Mexico’s Banks after the December 1994 Devaluation–A Chronology of the Government’s Response

Karaoglan, Roy A., Lubrano, Mike | January 1, 1995

The immediate effects of the December 1994 peso devaluation and the period of high interest rates and economic recession that followed had important repercussions for the Mexican banking and financial system. Since the onset of the crisis, the Mexican government has undertaken a number of important actions designed to assure adequate capitalization of financial institutions and continued public confidence in the banking system. The goal throughout has been to avoid a banking crisis that would exacerbate the contraction in the real economy and to set the stage for a recovery of the financial system based on sound institutions and efficient financial markets. The steps taken have included amendments to the legal framework for foreign ownership of banks, reinforcement of supervision, programs for re capitalizing troubled banks, the introduction of inflation-indexed lending and the provision of indexed funding to banks, a debtor relief program and direct intervention of those banks that proved unable to weather the crisis and its aftermath. The combination of these meas- ures has permitted most of the banks and the banking and payments system as a whole to continue to operate throughout 1995, despite a very sharp contraction in the real economy