Mexican banks: lending and profitability in The context of reforms, 1998–2004

This chapter characterizes bank lending and profitability in Mexico since 1998, a period of extensive reforms and structural change, including in bank balance sheets. This is done in two parts. First, we review bank reforms and other factors which may have influenced bank behavior in recent years. In particular, the nature and sequencing of reforms are described. Second, we estimate bank-level regressions which link bank lending to the private sector and profitability with balance sheet indicators for commercial banks. These regressions confirm the importance of sound balance sheets as a basis for bank lending growth, while refuting the hypothesis that bank credit to the public sector, mostly FOBAPROA notes extended to banks in exchange for their non-performing assets after the 1994-95 crisis, has crowded out private sector lending in recent years. However, the estimated relationships cannot explain the fast rebound of commercial bank lending to the private sector seen since end-2003-at an annualized rate of 26 percent in real terms. Other determinants not captured in the regressions, most likely resulting from both structural reforms and demand forces, are at play. The chapter briefly reviews the experiences of Chile and Korea, to illustrate the range of factors that could drive a recovery of credit, as well as the potential benefits and risks involved.