Mexico's Banking Crisis: Devaluation and Asset Concentration Effects

46 Pages Posted: 11 Nov 2008

Date Written: November 1997

Abstract

The sharp 1994-1995 Mexican peso devaluation was followed by a financial-sector crisis, forcing the Mexican government to retake control of several banks and to grant substantial assistance to many other banks. This paper uses daily stock price data to test several hypotheses concerning the impact of devaluation. First, we use event-study methodology to test whether some sectors of Mexican economy were 'devaluation-gaining' while other sectors were 'devaluation-losing.' Second, we test the linkage between the devaluation and the financial-sector crisis that ensued. Specifically, we test whether devaluation shocks were transmitted through the liability side versus the asset side of bank balance sheets. Our results suggest that governments should consider putting minimum guidelines on bank portfolios.

Suggested Citation

Caprio, Gerard, Mexico's Banking Crisis: Devaluation and Asset Concentration Effects (November 1997). NYU Working Paper No. FIN-98-075. Available at SSRN: https://ssrn.com/abstract=1298280

Gerard Caprio (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

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