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


  • Anne Krueger
  • Aaron Tornell


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.

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  • Anne Krueger & Aaron Tornell, 1999. "The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98," NBER Working Papers 7042, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7042
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    Cited by:

    1. Gabrisch, Hubert, 2014. "The binding constraint on growth in less developed Western Balkan countries," MPRA Paper 60020, University Library of Munich, Germany.
    2. Michael P. Dooley & Sujata Verma, 2003. "Rescue Packages and Output Losses Following Crises," NBER Chapters,in: Managing Currency Crises in Emerging Markets, pages 125-186 National Bureau of Economic Research, Inc.
    3. Gonzalo Castaneda, 2002. "Internal Capital Markets and Financing Choices of Mexican Firms Before and During the Financial Paralysis of 1995-2000," Research Department Publications 3146, Inter-American Development Bank, Research Department.
    4. Aaron Tornell & Frank Westermann (ed.), 2005. "Boom-Bust Cycles and Financial Liberalization," MIT Press Books, The MIT Press, edition 1, volume 1, number 9780262201599, July.
    5. Carrasco, Vinicius & Salgado, Pablo, 2014. "Coordinated strategic defaults and financial fragility in a costly state verification model," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 129-139.
    6. Ambrosius, Christian, 2017. "What explains the speed of recovery from banking crises?," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 257-287.
    7. Magnus Saxegaard & Michaela Erbenova & Yan Liu, 2011. "Corporate and Household Debt Distress in Latvia; Strengthening the Incentives for Market-Based Approach to Debt Resolution," IMF Working Papers 11/85, International Monetary Fund.
    8. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization; The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
    9. Athukorala, Prema-Chandra & Jongwanich, Juthathip, 2012. "How Effective are Capital Controls? Evidence from Malaysia," Asian Development Review, Asian Development Bank, vol. 29(2), pages 1-47.
    10. Pierre-Olivier Gourinchas & Rodrigo Valdes & Oscar Landerretche, 2001. "Lending Booms: Latin America and the World," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 47-100, January.
    11. Aaron Tornell & Frank Westermann & Lorenza Martinez, 2003. "Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 1-112.
    12. Perez-Batres, Luis A. & Eden, Lorraine, 2008. "Is there a liability of localness? How emerging market firms respond to regulatory punctuations," Journal of International Management, Elsevier, vol. 14(3), pages 232-251, September.
    13. Timothy J. Kehoe & Kim J. Ruhl, 2010. "Why Have Economic Reforms in Mexico Not Generated Growth?," Journal of Economic Literature, American Economic Association, vol. 48(4), pages 1005-1027, December.
    14. Ayhan Kose & Christopher M Towe & Guy M Meredith, 2004. "How Has Nafta Affected the Mexican Economy? Review and Evidence," IMF Working Papers 04/59, International Monetary Fund.
    15. Stephen H. Haber & Aldo Musacchio, 2013. "These Are the Good Old Days: Foreign Entry and the Mexican Banking System," NBER Working Papers 18713, National Bureau of Economic Research, Inc.
    16. Prema-chandra Athukorala, 2003. "FDI in Crisis and Recovery: Lessons from the 1997-98 Asian Crisis," Departmental Working Papers 2003-04, The Australian National University, Arndt-Corden Department of Economics.

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