Foreign Banks and the Mexican Economy, 1997-2004

In 1997 Mexico allowed foreign banks unrestricted entry to the market, allowing multinational banks to acquire almost all of Mexico's large banks. At the same time, the Mexican banking system began to limit private credit, in both absolute and relative terms. We investigate the hypothesis that these phenomena are related, and find for the null hypothesis: the contraction in credit is not related to foreign entry. The evidence does suggest, however, that foreign banks are better able to screen borrowers and charge lower interest margins than domestic banks. The evidence also suggests that foreign entry is associated with increased bank administrative efficiency. The implication is that foreign entry has produced welfare gains to consumers.