International Banking and Financial Fragility: The Contrasting Experience of Brazil and Mexico in the Lead-up to the 1982 Crisis

The recent international financial crisis has dramatically revealed the shortcomings and potential dangers of bank globalization and deeper financial integration. While the lack of supervision and adequate legal frameworks has been largely acknowledged as a main problem, the effects of regulation on the development of international banking activity and financial stability are still a matter of controversy. This article investigates the conditions under which the globalization of the domestic banking sector unfolded in Brazil and Mexico during the years of dizzying expansion of foreign finance that culminated the international debt crisis of 1982. It shows how the regulatory framework for international banking and foreign capital in Brazil created a model of intermediation that was considerably less vulnerable to crisis than in Mexico, with a more lightly regulated institutional base. These findings provide insights into historical discussions about the implications of financial regulation and capital controls for the development and expansion of foreign finance and whether the risks underlying international banking are necessarily inherent to the process of financial globalization.