Foreign Entry and the Mexican Banking System, 1997-2007

What is the impact of foreign bank entry on the pricing and availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks: the foreign market share therefore increased five-fold between 1997 and 2007. We construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. We also find that switching from domestic to foreign ownership is associated with a decrease in non-performing loans and an increase in interest rate spreads, suggesting that foreign concerns bought domestic banks that had been making loans with low interest rates to parties that had a low probability of repayment. **Haber is Peter and Helen Bing Senior Fellow of the Hoover Institution and A.A. and Jeanne Welch Milligan Professor, Department of Political Science, Stanford University. Musacchio is Marvin Bower Fellow and Associate Professor of Business, Government, and the International Economy at the Harvard Business School. Both are Research Fellows at the National Bureau of Economic Research. Research for this project was supported by the Hoover Institution’s Task Force on Property Rights. Research assistance was ably provided by Karma Galay, Andrew Hall, Andre Martinez, and Glen Weyl. Latika Chaudhary, Robert Cull, José Luis González Anaya, Noel Maurer, Victor Menaldo, and Armando Razo made helpful suggestions about an earlier draft of this paper.