The Peso Crash, the Banking Bailout, and Financial Market Performance in Mexico

This paper examines the development of financial markets in Mexico after 1994 and finds that there has been a reduction in the depth of the traditional financial markets. Lending from commercial banks to the non-financial private sector shrank from 10% of GDP in 1994 to 0.3% in 2000. However, gross domestic investment recovered quickly. Key questions are: where are firms getting financing; are these sources of finance sustainable, and will investment and monetary policies be affected? We find that contrary to the bank vs. market literature, traditional financial markets are complements rather than substitutes. Firms have difficulty issuing bonds without bank credit and issuing stocks without prior bond issues. Trade and suppliers credit are the only substitutes that play a dominant role in financing investment in Mexico.