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Introduction
A sound banking system is fundamental to the economic development of an emerging market. In Mexico, as in many other of the economies of Latin America, capital is relatively scarce and concentrated in the hands of a few. Meanwhile, the intermediary function of banks is inadequate and characterized by investment in local government fixed income securities at the expense of loans to business, as well as high-commission charges to the public and limited access to financial services. All of this combined creates a damper on the financing of productive private sector and the generation of wealth.
In contrast to emerging economies of post-socialist eastern Europe, where the end of state socialism occurred in an environment where few if any local investors possessed sufficient capital to finance the needed modernization of existing financial institutions ([2] Akbar and McBride, 2004), Latin-American economies have a long history of an elite with highly concentrated wealth sufficient to invest and operate well capitalized banks in their respective countries. Mexico, the subject of our study, is no exception to this generalization. However, in spite of a class of wealthy investors with experience running financial institutions, the recent history of commercial banking in Mexico has been turbulent and fraught with corruption and mismanagement, altogether promoting the widespread view that the system has been inadequate for the promotion of a prosperous and financially stable society.
In this paper, we focus on setting and conditions which eventually resulted in the opening of the Mexican banking sector to foreign direct investment (FDI) in the process of Mexican bank privatization of the 1990s. The aim is to identify the causes of the decision to liberalize regulations effectively permitting FDI and the reasons why the results of the privatization of Mexican banks have been viewed to date as disappointing.
In order to draw lessons from the Mexican financial crisis and the experience of FDI in the Mexican financial sector which might be applicable to other emerging markets, it is important to describe the major events and conflicts which have occurred since privatization began in 1991. What makes Mexico's case especially interesting is the fact that in 1991-1992 the government was eager to sell the majority stake in the earlier nationalized banks exclusively to Mexican entrepreneurs, who,...