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Venturing Abroad: The Internationalisation of Mexican Banks Prior to the 1982 Crisis

Published online by Cambridge University Press:  16 March 2017

SEBASTIAN ALVAREZ
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Abstract

This article explores the international expansion of Mexican banks and its implications for the domestic banking system during the decade leading up to the 1982 debt crisis. In contrast to the prevalent focus in the literature on profitability and performance, I examine the asset and liability structure of the banking sector and show that there were clear signs of deterioration in its financial condition well before the onset of the crisis. Financial statement analysis reveals that the banks engaged in international lending and foreign funding were the ones with the greatest propensity to be adversely affected by this problem. The international expansion of Mexican banks emerged and developed as an exit option to domestic funding problems and increasing competition from foreign bank loans, in a context of growing needs for financing and foreign exchange in Mexico.

Spanish abstract

Este artículo analiza la expansión internacional de la banca mexicana y sus consecuencias en el sistema bancario doméstico durante la década previa a la crisis de la deuda de 1982. Contrariamente al enfoque de la literatura en el desempeño y la rentabilidad del sector bancario, este artículo examina la estructura del activo y del pasivo de los balances bancarios y muestra la presencia de claros signos de deterioro en la posición financiera del sector mucho antes del estallido de la crisis. El análisis financiero revela que los bancos involucrados en préstamos internacionales y financiamiento externo fueron los más seriamente afectados por este deterioro. La expansión internacional de la banca mexicana surgió y se desarrolló como alternativa de salida a problemas de fondeo doméstico y una creciente competencia de préstamos de bancos extranjeros, en un contexto de gran necesidad de financiamiento y de divisas en México.

Portuguese abstract

Este artigo analisa a expansão internacional de bancos mexicanos e suas consequências no sistema bancário doméstico durante a década que precedeu a crise da dívida de 1982. Contrariamente ao foco prevalecente na literatura sobre rentabilidade e desempenho, examina-se a estrutura de ativos e passivos do setor bancário, demonstrando existir sinais claros de deterioração da situação financeira do setor muito antes da eclosão da crise. Análises financeiras revelam que os bancos que estavam envolvidos com empréstimos internacionais e financiamentos externos foram aqueles com maior propensão a serem afetados adversamente por esta deterioração. A expansão internacional de bancos mexicanos surgiu e desenvolveu-se como uma opção para a resolução de problemas de financiamento internos e aumento da competição com empréstimos advindos de bancos estrangeiros, em um contexto de crescimento das necessidades de financiamento e divisas no México.

Keywords

international bankingfinancial historypolitical economyLatin Americabanca internacionalhistoria financieraeconomía políticaAmérica Latinasetor bancário internacionalhistória financeiraeconomia políticaAmérica Latina
Type
Research Article
Information
Journal of Latin American Studies , Volume 49 , Issue 3 , August 2017 , pp. 517 - 548
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Copyright
Copyright © Cambridge University Press 2017 

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References

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5 Major exceptions are Diaz-Alejandro, Carlos F., ‘Good-bye Financial Repression, Hello Financial Crash’, Journal of Development Economics, 19 (1985), pp. 1–24 CrossRefGoogle Scholar; and Frieden, Jeffrey A., ‘The Brazilian Borrowing Experience: From Miracle to Debacle and Back’, Latin American Research Review, 22: 1 (1987), pp. 95–131 CrossRefGoogle Scholar.

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10 See, in particular, Sergio Negrete Cárdenas, Debt and Crises in Mexico (México DF: Centro de Estudios Espinosa Yglesias, forthcoming) and Bazdresch, Carlos and Levy, Santiago, ‘Populism and Economic Policy in Mexico, 1970–1982’, in Dornbusch, Rudiger and Edwards, Sebastian (eds.), The Macroeconomics of Populism in Latin America (Chicago, IL: University of Chicago Press, 1991), pp. 223–62Google Scholar.

11 See, respectively, Merchant, Luis Anaya, Colapso y reforma. La integración del sistema bancario en el México revolucionario 1913–1932 (Zacatecas: Universidad Autónoma de Zacatecas-Porrúa, 2002)Google Scholar and Goldsmith, Raymond W., The Financial Development of Mexico (Paris: OECD, 1966)Google Scholar.

12 Del Angel, ‘Paradoxes of Financial Development’, pp. 18–43.

13 Ibid., Chapter 4.4.

14 del Angel, Gustavo, ‘La paradoja del desarrollo financiero’, in Ficker, Sandra K. (ed.), Historia económica general de México: de la colonia a nuestros días (México DF: El Colegio de México, 2010), pp. 635–66CrossRefGoogle Scholar.

15 The other, less important, financial firms were thrift institution, trust organisations and residential mortgage banks. For a detailed account of the different financial entities contained in the Code see Romero, Miguel Acosta, Derecho bancario: panorama del sistema financiero mexicano (México DF: Porrúa, 1978)Google Scholar.

16 Del Angel, ‘Paradoxes of Financial Development’, p. 95.

17 For a description of economic and financial groups in Mexico around that time see Hamilton, Nora, México: los límites de la autonomía del Estado (México DF: Ediciones Era, 1983)Google Scholar; and Gustavo del Angel, ‘The Corporate Governance of the Mexican Banking System: A Historical Perspective, 1940–2000’, Documento de Trabajo del CIDE, 373 (2006) for the directorate connections between commercial banks and business groups.

18 Del Angel, ‘La paradoja del desarrollo financiero’, p. 637.

19 Del Angel, ‘Paradoxes of Financial Development’, pp. 152–93.

20 By end August 1982, the sector was made up of 35 multiple banks, 14 deposit and saving banks, 11 financieras and one mortgage bank. See Márquez, Javier, La Banca Mexicana: septiembre de 1982–junio de 1985 (México DF: CEMA, 1987), pp. 103–4Google Scholar.

21 See Edmundo Sánchez Aguilar, ‘The International Activities of U. S. Commercial Banks. A Case Study: Mexico’, unpubl. PhD diss., Harvard University, 1973; Del Angel, ‘Paradoxes of Financial Development’, pp. 139–48.

22 Del Angel, ‘La paradoja del desarrollo financiero’, p. 637; Quijano, Estado y banca, pp. 172–9; and Cardero, Quijano and Manzo, ‘Cambios recientes’, pp. 206–7.

23 Quijano, Estado y banca, Cuadro 6, p. 177. The total stock of real bank funds fell 13.3 per cent from 1973 to 1976 according to Buffie, Edward and Sanginés-Krause, Allen, ‘Mexico 1958–86: From Stabilizing Development to the Debt Crisis’, in Sachs, Jeffrey D. (ed.), Developing Country Debt and the World Economy (Chicago, IL: University of Chicago Press, 1989), pp. 141–68Google Scholar.

24 de México, Banco, Informe anual, 1972 (México DF, 1973), Cuadro 20, p. 73Google Scholar.

25 For the 1956–60 and 1964–70 periods, the average annual growth rates of GDP were 6 and 6.4 per cent respectively.

26 Banamex archives, Libro No. 2 de Actas de la Comisión Ejecutiva, meeting of 11 Aug. 1971.

27 Banco de México archives, Acta No. 2406 (Feb. 1974). New savings regimes were then introduced by Banco de México, that, in the words of Governor Fernández Hurtado, aimed to ‘provide domestic savers with a wider range of investment opportunities, in terms of timing and performance, and tried to encourage fundraising by putting emphasis not so much on significant increases in the return on investment, but on a more adequate timing structure’.

28 Stabilising development (desarrollo estabilizador) is the name given to the economic programme that prevailed in Mexico between the beginning of the López Mateos administration in 1958 and the end of the Díaz Ordaz administration in 1970, in which the country experienced high levels of growth and low inflation. See Mena, Alejandro Ortiz, El desarrollo estabilizador: reflexiones sobre una época (México DF: Colmex, 1998)Google Scholar.

29 Buffie and Sanginés-Krause, ‘Mexico 1958–86’, p. 146. In fact, the minutes of the Governing Board show that determining interest rates was pretty much based on changes in interest rates in international capital markets, in particular in the US and the Eurodollar, in order to keep domestic instruments at competitive levels and avoid outward flows of capital. See, for instance, Banco de México archives, Actas Nos. 2401 (July 1973), 2407 (April 1974) and 2420 (Jan. 1976).

30 Buffie and Sanginés-Krause, ‘Mexico 1958–86’, p. 146.

31 The level of 1971–2 was a historical peak that followed years of vigorous expansion beginning in the mid-1950s, when the ratio of banks’ loan portfolio to GDP was around 7.5 per cent. See Del Angel, ‘Paradoxes of Financial Development’, p. 24.

32 See Negrete Cárdenas, Debt and Crises; Sánchez, Enrique Cárdenas, La política económica en México, 1950–1994 (México DF: FCE-Colmex, 1996), pp. 86–119 Google Scholar.

33 Banamex archives, Libro No. 2 de Actas de la Comisión Ejecutiva, meeting of 11 Aug. 1971. By way of an example, in the meeting of 29 Aug. 1973, Agustín Legorreta informed the Committee of a conversation he had had with the Governor of the Banco de México concerning the financial needs of the Federal government. Hernández Hurtado had told him that the government would need 2 billion pesos (approximately US$160 million) to cover public spending until the end of the year and that he was expecting leading private banks to provide the financing.

34 See, in particular, Devlin, Debt and Crisis.

35 Green, Rosario, Lecciones de la deuda externa de México de 1973 a 1997: de abundancias y escaseces (México DF: FCE, 1998), p. 42 Google Scholar.

36 Del Angel, ‘Paradoxes of Financial Development’, pp. 152–201.

37 Banamex archives, Libro No. 3 de Actas de la Comisión Ejecutiva, meeting of 9 Feb. 1971.

38 Bank of America, Inlat, S. A. de C. V. (Grupo Senderos), Deutsche Bank, Paribas International, the Dai-Ichi Kangyo Bank and Union Bank of Switzerland were the other founders and shareholders of Intermex.

39 Sergio Negrete Cárdenas, ‘Mexican Debt Crises: A New Approach to Their Genesis and Resolution’, unpubl. PhD diss., University of Essex, 1999, Table B17, pp. 400–4.

40 See Martínez, Francisco Borja, ‘Desarrollo del derecho bancario mexicano (1968–1977)’, in Jurídica. Anuario del Departamento de Derecho de la Universidad Iberoamericana, Vol. I (México, DF: Universidad Iberoamericana, 1978), pp. 414–37Google Scholar.

41 See Kaminsky, Graciela L. and Schmukler, Sergio L., ‘Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization’, IMF Working Paper 03/34 (2003), pp. 44 and 56Google Scholar.

42 See Bértola, Luis and Ocampo, José A., The Economic Development of Latin America since Independence (Oxford: Oxford University Press, 2012)CrossRefGoogle Scholar.

43 A currency crisis would nevertheless break out in 1976, leading to the first devaluation of the peso in 22 years of stable parity with the dollar.

44 See Banco de México archives, Actas Nos. 2430 (March 1977) and 2438 (Feb. 1978).

45 de México, Banco, Informe anual, 1977 (México DF, 1978), p. 49 Google Scholar. This was not, however, the case for all savings instruments, since, on average, nominal interest rates continued to be lower than the annual rate of inflation (see Table 2).

46 Banco de México archives, Acta No. 2432 (July 1977).

47 Banco de México, Informe anual, 1977, p. 45. See also Banco de México archives, Acta No. 2428 (Jan. 1977).

48 In contrast, while also unified, the reserve requirement for liabilities denominated in dollars was raised from 30 to 75 per cent as a measure to prevent the dollarisation of the banking system. See Banco de México archives, Acta No. 2432 (July 1977).

49 See Alvarez, ‘The Mexican Debt Crisis Redux’.

50 Banamex archives, Libro No. 6 de Actas de la Comisión Ejecutiva, meeting of 17 April 1974.

51 Ibid. The branches were not, however, authorised to take deposits from the public.

52 Cardero, Quijano and Manzo, ‘Cambios recientes’, pp. 207–10.

53 The words of Marquis Gilmore, agent and senior vice president of Banco Internacional's agency in New York, are illustrative: ‘Since the parent bank is the smallest of the six Mexican banks operating in the U.S. and since it is not well known, the agency is unable to raise funds in the money markets directly, but has been able to obtain the needed funds through its international bank correspondents’, Federal Reserve Bank of New York archives, file: Mexican Government 1917–1984, Office Memorandum, 25 Aug. 1982.

54 Bazdresch and Levy, ‘Populism’, pp. 246–52.

55 Private sector foreign debt increased from US$7.1 billion in 1978 to US$16.9 billion in 1980, while, in the same period, public sector external debt rose from US$26.2 billion to US$33.8 billion. Roberto Gutiérrez R., ‘El endeudamiento del sector privado de México. Expansión y negociación’, Comercio Exterior, 36: 4 (1986), pp. 337–43; Cuadro 1, p. 338Google Scholar.

56 Banamex archives, Libro No. 12 de Actas de la Comisión Ejecutiva, meeting of 12 March 1980.

57 For instance, in 1975, 15 per cent of Intermex's liabilities consisted of primary deposits from clients, while the remaining 85 per cent were funds raised in international money markets. See Banamex archives, Libro No. 8 de Actas de la Comisión Ejecutiva, meeting of 18 Feb. 1976.

58 In 1978, the average interest rate for thee-month deposits was 11.2 per cent and, for 18-month deposits, 15.5 per cent. These rates were, respectively, 13.2 and 15.7 per cent in 1979, 20.6 and 22.8 per cent in 1980, 29.6 and 32 per cent in 1981, and 43.6 per cent in 1982 for both instruments. It thus seems logical that, in a context of rising inflation and diminishing spreads between long- and short-term deposits, the saving instrument with shorter maturity would be preferred.

59 Larger reliance on debt rather than equity financing leaves the bank less able to weather revenue shocks.

60 Banamex archives, Libro No. 8 de Actas de la Comisión Ejecutiva, meeting of 8 Feb. 1976.

61 Ibid., meeting of 5 Jan. 1977.

62 The bulletins were published by the Unidad de Análisis Financiero (Financial Analysis Unit) of the CNBS under the names ‘Boletín mensual de indicadores y estados financieros de las instituciones de créditos’ from 1978 to 1979 and ‘Boletín de indicadores financieros de la banca múltiple privada y mixta’ from 1980 onwards. They are available at the library of Banco de México.

63 The two first quarters were discarded because the bulletins did not include as many banks as the following ones, which would have necessitated a considerable reduction in the sample in order to have a complete time series.

64 Alvarez, ‘The Mexican Debt Crisis Redux’.

65 These ratios were chosen and defined in order to have a comprehensive representation of the banks’ assets and liabilities structures and the risks underlying their balance sheets.

66 T-tests performed on the principal component scores show that the differences between the means are not statistically significant in any of the quarters.

67 In fact, by that time Banco de México was providing significant amounts of funds in special ‘auctions’ to help commercial banks meet reserve requirements: ‘Bankers’ Hard-luck Stories Fail to Move Government’, Latin American Weekly Report, WR-80-25, 27 June 1980, p. 7.

68 It is worth mentioning here that there was no deposit insurance system in Mexico at that time. The first was the Fondo de Apoyo Preventivo a las Instituciones de Banca Múltiple (Fund for Preventive Support to Banking Institutions, FONAPRE), which was established in 1986.

69 This is the case, for instance, in the ratios such as equity to total assets, total capital to total assets and reserves and equity to total liabilities, which are all indicators of bank capitalisation.

70 Recall that these four principal component account for as much as 81.6 per cent of the variation of the financial ratios data set (see Table A1).

71 Yet the switching sign for the inflation variable once a trend (variable ‘time’) is introduced is intuitive. The trend captures the long-run average effect of inflation on nominal variables, so it is logically positive. Once purged from that influence, the inflation proxy captures the remaining short-run yearly fluctuations of the inflation rate, which has the usual negative effect on money holdings.

72 For the banks, the alternative to foreign borrowing would have been to attempt to improve their long-term deposit base. However, the cost of raising dollars abroad was significantly lower than interest rates on domestic fundraising instruments and, additionally, foreign borrowing was not subject to reserve requirements while reserve requirements on domestic deposits were at 37 per cent. See Alvarez, ‘The Mexican Debt Crisis Redux’, p. 88.

73 Simple and partial correlation analysis has been performed between dependent and independent variables to check for the positive or negative association observed in regressions. In all cases, the endogeneity bias that may result in the regression analysis does not change the nature of the relationship between the variables or its significance, particularly regarding deposit growth rate and banks’ risk levels. Although a procedure properly designed to deal with endogeneity and reverse causality issues would require instrumental variable analysis, this is well beyond the scope of this study. Results of correlation analyses are available upon request.

74 See specially the work of Reinhart, Carmen and Rogoff, Kenneth, ‘From Financial Crash to Debt Crisis’, American Economic Review, 101: 5 (2011), pp. 1676–1706 CrossRefGoogle Scholar; and This Time Is Different: Eight Centuries of Financial Folly (Princeton, NJ: Princeton University Press, 2009), pp. 73–5Google Scholar.

75 Marichal, Carlos, ‘Crisis de deudas soberanas en México: empresas estatales, bancos y relaciones internacionales, 1970–1990’, Historia y Política, 26 (2011), p. 124 Google Scholar and del Angel, ‘Paradoxes of Financial Development’, pp. 228–9.

76 See, for instance, Tello, Carlos, La nacionalización de la banca en México (México DF: Siglo XXI, 1984), pp. 61–5Google Scholar and José López Portillo's statement to the Mexican Congress on the sixth presidential report (available at http://www.biblioteca.tv/artman2/uploads/1982.pdf, last access 30 Dec. 2016).

77 The threshold is set at 0.4 and, therefore, only factor loadings larger than 0.4 in absolute terms (in bold in Table A1) are retained for analysis.

78 Banco Occidental de México, which is among the smallest banks in the sample, is the only exception, with component scores higher than the rest for most of the period.