Paradoxes of financial development: The construction of the Mexican banking system, 1941--1982

Between the years 1941 and 1982, the Mexican banking system experienced unprecedented growth and remarkably sound management. Historically, however, it was a banking system that did not fulfill the real financial needs for the Mexican economy. The explanation of why this happened is based on how the institutional framework, as well as the organizational design, of the Mexican financial system evolved.; Reconstruction of historical statistics shows that although the Mexican financial system experienced sustained growth and sound management, penetration in the economy was poor with respect to overall growth and its development was modest in comparison with other countries. This growth was made possible by an institutional reconstruction carried out between 1925 and 1941. After institutional reconstruction, the Mexican banking system experienced a gradual process of amalgamation among intermediaries, which finally culminated in 1975 with the formation of multi-banks. Commercial banks absorbed other intermediaries to overcome restrictions on credit expansion and to profit from scope economies. However, the high concentration of the banking industry, coupled with weak competition in credit markets, arrested alternatives to financing. Part of the lack of alternatives in the Mexican financial system can be explained by the minor role that the stock market played in financing, and by a policy of protecting the banking industry from foreign competition. Regression tests demonstrate that concentration had perverse results in the expansion of credit because banks with greater market penetration tended to expand credit at a slower rate than smaller banks in spite of their superior profitability.; Banks were embedded in business groups. Banks also formed long-term relationships with borrowers. These relationships permitted banks to solve problems of informational asymmetries and create commitments with borrowers. Problems of informational asymmetries created an environment that was unfavorable for financial transactions. A network of interlocking directorates formed in the banking system between the 1930s and the 1970s. Using social network analysis and panel regression test, this dissertation shows that the network permitted information transmission and prevention of idiosyncratic risks.