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Document Type

Case Study

Abstract

In December 1994, Mexico entered a financial crisis. The government abandoned its crawling peg exchange rate policy, letting the peso float and devalue substantially. The recently privatized banking sector found difficulties in meeting regulatory minimum capital. The Mexican government assisted with a $52 billion international financial package, enacted multiple programs to contain the crisis. The first program introduced to recapitalize the banks was the Temporary Capitalization Program (PROCAPTE) in February 1995. Banks could issue subordinated debentures to the Bank Fund for Savings Protection (FOBAPROA). These debentures were convertible into equity shares (common stock) with voting rights after five years. Banks would receive cash for the debentures, however, they had to maintain these cash proceeds at the Bank of Mexico. On March 31, 1995, six banks were recapitalized, including Serfin, Inverlat, and Bital—the third-, fourth-, and fifth-largest banks in Mexico. The overall amount of recapitalization was $950 million, increasing banks’ average capitalization ratio from 5.8% to 9.6%.

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