Mexico's Experiments with Bank Privatization and Liberalization, 1991-2002

During the 1990s Mexico conducted two experiments with its banking system. In the first experiment (1991-96) it privatized the banks. This experiment took place with weak institutions to enforce property rights. It also took place without institutions that encourage prudent behavior by bankers. The result was reckless behavior by banks, and a collapse of the banking system. In the second experiment (1997-2002), Mexico reformed many of the institutions that promoted bank monitoring and it opened up the industry to foreign investment. It did not, however, reform the institutions that promote the enforcement of property rights. The result was that bankers behaved prudently, but prudent behavior means that they do not lend to firms or households.