Research Summary

Contract Rights and Risk Aversion: Foreign Banks and the Mexican Economy, 1997-2004



In 1997 Mexico’s banking laws were reformed, allowing foreign banks, for the first time since the nineteenth century, to purchase controlling interests in the country’s largest banks. Foreign banks controlled 16 percent of Mexican bank assets in March 1997. By June 2004 they controlled 82 percent. What impact did foreign mergers and acquisitions have on the strategy and performance of Mexico’s banks? We find that all banks in Mexico (both domestic and foreign) have become increasingly risk averse. We also find that foreign banks are more risk averse than domestic banks: they allocate less of their assets to loans for private consumption and investment and screen borrowers more intensively than domestic banks. As a consequence of their risk aversion, foreign banks charge lower interest rate spreads than domestic banks. We find, however, that the lower interest rate spreads charged by foreign banks do not translate into lower rates of return on equity. Given the weak property rights environment in Mexico, a risk averse asset allocation strategy is economically rational.

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