Since the Tequila Crisis of 1994–95, one of Mexico’s most persistent and striking economic contradictions has been a recovery in economic growth coupled with stagnation in bank lending. This contradiction has fueled increasing concerns about bottlenecks within Mexico’s production chains and about what some analysts view as expansion rates below potential.

      Lending typically declines in the wake of a financial shock, and Mexico’s Tequila Crisis was no exception. Mexico’s currency lost half its value in just a few months. The interbank interest rate rose some 60 percentage points, to over 90 percent, and remained above 20 percent until late 1999. Mexican banks needed most of their resources to resolve problem assets, leaving little room for new lending.

      Even worse, credit extended by Mexico’s banks continued to fall long after the national economy had recovered. Compared with other countries in similar circumstances, Mexico’s stagnation in lending has been unusually severe and long-lasting.

      However, Mexican banks report that business loans began to grow substantially in the fourth quarter 2004 and that healthy growth rates continued through the first quarter of this year, signaling a possible reversal of the credit slump of the past 10 years.

Globalization and bank credit
 

      A vibrant banking system that growing businesses can turn to for credit facilitates firms’ entry into previously segmented markets, enhancing competition. The availability of finance promotes economic freedom by enabling entrepreneurs to leverage resources in pursuit of business opportunities. Similar considerations apply to consumer credit, which can help individuals tap future income for present critical needs, such as housing and education.

            Three years ago we advocated financial globalization, using Mexico’s banks as a case study.  We concluded that the growing prominence of foreign firms in the Mexican banking system was not cause for alarm, but would promote world-class banking practices...

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