Looting Mexican Banks

An important reason that U.S. bankers have found profitable markets in Mexico is the plight (self-inflicted) of Mexican banks. The National Bureau of Economic Research has released a research study by three economists titled Related Lending, (NBER Working Paper No. 8848). The crux of the Mexican banking market is the practice of "related lending;" that is, making loans to companies owned by directors. These arrangements "may allow insiders to divert resources from depositors and/or minority shareholders to themselves." Bank management is able to shift a portion of the risk to the state and allow the bank to make loans to related borrowers on more favorable terms than would be warranted by the risk involved. In short, the insiders are looting the bank for their personal benefit, letting the government (i.e. taxpayers) cover part of the cost.

To test their theories, the authors obtained from each bank data on the 300 borrowers that had the largest loans outstanding at the end of 1995. They then took from each bank a random sample of 90 loans and then tracked their performance through December 1999. At the end, they had a sample of 1,500 loans, of which a fifth were "related loans." The credit terms offered these related borrowers were significantly more favorable than those given to unrelated borrower, even after adjusting for risk. For example, interest rates of related loans were four percentage points lower than charged unrelated borrowers. Moreover, the banks required collateral on 84 percent of unrelated loans, versus only 53 percent of related loans. In spite of their favorable treatment by bank management, related borrowers did not reciprocate. The default rate on their loans was 77.4 percent vs. 32 percent on unrelated loans. Recovery rates on related loans were significantly lower than on unrelated loans. In short, "in most cases, dollar lent to a related person or a related privately-held turned out to be a dollar lost."