on their own, even under a high GDP growth scenario. Furthermore, the existence of non-performing loans presents an obstacle for the banking system to adequately perform its functions. This raises the question of whether an alternative strategy under which all non-performing loans were recognized at once and the fiscal costs were all paid up-front would have been preferable.

Suggested Citation

Krueger, Anne O. and Tornell, Aaron, The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98 (March 1999). NBER Working Paper No. w7042, Available at SSRN: https://ssrn.com/abstract=157430

Anne O. Krueger (Contact Author)

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Aaron Tornell

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