The Mexican financial system: reforms and evolution 1995-2005

The Mexican banking crisis of 1995 contained many of the same characteristics as other banking crises: a massive expansion of credit in a short period of time, poor bank management, supervisory and regulatory loopholes, and a shock (both domestic and external). The perverse incentives created by a quasi-fixed exchange rate regime contributed to the onset of the crisis. However, the weakness of the financial system and loopholes within the regulatory and supervisory frameworks exacerbated its aftermath. The experience has provided important policy lessons. We divide the different factors that triggered the crisis and were responsible for its severity into the following categories: the macroeconomic environment, the incentives’ structure faced by economic agents, and the legal and regulatory framework.