TY - JOUR AU - Krueger,Anne AU - Tornell,Aaron TI - The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98 JF - National Bureau of Economic Research Working Paper Series VL - No. 7042 PY - 1999 Y2 - March 1999 UR - http://www.nber.org/papers/w7042 L1 - http://www.nber.org/papers/w7042.pdf N1 - Author contact info: Anne O. Krueger Department of International Economics SAIS, Johns Hopkins University 1740 Massachusetts Avenue NW Washington, DC 20036 Tel: 202/587-3238 E-Mail: annekrueger@jhu.edu Aaron Tornell Department of Economics UCLA 405 Hilgard Ave, Bunche Hall #8283 Los Angeles, CA 90095-1477 Tel: 310/794-1686 Fax: 310/825-9528 E-Mail: tornell@econ.ucla.edu M2 - featured in NBER digest on 1999-09-01 AB - In this paper we analyze the evolution of the Mexican economy between 1995 and 1998. The remarkable quick recovery seen in aggregate activity has not been uniform across the economy. The tradable sector has grown strongly, while the non-tradable sector has recuperated only sluggishly. This asymmetric response is intimately linked with the severe credit crunch that Mexico has experienced since 1995. Although fresh domestic bank lending dried up, tradable firms obtained financing in the international capital market. This was not the case in the non-tradable sector. A phenomenon that has gone hand in hand with the credit crunch is the steady increase in the share of non-performing loans. We analyze the reasons for this increase, the rationale for the partial bailout policy adopted in 1995, and we investigate why this policy stance did not solve the banking problem. An important lesson is that non-performing loans are unlikely to disappear on their own, even under a high GDP growth scenario. Furthermore, the existence of non-performing loans presents an obstacle for the banking system to adequately perform its functions. This raises the question of whether an alternative strategy under which all non-performing loans were recognized at once and the fiscal costs were all paid up-front would have been preferable. ER -