Bank Nationalization

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Bank Nationalization

The most significant case in modern history of private banks nationalization or expropriation by a Latin American government took place on September 1, 1982, in Mexico, when Mexican president José López Portillo issued a decree whereby Mexican private commercial banks were nationalized. The nationalization or expropriation of Mexican private commercial banks has been one of the banking appropriations of greater magnitude in modern history and was an unprecedented event with major consequences on the Mexican economy.

The bank nationalization in Mexico was preceded by the outbreak of the debt crisis in Latin America in August 1982. In this context, the arguments to seize banks were to implement an exchange rate control, and to bring to an end the outflow of funds from the country to foreign nations. However, the underlying causes differ from those officially advocated. Previously a political rupture between the government and bankers had taken place. Moreover, there was an ideological element, since there were groups in the government in favor of an expropriation of commercial banks, who deemed such appropriation as a necessary measure to support the country economy.

Consequences are summarized in three key points: a) banks were used by the government to finance public deficit; b) the structure of ownership and corporative control in the banking sector changed, thus influencing the behavior and performance of this industry; c) the relations between the State and the Mexican private sector changed dramatically, thus generating direct effects in the political scene.

In 1990, Mexican president Carlos Salinas re-privatized banks. However, this process was implemented through a weak institutional framework which implied strong irregularities in the process; these reached the public domain during the 1995 banking crises. In the process, some of the bank charters were granted to entrepreneurs that mismanaged the banks and conducted their institutions to bankruptcy. The newly privatized banks also had weak structures for assessing credit risks, an inheritance from their previous status as government financial entities. A deficient conduction of many Mexican banks, and the lack of an adequate prudential regulation aggravated the financial situation of the banking system at the moment when the 1994 Peso crisis exploded. After the crisis, the Mexican banking sector had to open its doors for capital injections from global financial intermediaries. As a consequence, today's Mexican banks are property of international financial conglomerates.

Conceptually speaking, the bank nationalization was an expression of the State's capacity to alter private property rights. Mexican banks were always exposed to an expropriation risk throughout the twentieth century (Haber, 2005). However, there were several factors, inherent to the relationship between the banking sector and the government that inhibited an expropriation or reduced expropriation risk before 1982 (Del Angel, Bazdresch and Suárez, 2005).

Other Latin American experiences which preceded the Mexican case include Costa Rica, where in June 1948 the four most important banks of this country were nationalized. In July 1979, the government of Nicaragua nationalized all the banking system. In May 1980, the government of El Salvador nationalized the entire banking system.

Subsequent to the Mexican case, in Peru, president Alan García announced the nationalization of private commercial banks in 1987. The reasons for such expropriation in Peru are similar to those in Mexico. However, García did not count on an effective authoritarian governmental steering mechanism as in Mexico. The action could not take place due to strong civil opposition, including the media. One of the leaders in the campaign against the nationalization was Mario Vargas Llosa, who after this event started to fully participate in Peruvian politics.

BIBLIOGRAPHY

Del Angel, Gustavo, Carlos Bazdresch, and Francisco Suárez, eds. Cuando el Estado Se Hizo Banquero. Consecuencias de la Nacionalización Bancaria. Fondo de Cultura Económica, Colección Lecturas del Trimestre #96. México, 2005.

Haber, Stephen. "Mexico's Experiments with Bank Privatization and Liberalization, 1991–2003." Journal of Banking and Finance 29: 8-9. August-September 2005. pp. 2325-2353.

Gustavo A. Del Angel

Encyclopedia of Latin American History and Culture