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Document Type

Case Study

Abstract

In December 1994, Mexico entered a financial crisis after a year of political turmoil, assassinations of high-level politicians, and a substantial depreciation of the peso. In 1995, following the economic contraction, the recently privatized banking sector experienced difficulties in meeting regulatory minimum capital requirements. The Mexican government received a $52 billion international financial package and enacted multiple programs to support the banking system. In the spring of 1995, through the Bank Fund for Savings Protection (FOBAPROA), the Capitalization and Loan Purchase of Bank Portfolio Program (CLPP) was introduced to provide new, permanent capital to Mexican banks. For banks that were able to secure private recapitalizations, FOBAPROA acquired twice the amount in nonperforming loans. Between 1995 and 1996, 11 banks participated in the program, which purchased nonperforming assets with a book value of MXN 142 billion for MXN 119 billion ($18.1 billion for $15.6 billion in end-1996 US dollars). By 1997, the Mexican financial system had stabilized, but the banking sector was still struggling when FOBAPROA was discontinued in 1999. The CLPP ameliorated the situation, but it remained a highly controversial program and some commentators were not sure whether it did enough to revive the Mexican economy.

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