Mexico's Banking Crisis: Devaluation and Asset Concentration Effects

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.