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Document Type

Case Study

Case Series

Blanket Guarantees

JEL Codes

G01, G28

Abstract

On December 22, 1994, the Mexican government allowed the peso to float freely against the US dollar, aggravating the run on peso deposits, leading to the rapid devaluation of the peso, and sparking the peso crisis. The following week, the Bank of Mexico announced that the Mexican deposit insurer would fully guarantee all commercial bank deposits and liabilities except subordinated debt. The announcement of the blanket guarantee appeared effective at reassuring foreign investors, as the central bank was soon able to ease the liquidity support that it had been providing to banks during the crisis. The government created a deposit insurer, the Bank Fund for Savings Protection (Fondo Bancario de Protección al Ahorro, or FOBAPROA), in 1990. Over the next two years the government privatized government-owned banks. Every December, the Bank of Mexico was responsible for announcing which bank liabilities FOBAPROA would cover and the coverage limit for the following year. In its 1993 statement, under financial and political pressure, the Bank of Mexico announced a similar blanket guarantee of bank deposits and liabilities as a preemptive measure to reassure market participants about the soundness of the newly privatized banking system. The Mexican government took a number of other actions to protect the banking system as the financial crisis deepened in 1994 and 1995. The central bank opened a US dollar credit window for commercial banks; the government also charged FOBAPROA with bank recapitalization and the purchase of nonperforming loans from troubled banks. In December 1998, the Mexican Congress replaced FOBAPROA with the Institute for the Protection of Bank Savings. This move corresponded with a gradual transition from FOBAPROA’s blanket guarantee to a more limited guarantee. The gradual reduction of the guarantee began in 1999 and ended in 2005.

Date Revised

2022-12-22

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